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National Semiconductor Strategy to guide industry up value chain

National Semiconductor Strategy to guide industry up value chain

20 Jun 2024

MALAYSIA’s electrical and electronics (E&E) industry needs to take the first step to move up the value chain, from outsourced semiconductor assembly and test (OSAT) to higher-end activities such as integrated circuit (IC) design, high-end manufacturing and niche equipment.

The newly unveiled National Semiconductor Strategy (NSS), which has five ambitious headline targets, is the road map for achieving this objective. It is to be implemented in three phases over the next 10 years.

“We have to take one step at a time as we advance phase by phase. Malaysia already has the edge because our OSAT (sector) is quite strong. So, our next step should be modernising OSAT and going into advanced packaging, which itself is already quite a complex and high-value activity,” says Minister of Investment, Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz, emphasising that the NSS is a dynamic “living document” that has to be continuously refined for ongoing improvement.

According to him, Malaysia is also keen to attract wafer fabrication players but due to the capital-intensive nature of this segment of the value chain and the country’s financial constraints, such investments may only materialise in the third phase of the NSS.

“We want higher-end wafer fabs in Malaysia, but we cannot afford it right now. That’s why NSS has three phases, and we shall be looking at wafer fab in Phase 3. The new wafer fabs that we hope to attract in the future have to be higher-end than the existing ones.

“When you look at the global value-add share, OSAT made up 6% and this area has been our strength. Meanwhile, front-end fabrication accounts for 24%, whereas IC design and embedded software made up 50%. Therefore, we have to shift our focus from OSAT to higher-end value chain opportunities,” he stresses.

Based on The Edge’s channel check, it appears that many countries typically offer subsidies of about 30% to incentivise the establishment of capital-intensive wafer fabs.

When asked, Zafrul says that some wafer fabs are willing to come to Malaysia even if the government provides them with only a 10% subsidy.

“But to us, the amount is just too big. The Ministry of Finance (MoF) said there is a fiscal constraint. They want us to move step by step. And also, we need to show them the spillover effect of having wafer fabs.

“Other countries like Japan and South Korea have deeper pockets. They are already in that area and they have got bigger balance sheets. We want to play the game, but we have to have the money to play. That’s why there are only eight wafer fabs in Southeast Asia currently,” he explains.

Zafrul also points out the importance of specialty chemicals as raw materials to make wafer fabs. Petroliam Nasional Bhd (Petronas) has yet to build facilities to produce specialty chemicals within the country and currently makes them overseas.

“If we could ‘marry’ the wafer fab with Petronas, then they would probably need less fiscal support since we have talent, we have infrastructure, we have ecosystem, and now we have the ingredients that they need.

“Petronas has the specialty chemicals technology but currently, they don’t bring it back to Malaysia because it’s very high-end. The volume must be commercially viable for them to do it in Malaysia. Again, Malaysia has that base already. Now, we are encouraging them to build it here, so that we could complete our ecosystem,” he says.

Under the first phase of NSS, Malaysia will continue to develop the country’s strengths in the chip industry by modernising OSAT, attracting high-end semiconductor manufacturing equipment players and growing existing Malaysian fabs.

In the second phase, the country will pursue cutting-edge technology by attracting foreign direct investment (FDI) in advanced chips manufacturing, and at the same time, building more local champions.

Finally, in the third phase, Malaysia will double down on developing local firms in semiconductor design, advanced packaging and manufacturing equipment. By doing so, it will attract buyers of advanced chips to pursue advanced manufacturing here.

For a start, RM25 billion has been allocated as targeted incentives to implement the NSS.

The Edge has learnt that this figure includes RM5 billion in estimated tax foregone over five years, RM2 billion for existing capital grants and RM1.25 billion for the Human Resources Development Fund dedicated to the semiconductor sector.

Other key investments include RM2 billion for the Semiconductor Industrial Park, RM1.59 billion for the Advanced Packaging Centre, as well as RM2 billion each for the National Energy Transition Facility and the Green Tech Financing Scheme.

Additionally, there are funds for strategic co-investments, high-impact projects, domestic strategic investments and training incentives. Notably, RM1 billion has been earmarked for the Domestic Strategic Investment Fund to support locally owned semiconductor companies.

