Kulim, Malaysia – When tech giant AT&S decided a few years ago that it needed to ramp up production to keep pace with the artificial intelligence (AI) boom, it did not look to its largest manufacturing facilities in China.
The Austrian firm’s plants in Chongqing and Shanghai – opened in 2022 and 2016, respectively – employ some 9,000 workers between them, churning out high-end components used in everything from consumer electronics to cars.
But AT&S was at the same time coming to grips with the risks of concentrating production in one country.
Like many tech firms grappling with the disruption of the COVID-19 pandemic and the trade war salvoes between the United States and China, AT&S decided it needed to diversify its supply chains.
Malaysia quickly emerged at the top of the company’s list of potential locations for its next plant.
A little more than two years after breaking ground, AT&S opened its newest production facility in Kulim, in Malaysia’s Kedah state, in January 2024.
The plant, AT&S’s first in Southeast Asia, produces substrates – critical components that act as an intermediary layer between the chips and circuit boards used in AI systems and other advanced electronics.
The 1.7 billion euro ($1.8bn) facility represents AT&S’s largest-ever investment and is expected to employ about 6,000 workers once it reaches full capacity.
“It’s part of the China Plus One strategy,” Suan See Yap, AT&S senior vice president and managing director, told Al Jazeera, referring to the efforts of many companies to diversify production outside China.
“The decision is basically driven by the need for more capacity and also to have a footprint outside China as well,” Yap said.
AT&S’s Malaysian facility is located at Kulim Hi-Tech Park, an industrial park which is a stone’s throw away from the neighbouring state of Penang, home to a free-trade zone that earned the moniker “Silicon Valley of the East” after emerging as a semiconductor hub during the 1970s.
Among the chip makers with a manufacturing presence in Penang is the US firm AMD, one of the main buyers of AT&S’s substrates.
“Our customers are located here, so it’s a very strategic location, and there are 4,000 SMEs around this area as well,” Yap said, referring to small and medium enterprises.
“So the supply chain is very well supported.”
Malaysia’s geopolitical position also factored into the company’s thinking.
“Our government tries to be neutral and, in fact, we want to be friends with all the countries,” Yap said.
“This is a personal view, but I think we want to become the United Nations of semiconductors. We want to operate in an environment where politics and, you know, geopolitical influences are not part of the puzzle.”
AT&S is just one of a host of tech companies betting on Malaysia, drawn by a range of factors – from the country’s strategic location and established chip industry to its well-developed infrastructure and neutral stance in the Washington-Beijing rivalry.
After grappling with political instability and corruption scandals in recent years, Malaysia hopes that positioning itself as a leading AI hub will transform its economy, cementing its rise from middle-income to developed status.
Malaysian Prime Minister Anwar Ibrahim has stressed the need to embrace all aspects of the AI economy, from manufacturing chips to hosting the data centres used to train and run models such as ChatGPT.
Anwar, 77, has placed particular emphasis on the potential of AI to raise labour productivity and wages for workers, nearly one-third of whom earn less than 2,000 ringgit ($450) a month.
Among other initiatives, the veteran opposition figure-turned-leader has overseen the launch of an ambitious national semiconductor strategy and a dedicated AI office.
He has also made it a priority to attract investment from overseas.
Since taking office as the head of a multi-party unity government in 2022, Anwar has visited more than 30 countries to court investors and promote the country.
At home and abroad, he has repeatedly stressed that Malaysia has no wish to take sides in the US-China rivalry and intends to remain “fiercely neutral”.
Last year, Malaysia approved $38.5bn in foreign investment, a 15 percent rise from the previous year’s amount and the biggest haul on record.
The influx appears to already be bearing fruit across the wider economy, which has grown at a robust pace since the end of the COVID-19 pandemic.
Gross domestic product (GDP) expanded by 5.1 percent in 2024, outpacing regional peers such as Thailand and Indonesia.
The World Bank has estimated that Malaysia could reach its target of becoming a high-income economy – currently defined as a gross national income (GNI) per capita above $14,005 – several years ahead of the government’s 2030 target. Malaysia’s GNI per capita stood at $11,710 in 2023, the most recent year for which data is available, putting it roughly on par with Turkiye and Mexico.
A large portion of the foreign investment windfall has come in the form of plans by Amazon, Google, ByteDance and Microsoft to establish a host of new data centres in the country.
Once completed, the facilities are expected to power AI and cloud services used for everything from medical services to ride-hailing and online banking, while also meeting local requirements for sensitive data held by public agencies to be stored within the country.
Microsoft, which plans to launch three data centres in greater Kuala Lumpur this year, has estimated that its facilities alone will generate some $10.9bn in new revenues and more than 37,500 jobs over the next four years.
“Part of our mission is to ensure that we enhance the adoption of AI as quickly through Microsoft Cloud,” Andrew Lau, director of strategic programs for Microsoft in Malaysia, told Al Jazeera at the Microsoft office in Kuala Lumpur.
“Especially here in Malaysia, because the networking is very strong – in the sense that we have good cables, we have good 5G as well – the capability to deliver the computate power to the public and to every person is a lot faster,” Lau said.
