Transcript: A surprising winner in the US-China chip wars

This is an audio transcript of the Behind the Money podcast episode: ‘A surprising winner in the US-China chip wars’

Michela Tindera
Hey BTM listeners. I want to share a special invitation with you. The FT’s finance blog, Alphaville, is hosting a live in-person pub quiz right here in New York next week on Tuesday, April 9th. So if you’ve ever wanted to test your knowledge of the wonky ass markets, finance and economics topics, come on out. There’s more info on all of that in our show notes. Now let’s get on to this week’s episode.

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Back in February, FT correspondent Mercedes Ruehl took a trip to a small island state in northern Malaysia called Penang. And one night, she stumbled upon a Lunar New Year celebration.

[AUDIO CLIP OF LUNAR NEW YEAR CELEBRATION]

Mercedes Ruehl
I recorded this walking down one of the main streets of Georgetown, which is the capital, and it was about 10pm at night.

[AUDIO CLIP OF LUNAR NEW YEAR CELEBRATION]

Mercedes Ruehl
There was celebration. There were decorations everywhere. Bars are pumping music, and it’s alive and buzzing.

Michela Tindera
Penang is known for its beautiful beaches and good food. But Mercedes travelled there to see something else.

Mercedes Ruehl
I’d been hearing for months and months that Penang was experiencing a new boom. Not, this time, in food or resorts but for semiconductor chips.

Michela Tindera
Semiconductor chips. They’re the tiny processors powering everything from your smartphone to TVs and EVs. And recently, companies that make these chips have been racing to set up or expand their manufacturing operations in Penang.

Mercedes Ruehl
I’d heard a lot of Chinese companies were setting up, that a lot of existing companies, big names, multinationals were expanding. Think Intel, Infineon, Micron. And that the government could barely find land fast enough to meet this demand. So I’d heard all this, and I wanted to see if the reality lived up to all that buzz.

Michela Tindera
Semiconductor chips are a $520bn industry, and the global demand for them is only increasing. But the US and China, in their own growing battle over which country dominates the sector, is having a wide ranging impact.

Mercedes Ruehl
The US and China have been vying for control over semiconductors due to their role in modern technology for years now. The interesting thing is this battle is creating spillover consequences or for some countries, opportunities. And Malaysia is one such country that is seeing benefits from this.

Michela Tindera
Companies around the world are looking to protect their supply chains from potential disruptions that could stem from this US-China chip war. And right now, Malaysia is cashing in on that big time.

Mercedes Ruehl
Penang received $12.8bn in foreign direct investment in 2023. And to put that into perspective, that alone was more than 2013 to 2020 combined. And there is expectation, certainly when I was there, from the government that this was not going to stop anytime soon.

Michela Tindera
This investment is creating new opportunities for Malaysia’s economy. But can the country’s tech boom last?

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I’m Michela Tindera from the Financial Times. As tensions between the US and China intensify. Malaysia has emerged as an unexpected winner. Today on Behind the Money, we’re taking a closer look at how Malaysia got here, and whether the country will be able to capitalise on this important spot that they’ve established in the global supply chain. Hi, Mercedes. Welcome to the show.

Mercedes Ruehl
Thank you.

Michela Tindera
So right now in Malaysia and in particular this island state, Penang, is experiencing this big increase in investment from a slew of international companies that are looking to produce semiconductors there. But could you give me a bit of background to this? How long has the country been in this industry?

Mercedes Ruehl
A lot of people don’t know this, but Malaysia has a 50-year history in the semiconductor supply chain. One of the first big companies to actually open a production facility in Penang was Intel. Lured by things like new free trade zones. It was in a busy shipping port. A bunch of companies, including Intel, set up and were pioneers of what was then called Silicon Valley of the East. This was in 1972. And think Penang back then it was Intel’s site was in a muddy paddy field. This was a very bold move, I guess you could say at the time.

Michela Tindera
And so, historically speaking, I mean, what role has Malaysia played in the chip supply chain? Have they been designing chips from the start or what exactly?

