Cover Story: Chinese Chipmakers Look to Malaysia to Sidestep U.S. Tariffs

By Wang Duan, Yang Min, Qin Min and Han Wei

As global supply chains are braced for disruption following Donald Trump’s re-election, China’s chipmakers are speeding up efforts to expand production abroad to avoid potential trade barriers.

And Malaysia, with its strategic location and robust infrastructure, is becoming a popular destination.

The northwestern state of Penang has earned itself the nickname “Silicon Valley of the East” and now houses the highest concentration of integrated circuit design and R&D companies in Malaysia.

The island’s semiconductor assembly and testing industry dates back to the 1970s, when Bayan Lepas was established as Malaysia’s first free trade zone to attract foreign investment.

Bayan Lepas is now home to an array of leading chipmakers from the United States, China, Japan and Europe, alongside a growing number of local startups.

Loo Lee Lian, chief executive of InvestPenang, the state government’s investment promotion agency, told Caixin that more than 350 foreign-invested companies have established operations in Penang, most in the semiconductor and electronics sectors. More than 50 are from China.

“Our key initiative is to develop a chip design and technology hub within a 5-kilometer radius of Bayan Lepas,” she said.

The growing threat of trade barriers and fierce domestic competition are pushing Chinese chipmakers to look abroad for expansion.

With Trump returning to the White House, there is a consensus in the U.S. that China’s technological and economic influence needs to be curbed and Trump’s threat of imposing a 60% tariff on Chinese goods seems likely to disrupt the global semiconductor supply chain.

All this has intensified the urgency for Chinese companies to pursue growth abroad. And it isn’t just China looking overseas.

On Nov. 13, Jensen Huang, the chief executive of NVIDIA emphasized the need to strengthen global supply chains and highlighted the importance of decentralizing production bases.

Malaysia has been quick to react. Liew Chin Tong, its deputy minister of Investment, Trade, and Industry, has referred to the growing demand as a “golden opportunity” to further expand Malaysia’s semiconductor sector.

The emergence of artificial intelligence (AI) has created a surge in demand for computational power.

The semiconductor supply chain revolves around three stages — design, manufacturing, and assembly and testing. Design, which relies on knowledge and talent, creates the most value, while manufacturing is constrained by the complexities of chip fabrication. Assembly and testing are traditionally outsourced to regions with lower costs, particularly in Southeast Asia.

The emergence of artificial intelligence (AI) has created a surge in demand for computational power and this in turn has renewed focus on advanced semiconductor packaging, positioning it as a critical factor in driving the next wave of innovation in the industry.

With this in mind, Malaysia is eager to attract Chinese capital, technology, talent, and production capacity, all while carefully navigating the complexities of U.S.-China tensions. Penang in particular is emerging as a key hub in this strategy.

According to Wong Siew Hai, chairman of the Malaysia Semiconductor Industry Association (MSIA), Western semiconductor companies in Malaysia have been keeping an eye on China-U.S. tech rivalry, especially regarding products that could attract U.S. scrutiny.

China’s semiconductor sales have grown from $100 billion in 2016 to $150 billion in 2023, now accounting for nearly 30% of the global market. The country is also making significant strides in chip design and materials, allowing it to become more self-reliant. However, its semiconductor journey is still in its early stages. A senior chip design executive said that while his company has moved into Malaysia, international expansion remains challenging.

Despite this, Chinese chip companies are pushing forward, with operations not only in Southeast Asia but in the Middle East, Mexico and even the United States and Canada.

Growing opportunities

Many in the industry believe Trump’s return will create new opportunities for Southeast Asia.

The chip industries of its three main players — Singapore, Malaysia, and Vietnam — are complementary, yet competition among them is intensifying.

“I need to visit Vietnam as soon as possible to see what progress its making and assess how quickly Malaysia needs to advance,” MSIA’s Wong said.

According to Lin Sihan, a partner and co-president of Hopu Investment, many Chinese semiconductor companies are exploring how to capitalize on Southeast Asia’s diverse economies. Singapore offers world-class infrastructure, a strong legal framework and a rich talent pool. Malaysia, with its established semiconductor industry, is actively pushing for growth in the sector. Meanwhile, Vietnam with its young, skilled software engineers is attracting multinational companies to set up R&D centers.