Zafrul reveals that about two weeks ago, the ministry held a session with government-linked investment companies, including Khazanah Nasional Bhd, the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB), urging them to have higher exposure to the semiconductor sector.

“To be fair, EPF and PNB said they have already invested in a few listed companies such as Oppstar Bhd (KL:OPPSTAR), ViTrox Corp Bhd (KL:VITROX) and Inari Amertron Bhd (KL:INARI). So, they said they are there, but they also realised that they could’ve come in earlier. But the thing is, they don’t have a team specialising in this area (semiconductor stocks). They are now looking at that,” he says.

Zafrul adds that the sovereign and local funds must support more local companies within the E&E ecosystem.

“We should help them to move higher in the value chain since they already have the base. I was surprised with companies like Inari, which has a market cap of over RM10 billion (close to RM13 billion at press time). With more support from the government and local funds, I am sure they could go to another level.

“At the moment, they are all on their own because our funds do not have high exposure to them. Now, Khazanah is leading it. Together with the Malaysian Investment Development Authority (Mida), they have done a lot of good studies on the landscape of the semiconductor industry in Malaysia,” he says.

Nurturing 60,000 local engineers

It is noteworthy that the RM25 billion allocation includes RM1.2 billion to cover the cost of training and upskilling 60,000 high-skilled engineers, at RM20,000 per engineer.

Zafrul says Malaysia has a strong E&E ecosystem in Penang and Kedah, while the country has produced many talents over the last 50 years. Unfortunately, Malaysia doesn’t have a complete ecosystem that goes all the way up to IC design. As a result, some of these talents have left to pursue their careers in other countries.

“We are working very hard on the talent programmes. MoF is committed to support the talent programmes. We should also allow more foreign talents to come in. All these are being done,” he says.

Zafrul highlights that the Ministry of Education has committed to nurturing 30,000 high-skilled Malaysian engineers in five years while another 30,000 local Technical and Vocational Education and Training talents will come from the other ministries.

“We need not just engineers, we also need engineers who are technicians. That’s how we got the number (60,000). Based on today’s number, we could produce 10,000 talents a year, so that’s 50,000 in five years. We have to increase it by another 10,000 to 60,000. Vietnam is looking at 50,000, so we need to have a minimum of 60,000.

“We need to take into consideration that some engineers might not be practising. When I was in CIMB, half of my former colleagues in the exco (executive committee) were engineers. The reason is because engineers’ starting pay is low as compared to the service sector,” he elaborates.

Meanwhile, it is also important to note that some engineers opt to leave Malaysia to pursue opportunities abroad or become entrepreneurs as many in this profession are not actively practising.

“That’s why we want to push for higher pay in Malaysia. My colleague (deputy minister Liew) Chin Tong has been urging this. At the end of the day, it’s supply and demand, right? If we want them, we have to pay them more. That’s the only way,” Zafrul reasons.

He acknowledges, however, that local companies have been complaining about this as some claim that they cannot compete with the multinational corporations (MNCs) in terms of paying higher salaries.

“The thing is, if you look at the numbers, they are making money. So, their concern is more about profit margin. But in the long run, they have no choice (but to increase the pay).

“I think they realised their problem and they are starting to pay more to get the good engineers. Some even pay better than the MNCs so that their talents are not poached by the foreign firms,” says Zafrul.

He adds that Malaysia could also look at attracting foreign talents, but the priority is to bring Malaysians home.

“Perhaps we could be looking at attracting talents from China and India. But right now, we are looking at mainly Malaysians in other countries. That’s more realistic to me,” he says.

Interestingly, Zafrul believes that some companies were “exaggerating” when they complained about the shortage of talent in Malaysia.

“This talent shortage issue, I’m not convinced (by everything I have heard). I just can’t see it. Some of them complain because of the price. The talents are not enough when they have to pay more. Perhaps next time when you talk to the industry players, you should ask them ‘how many talents are you short of?’”

“In fact, we are getting Mida to check properly. Yes, it is true that we have a shortage of talents, but only in some specialised areas, not in general numbers. Many of them claim that there is a shortage of talents, but they still come, and they are still operating. I mean, why would you come to Malaysia if there’s no talent?” 

Source: The Edge Malaysia