Mercedes Ruehl
Malaysia has huge experience in what is called the back end of the semiconductor supply chain. So if you think of the front end being a very sophisticated, expensive process, the back end is the kind of last part before they’re shipped out and, you know, go into the world. Things like packaging, assembly and testing. This is important, but it’s not quite as sexy as the front end.

Michela Tindera
OK, so Intel really leads this charge to set up in Penang in the 1970s. And other big companies follow their lead. And that development really allows Malaysia to find a niche in this back end part of the chip supply chain. So what’s happened since then?

Mercedes Ruehl
So Malaysia had this boom in the ’70s and the ’80s. It was all looking pretty good. It was just that it never really took off. And Malaysia kind of took a back seat as other neighbouring countries in the region grew and developed their own semiconductor industries much faster, and created big global tech companies and like kind of national champions like TSMC and Taiwan or Samsung in South Korea. Malaysia never quite got there for whatever reason. And it kind of really stayed in this back end, in this testing and packaging market. What’s different now is the US-China rivalry, particularly the tech rivalry. It started under Trump and people thought it might die down under the Biden administration, but it really hasn’t. In fact, the Biden administration has doubled down on it.

Joe Biden voice clip
I’ve made sure that the most advanced American technology can’t be used in China, not allowing to trade in there. Frankly, for all his tough talk on China, it never occurred to my predecessor to do any of that. I want competition with China, not conflict.

Mercedes Ruehl
This has created opportunities for places like Malaysia. There’s a phenomenon called the China Plus One trend. Basically, it refers to diversifying your supply chains by adding manufacturing or operations usually outside of China so that you’re reducing dependency on a single location. It’s a way to mitigate risk, such as geopolitical tensions. You know, the US keeps putting more export controls on Chinese companies. So companies really need to have a plan B, have a back up. For that reason, they look to places like Malaysia.

Michela Tindera
What’s so appealing about Malaysia specifically over another place?

Mercedes Ruehl
Malaysia’s neutral in terms of geopolitics. It’s friendly with the US. It’s also friendly with China. It’s got a strategic location. There’s easy access to suppliers and customers. Workers tend to be multilingual. It isn’t too expensive. So it has a kind of a lot of the parts of the puzzle that these big multinational companies look for. Another thing that is helping Malaysia is there’s just a lot more demand for semiconductors. I mean, these things power everything from electric vehicles and AI to your television, to your phone. So one, there’s a demand, but two, something else happened in the last few years that has benefited Malaysia, and that is that the demand for more high powered chips means that the so-called back end has actually become a lot more advanced, and Malaysia has all of the pieces of the puzzle of that to be able to quickly embrace advanced packaging.

Michela Tindera
Earlier, you mentioned that companies like Intel and Infineon have been expanding their operations into Penang, and that’s all part of that China Plus One trend. But there’s also been a wave of Chinese companies that are setting up or expanding in the country. So why are they coming to Malaysia?

Mercedes Ruehl
So a lot of Chinese companies actually have a lot of foreign suppliers, or they supply from foreign companies from the US or Europe. The struggle for them at the moment is with this rivalry with the US, there’s this kind of increasing risk that they might be shut out of the US market. The US has already made it extremely difficult for exports, imports. So it’s not just, you know, western companies that need to protect themselves. Chinese companies also need to do this. And so somewhere like Malaysia, which is welcoming of Chinese investment, is the perfect place to do that.

Michela Tindera
So these policies are having spillover effects. So what would you say are the consequences or repercussions that are coming out of this?

Mercedes Ruehl
The reason all of this is important is because this China Plus One phenomenon, this global supply chain diversification, is still quite new. Right? Like a lot of companies are testing, trying new markets, figuring out what works, what doesn’t work, but also figuring out is it safe? Like am I safe if my Chinese supplier moves to Malaysia and can I still supply to my customers? I mean, this is a great test case for does diversification in your supply chain work.