While competition between these for investment and talent exists, they are also fostering collaboration.

“We used to view Singapore as a competitor, but now our thinking is shifting towards forming cooperative relationships,” said Vinothan Tulisinathzan, MIDA’s director in Singapore.

According to Wu Zheng, chairman of Shenzhen Semiconductor Industry Association (SSIA), chip design companies choose Singapore for its strong talent pool and favorable business environment.

In contrast, Malaysia is attractive for its comprehensive semiconductor supply chain, which includes advantages in assembly and testing, as well as growing capabilities in design, wafer fabrication and materials.

Companies investing in Vietnam are often following their customers, as major chip clients such Samsung, Foxconn and BYD expand their operations there.

Hopu’s Lin said more Chinese, U.S. and European companies are establishing administrative headquarters in Singapore while setting up R&D teams and data centers in Malaysia to get the best from each countries. The synergy between Singapore and Malaysia is supported by their governments, which have introduced incentives to encourage cross-border collaboration.

Trump’s return to the White House in January is expected to heighten uncertainty in the already unstable global semiconductor industry, with America continuing to tighten restrictions on China.

In late October, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) told several Chinese chip design firms that was temporarily stopping shipments of AI chips made with 7-nanometer or more advanced process technology to mainland clients. According to industry sources, while new U.S. regulations against Chinese chipmakers were delayed because of the presidential election, they could now be rolled out at any moment, adding urgency for Chinese companies wishing to expand abroad.

Yvonne Keil, senior director of operations at GlobalFoundries in India and Malaysia, emphasized that companies need to adopt a global strategy to deal with rising costs in materials, manufacturing and plant construction as well as growing geopolitical risks.

Malaysia’s ambition

A representative from the Shenzhen Semiconductor Industry Association said that while Singapore and Vietnam were early choices for Chinese capital and industry shifts, the trend is now increasingly moving toward Malaysia.

Sun Zhilin, general manager of HanSingTek, a Chinese chip design services company, said China’s chip industry boom since 2018 has fueled the industry’s growth in Southeast Asia. Many design firms initially chose Singapore but found the market limited, prompting expansions into Vietnam and Malaysia.

In recent years, Malaysia has seen a rising number of assembly and testing companies set up operations. Its government has also been increasing support for its domestic chip industry. Since taking office in 2022, Anwar Ibrahim, its prime minister, has made economic development a priority, with a particular focus on semiconductors. In May, his government introduced its National Semiconductor Strategy committing more than 25 billion ringgits ($5.6 billion) to drive growth and attract foreign tech companies through targeted incentives.

Already the world’s sixth largest chip exporter and the tenth largest exporter of electrical and electronic products, Malaysia produces 23% of the chips used in the U.S. According to the Malaysia Semiconductor Industry Association (MSIA), the country’s electronics and electrical sector, including semiconductors, attracted 262 billion ringgits in investment from 2021 to 2023 — more than total investment over the previous two decades.

In 2023, Malaysia introduced the “New Industrial Master Plan 2030” (NIMP 2030), which designates the electronics and electrical industry as a priority, with a focus on advancing integrated circuit design, wafer production and semiconductor equipment manufacturing.

Malaysia’s latest industrial policies mark a shift from the foreign investment focus of the 1970s and 1980s, which prioritized upstream industry expansion and support for local businesses. Several domestic semiconductor companies have emerged, including Inari Amertron, a chip testing and electronic manufacturing firm founded in 2010, and Skyechip, an integrated circuit (IC) design company based in Penang.

Penang is poised to play a central role in Malaysia’s semiconductor ambitions. In 2016, Tongfu Microelectronics, a leading Chinese chipmaker, acquired an 85% stake in two AMD factories — one in Suzhou and the other in Penang — investing $371 million. This led to the formation of the TF-AMD joint venture, based in the Bayan Lepas Free Industrial Zone, where it became integral to the global semiconductor supply chain, specializing in packaging and testing for CPU and GPU chips.

