Greater reliance on domestic suppliers could help Malaysian technology hardware companies improve operating margins and reduce inventory holdings, although the benefits have yet to translate into stronger cash conversion, according to Kenanga Research.
Its analysis of nine Malaysian technology hardware companies found that every 10-percentage-point (ppt) increase in local procurement was associated with a 0.52ppt improvement in operating margin and an 8.7-day reduction in inventory days.
However, the relationship was less favourable for cash conversion, with the research house’s adjusted model indicating a 14.2-day increase in the cash conversion cycle for every 10ppt rise in domestic sourcing.
Kenanga said the findings suggest that localization could support profitability and inventory efficiency, but does not guarantee better financial performance, as company-specific operating dynamics remain important.
The study examined 27 company-year observations and 18 year-on-year changes across FY2023 to FY2025, measuring local procurement as the proportion of purchasing expenditure allocated to Malaysia-based suppliers.
Despite the positive associations, the regression models had limited explanatory power, with R-squared values ranging from 0.5 percent to 12 percent, while none of the coefficients was statistically significant.
As such, Kenanga cautioned that the findings should be viewed as preliminary indications of potential operational benefits rather than conclusive evidence that greater domestic sourcing directly improves financial performance.
Local procurement exposure also varied widely among the companies. KGB recorded the highest domestic sourcing ratio at 94.4 percent in FY2025, followed by AMBEST at 89 percent, UWC at 71.4 percent and INARI at 62 percent. SKPRES and UNISEM had among the lowest ratios at 12 percent and 25.2 percent, respectively.
The average local procurement ratio across the sample stood at 54.4 percent in FY2025.
Kenanga attributed the differences largely to variations in manufacturing activities, the availability of qualified local suppliers and customer-specific sourcing requirements. Precision engineering and equipment manufacturers may have more opportunities to source fabricated components and mechanical parts domestically, while semiconductor assembly and testing companies remain more dependent on imported materials and specialised components.
Localization trends were also mixed. NATGATE recorded the largest increase in domestic sourcing, with its ratio rising 18ppt to 50 percent in FY2025 from 32 percent in FY2023. PIE and KGB followed with increases of 12ppt and 11.8ppt, respectively.
In contrast, UWC’s local procurement ratio declined 14.6ppt over the same period, while AMBEST and UNISEM recorded decreases of 9ppt and 8.7ppt, respectively.
The differing trends suggest that procurement strategies remain driven largely by commercial considerations rather than a uniform industry-wide shift towards domestic sourcing, Kenanga said.
The research house also highlighted contrasting company performances, suggesting that localisation alone does not determine profitability.
KGB increased its local procurement ratio by 11.8ppt between FY2023 and FY2025, alongside a 6ppt improvement in operating margin to 15 percent. However, NATGATE’s domestic sourcing ratio rose 18ppt while its operating margin declined 9.1ppt to 3.2 percent.
Similarly, UWC recorded a 12.5ppt contraction in operating margin to 11.3 percent, despite a 14.6ppt decline in its local procurement ratio.
Kenanga said product mix, capacity utilisation, pricing and operating leverage remained important factors influencing profitability.
Nevertheless, the strategic value of domestic sourcing could become more apparent as the semiconductor industry enters an upcycle, with accelerating customer orders and tightening manufacturing capacity placing greater emphasis on supply chain reliability.
Companies with established domestic supplier networks could be better positioned to secure materials, minimise production disruptions and respond quickly to additional customer orders, supporting earnings visibility and execution, it said.
However, Kenanga cautioned that localization should not be viewed as an end in itself or a substitute for broader supplier diversification, as excessive reliance on a single geography could introduce other operational risks.
It said procurement decisions should continue to balance cost competitiveness, supplier capabilities, quality and delivery reliability across domestic and international supply networks.