KUALA LUMPUR -- Malaysia is making great strides in its effort to become a major player in the global semiconductor industry as it looks to capitalise on a surge in demand driven by the artificial intelligence (AI) explosion, but analysts warn it faces headwinds.

The signing of a major deal with British chip giant Arm this month was the latest step towards achieving the country’s goal of producing its own top-end chips in the next five to seven years.

But experts say internal constraints such as a talent crunch, funding problems and other supply chain gaps are key hurdles the country must overcome if it is to compete with top regional industry giants such as Taiwan, South Korea and Japan.

Shafiq Kadir, an equity analyst at CGS International, said local integrated circuit (IC) design houses had narrow access to large capital, and lacked a strong track record and established pool of experienced engineers.

“We still lack sufficient talent, as our tertiary education is less prepared in producing graduates with the right skill set,” Shafiq told AFP.

Malaysia Semiconductor Industry Association president Wong Siew Hai said there was a “shortage of those suitable for the specific experience and skill sets that we are looking for”.

Although there are experienced Malaysians who have worked with multinational firms, many of them chose to work abroad for better pay and opportunities, among other factors, Wong said.

“We lose an average 15% of our talent in the semiconductor industry every year to brain drain,” he added.

In the deal signed on March 5, Malaysia will pay Softbank-owned Arm US$250 million over a decade to access its intellectual property, including seven high-end chip design blueprints and other technology.

The aim is to help Malaysia move into more value-added production such as wafer fabrication and IC design.

The deal also includes the training of 10,000 local semiconductor engineers, while Arm will establish its first office in Southeast Asia in Kuala Lumpur.

‘White elephants’

Farlina Said, a cyber and technology policy fellow at the Institute of Strategic and International Studies Malaysia, said building semiconductor ecosystems would require time and careful planning.

“These would have to be mapped against resource availability and market conditions. Building the infrastructure without sufficient players can create white elephants for the industry,” she said.

“Moving up the value chain means Malaysia has to first find the means of transferring knowledge to develop local capacities.

“Secondly, funds are needed to develop the ecosystem surrounding knowledge transfer. This includes technology transfers, talent pipelines and R&D sustainability,” she added.

Wong said the government’s US$5.3 billion allocation over the next decade to upscale Malaysia’s semiconductor sector is small compared with state investments by China and the US.

Shafiq said the tools and equipment required for chip production could run into billions of dollars – apart from the need for highly skilled engineers and operators.

“Achieving a certain level of production yield on those high-end chips has proven to be very challenging even for established fabs like Samsung and Intel,” he said.

Farlina said competing with semiconductor powerhouses in the region will not be a walk in the park as they have “developed the ecosystems to support technological leadership in the past few decades”.

Malaysia, however, is not starting from scratch, the analysts said.

The country has long been a key player in the chips sector, with Penang – often called the nation’s Silicon Valley – at the heart of its success, although focussed on the back-end of the industry such as assembly and testing.

“Key multinational corporations, such as Intel and AMD, have integrated circuit design operations in Penang, and this has somewhat generated the development of IC design among local engineers for decades,” Shafiq said.

“We stand to benefit from this as more capital and focus are being put into the IC design area.”

Malaysia accounts for an estimated 13% of global back-end manufacturing, according to German tech firm Bosch.

The nation’s semiconductor exports were valued at RM387.98 billion (US$87.48 billion) in 2024, the Malaysia External Trade Development Corporation (Matrade) said, making the country one of the world’s top 10 chip exporters.

The semiconductor industry association is aiming for the country’s chip exports to reach US$270 billion by 2030, which Wong said would allow the country to “maintain its relative position in the world” as a top semiconductor exporter.