Intel is also expanding in Penang, building a facility focused on advanced 3D IC packaging technology. In 2021 it announced a $7 billion investment to support this project.

Taiwan’s Advanced Semiconductor Engineering Inc., operating in Penang since 1993, is expanding its semiconductor packaging and testing capabilities with a new plant opening in 2025. In addition, German semiconductor giant Infineon is investing €7 billion in a wafer fab in Kulim, near Penang.

Looking aboard

Inari Amertron, a local Malaysian company, has told its senior management to add both Chinese and English names to their business cards, despite most of them not speaking Chinese. The company serves a client base with 70% from the U.S. and 30% from China. According to a senior executive, many Chinese clients want to establish new operations or form partnerships in Malaysia.

In China, intensifying domestic competition is pushing its semiconductor companies to seek new markets abroad, particularly in sectors such as mature process chips, where production has surged but demand is weakening.

“As the domestic market becomes saturated, companies are turning to overseas markets,” said Wu from the SSIA. Chinese firms are now competing for orders with razor-thin profit margins and are looking for ways to reduce expenses. The competition, he added, has become fiercer.

Xu Junfeng, founder of the augmented reality startup Futurus Technology Co. Ltd., said that while Chinese companies focused on differentiation and innovation three years ago, by 2023 and especially in 2024, the focus has shifted to reducing costs.

Lu Xiaobao of venture capital firm CAS Star emphasized the urgency for domestic companies to plan their international expansion. “Since mid-2023, I’ve been advising my portfolio companies to prioritize going overseas,” he said. “Domestic competition is fierce, and companies are investing significant effort for limited returns. Meanwhile, expanding abroad could yield much greater rewards with slightly more effort. The time to expand internationally is now — waiting too long could mean missing the opportunity.”

Wang Zhilong, founder of Yihai Chuangteng, an overseas marketing consulting firm, said: “Many forward-thinking companies started expanding internationally during Trump’s first term. With Trump’s return to office and the rise of domestic overcapacity, it is expected that even more companies will follow this trend.”

Chinese companies exploring opportunities abroad, face the challenge of not only changing their location but restructuring their existing supply chains, analysts said.

At the same time, China’s semiconductor industry has made significant strides which has led to increasing adoption of Chinese products by international clients. “In emerging fields like third-generation semiconductors, particularly in the silicon carbide sector, Chinese companies are now playing a role in every stage of the supply chain, with their capabilities continuously improving,” said Lu. He anticipates that in the next five to eight years, Chinese chips will gain broader acceptance in global markets.

Wang Huilian, a semiconductor investor, said that before 2017, Chinese companies expanded abroad through investments and acquisitions to gain access to talent, technology and customers. The focus has since shifted toward integrating into global supply chains. “Semiconductor demand is market-driven, and Southeast Asia has emerged as an important destination for Chinese firms,” Wang said.

Shi Lei, general manager of Tongfu Microelectronics, said the current wave of Chinese semiconductor companies going overseas is largely driven by the need to shift production capacities in response to market and customer demands.

But there are still uncertainties ahead. While the Malaysian government supports local businesses and encourages joint ventures with foreign firms, local companies remain cautious about linking up with Chinese firms due to the complex geopolitical landscape, according to Wang.

“While the U.S. is currently targeting only China’s advanced semiconductor processes, overseas clients are becoming cautious and taking preventive measures,” Wang added.

Mohamad Hasan, Malaysia’s foreign minister, recently warned that U.S. secondary sanctions could extend to Malaysia, urging businesses to be vigilant about export destinations to avoid risks related to U.S. sanctions on Russia. He also revealed that six Malaysian companies were sanctioned by the U.S. in early November for falsely declaring the origin of products.

Despite these challenges, an industry expert emphasized that commercial interests ultimately drive market decisions. Governments and businesses, while mindful of compliance, are likely to pursue flexible partnerships, with product competitiveness remaining the key factor.

Wen Simin and Liu Peilin contributed to the story.

Contact reporter Han Wei (weihan@caixin.com)

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