“Which means the adoption of AI in Malaysia, with the cloud, is going to be pretty fast,” he added.
“In fact, we’re seeing that already… 84 percent of Malaysians are actually bringing AI to work already.”
A key plank of Malaysia’s plan for riding the AI boom involves upscaling its long-established chip industry.
While Malaysia already ranks as the world’s sixth-largest semiconductor exporter, playing host to major players such as Intel, Infineon, GlobalFoundries, the local industry has been largely focused on “backend” services, such as chip assembly, packaging and testing.
More complex – and lucrative – high-end manufacturing and design have been respectively dominated by Taiwan, South Korea and the US.
Under the National Semiconductor Strategy unveiled last year, Anwar’s government has allocated more than 25 billion ringgit ($5.6bn) to invest in high-value-added front-end activities over the next decade.
The blueprint includes a set of ambitious targets for moving up the value chain, from establishing at least 10 Malaysian firms focused on design and advanced packaging that pull in revenues of 1 billion to 4.7 billion ringgit (roughly $225m to $1bn) to training 60,000 high-skilled engineers.
In an announcement hailed by the government as a pivotal step towards Malaysia becoming a hub for advanced production, officials earlier this month revealed a first-of-its-kind partnership with Arm, a United Kingdom-based chip maker owned by Japan’s SoftBank.
Under the agreement, Malaysia will pay the firm $250m over a decade to share its semiconductor-related licences, technology and know-how.
“Through this comprehensive partnership with Arm, we have conceived one of the most ambitious technological plans Malaysia has ever seen to pioneer ‘made by Malaysia’ AI chips,” Anwar said during an event launching the partnership.
“These chips will be designed, manufactured, tested and assembled here, and sold to the rest of the world.”
While Malaysia ultimately hopes to enter the arena of high-end manufacturing, industry figures also see big potential for the country to build on its traditional strengths.
Malaysia is particularly well positioned to take advantage of the growing importance of advanced packaging, which involves the integration of multiple chips into a single casing for greater performance and functionality, said David Lacey, the president of the Free Industrial Zone, Penang Companies’ Association.
Bringing together multiple chips in a single package opens up possibilities for combined functionality, Lacey said, which can be more easily commoditised in products ranging from health watches to electric vehicles.
“So, the value-add of the packaging, or the value-proportion of the packaging, is rising up. So it’s going from 10 percent of the value-add, to 30 percent or 40 percent of the value-add,” Lacey, who is the current director of research and innovation at the German optoelectronic chip maker Osram Opto Semiconductors, told Al Jazeera.
“The balance of power, the product definition, is moving towards a package,” Lacey said.
“So again, Malaysia is well-placed to exploit this. So, you’ve got 50 years of packaging experience. And now the packaging industry becomes a significantly more valuable part of the electronics supply chain.”
Still, industry figures and government officials are keenly aware of risks looming on the horizon.
While the US-China rivalry benefitted Malaysia by spurring firms to diversify their supply chains, protectionist winds are now casting uncertainty over its tech ambitions.
US President Donald Trump said last week that tariffs on semiconductors would be announced “down the road”, following up on an earlier pledge to impose duties of “25 percent or higher” on the chips.
Trump, who has made a flurry of back-and-forth announcements on tariffs since entering office in January, did not specify a timeframe for the measures or whether certain countries or sectors could be excluded.
With Trump’s next moves unclear, many firms are in wait-and-see mode when it comes to making investment decisions in Malaysia, said Loo Lee Lian, the chief executive officer of Invest Penang, an investment promotion nonprofit under the Penang state government.
“So everybody is… holding on tight. A lot will happen in the next six months,” Loo told Al Jazeera.
“Nobody is making any decisions.”
Industry figures see challenges closer to home, too, not least of them being the difficulty of sourcing talent.
In a 2022 survey conducted by the Malaysia Semiconductor Industry Association, 47 percent of businesses identified the availability of talent as a major constraint to their operations.
While the government aims to train up tens of thousands of engineers in the coming years, making up the shortfall will take some time.
Malaysian Minister of Investment, Trade and Industry Tengku Zafrul Aziz has noted that although the local industry needs about 50,000 skilled engineers, local universities are only producing about 5,000 engineering graduates annually.
Aziz’s ministry has floated allowing foreign graduates of local universities to work in the local tech scene for a temporary period as one possible solution to the shortfall, a proposal that has garnered pushback from unions and, so far, has not come to pass.
In Kulim, AT&S’ Yap foresees business being “flattish” this year, after company revenues declined 13 percent in 2023-24 amid an industry-wide slowdown in demand.
But looking further ahead, the Leoben-based company’s outlook is bullish.
Revenues are forecast to hit 2.1-2.4 billion euros ($2.3bn-$2.6bn) in 2026-2027, greater than 2022-2023’s record haul of 1.8 billion euro ($2bn).
“We are at where we want to be today,” Yap said.
“We have a very talented workforce. We have developed very high-yielding processes to produce very high-quality parts. So, we are very open and we are ready for more business.”
