Malaysia’s semiconductor sector is benefiting from the global artificial intelligence (AI) boom, but gains remain uneven across the industry, while supply risks and the challenge of moving further up the value chain continue to weigh on its longer-term outlook, HSBC Global Investment Research said on Thursday.
The research house said in a report that along with Singapore and Vietnam, Malaysia stands out as one of Southeast Asia’s primary beneficiaries of the AI tech upcycle, and this is evident in Malaysia’s surging chip exports over the past year, as well as its strong electronics trade flows with the United States, mainland China, Taiwan and neighboring Singapore.
These patterns underscore deeply integrated cross-border production networks where fabricated chips are shipped to Malaysia for assembly, testing and packaging (ATP) before being passed on to end consumers.
That said, HSBC sees Malaysia’s chip sector faces several challenges.
First, the AI boom’s benefits are unevenly distributed. Firms with direct exposure to the AI super cycle and related infrastructure build-out — such as chipmakers and data centers — are seeing stronger demand.
By contrast, companies geared towards traditional consumer electronics may face a tougher environment, as higher memory prices lift input costs and even slow production.
Second, lingering uncertainties in the Middle East conflict remain a risk to the supply of key chipmaking inputs, such as helium.
“Fortunately for Malaysia, ATP relies less on helium-intensive processes and more on nitrogen, for which the country has substantial domestic production,
“However, Malaysia’s wafer fabs do rely on helium, which means supply management still matters,” said the research house.
Third, Malaysia’s longer-term ambition is to move up the semiconductor value chain — capturing a greater share of advanced front-end manufacturing and chip design — while
continuing to deepen its capabilities in advanced packaging. That climb could prove arduous.
According to HSBC, foundries are exceptionally capital-intensive and resource-intensive. While financing and infrastructure can be addressed over time with the right incentives and execution, building (and retaining) a large pool of engineering talent is more difficult.
It is noted Malaysia’s government is clearly aware as the National Semiconductor Strategy (NSS), announced in 2024, allocates MYR 25 billion ($6.12 billion) and targets the training of 60,000 highly skilled local semiconductor engineers by 2030.
However, HSBC said the bigger question is retention. It highlighted that average engineering wages in Malaysia’s
manufacturing sector trail those of several Asian competitors.
This creates a particular vulnerability to talent outflows to neighboring Singapore, where compensation is significantly higher.
Realistically, matching wages with wealthier economies will be challenging, said the research house.
“Policymakers may narrow the gap through targeted grants, tax incentives and other schemes that improve the overall value proposition for high-skill roles, as well as partially offset the constraint through targeted immigration policies,” it added.
According to the report, a crucial advantage Malaysia enjoys is its ability to balance relationships amid rising geopolitical tensions.
By maintaining constructive ties with both the United States and China, and by complementing Singapore (which faces land and resource constraints), it said Malaysia can continue to attract diversified sources of foreign investment to expand its semiconductor ecosystem.
It is noted that between January 2024 and March 2026, Malaysia’s semiconductor sector secured around MYR 92 billion ($22.52 billion) in approved investments, of which roughly MYR 83 billion ($20.31 billion) was foreign direct investment.
“Moreover, given the geopolitical hotspots surrounding some other major Asian semiconductor hubs, Malaysia’s neutral reputation could become an increasingly valuable differentiator over time as multinational chipmakers reassess location risk when planning new capacity,” it noted.
According to the report, Malaysia entered the industry soon after Singapore when Intel established a chip assembly plant in Penang in 1972.
Since then, the country has become a major hub for back-end semiconductor ATP, accounting for 13% of the global market.
Together with Singapore, it is also one of only two ASEAN economies with front-end manufacturing (fabrication) capabilities, with a particular strength in automotive power
semiconductors supported by German chipmaker Infineon’s local manufacturing footprint.
Reflecting its chipmaking prowess, Malaysia exported nearly $110 billion of semiconductors in 2025 — equal to around 23 percent of gross domestic product (GDP).
Overall, HSBC said operating conditions in the electronics sector remained robust in July.
The global electronics Purchasing Managers’ Index (PMI) eased to 55.3 last month from 55.7 in June, while the Asia electronics PMI edged down to 54.7 from 55.0.
“Even so, both readings remain firmly in expansionary territory — well above the 50 threshold — and continue to run comfortably ahead of their 12-month averages of 52.5 and 53.6, respectively,” said the research house.
However, it noted supply-chain pressures persist, driven by strong AI-related demand for select components (e.g., memory chips) and ongoing uncertainty around the Strait of
Hormuz, which continues to influence energy prices and the shipment of critical inputs.
“Conditions appeared to ease marginally in July as input and output prices dipped and supplier delivery times improved slightly,
“However, price pressures remain elevated and order backlogs continue to build,” it noted.
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