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Michela Tindera
So Malaysia sits at an important inflection point. Thanks to the US-China rivalry, chip companies are more eager than ever to pour their dollars into this country. But there’s another question on the horizon. Will the success that Malaysia’s experience from those geopolitical tensions also lead to new complications? So Mercedes, as we said, Malaysia is doing really well right now as these new investments are rolling in. But what are the country’s plans to capitalise on this and not miss out the way they did after that early 1970s investment? How are they trying to seize on this opportunity?

Mercedes Ruehl
There are a couple of goals here for Malaysia to take advantage of this boom. And goals that they’ve kind of really do feel a need to make sure so what happened last time doesn’t happen again. So for one, Malaysia would like to be the first south-east Asian country — just take out Singapore for a moment because that’s slightly different — Malaysia would like to be the first south-east Asian country to hit high income status. This is one of the key ways of doing that. It’s not the only way, but it’s an important one that will help. Second of all, Malaysia has for many years wanted to move from the back end of the supply chain to the front end, which is where you get the real big investment dollars. And that is the process involved in creating silicon wafers, fabricating semiconductor devices. It’s the more high tech, expensive part.

Michela Tindera
OK, so to recap, when it comes to capitalising on this boom, Malaysia has two big goals here. The first one is to move the country’s economy out of this middle-income bracket and into a high income bracket. And then second, establish itself in the front end of the semiconductor chip supply chain. Mercedes looking at where things stand right now. What are the main threats to achieving these goals? What might hurt their chances of accomplishing this?

Mercedes Ruehl
There are few risks, but I think if you are to single out two as the main ones. One is that the country has quite a severe engineering shortage. The trade minister, whom I spoke to on my trip, said that the electrical and electronics sector requires like 50,000 engineers a year, for instance. But there are only 5000 engineering graduates each year. A lot of these people are not paid enough. They end up going places like Singapore or elsewhere where they have higher salaries. And you know, this is important as well, not just for growing the kind of talent that’s needed to service that, that kind of more lucrative end of the supply chain. But it’s also important for creating tech champions and for growing their own, you know, one day maybe semiconductor champion.

Michela Tindera
Got it. And what’s the other potential risk here?

Mercedes Ruehl
There’s always a risk in any of these kinds of booms and these stories around politics. And that being in this case the chance that the thing that has kind of catapulted Malaysia into this space, into this opportunity, that’s US tensions with China. So there is some concern, that if Chinese companies are more sensitive and higher-value sectors, start to set up shop, so semiconductors being one, this might invite a little bit more scrutiny. You know, the American government has shown it is quite open to keep broadening their criteria, putting more products or people on its restricted list. You know, so who’s to say that perhaps a company that is assembling something in Penang, but it’s with Chinese parts. Or it’s being assembled by a Chinese company, even though if it’s in Penang, maybe there’s kind of a question mark on whether the US looks a little bit further down that supply chain and puts more restrictions on somewhere like Malaysia.

Michela Tindera
So what’s Malaysia doing to combat these risks or obstacles that are ahead? Let’s start with the talent shortage. What’s being done to tackle that issue?

Mercedes Ruehl
We are seeing Malaysia start to address some of this. There are more programs. Universities and the industry are working together to give more experience to students, create more specialised talent, offer better courses. You’re seeing also some joint programs between universities in places like Australia or China or the US. You’re also seeing the government for the first time in a long time, really look at what incentives they can provide, both domestic and foreign companies and what kind of money they can provide to encourage further investment.

Michela Tindera
Got it. And with the other risk, US-China tensions. Now that’s obviously a big one. But is there anything that Malaysia can do to avoid becoming collateral damage?

Mercedes Ruehl
Malaysia, like all countries, is always going to be worried about getting caught in the middle between the US and China. And certainly they agree there’s a question mark over what the US could do, what China might do. But in this sense, it makes it even more important for Malaysia to become a crucial cog in this chip supply chain to make themselves even more indispensable to these companies. At some point down the line, the theory goes that there could come a point where, if so many American companies have set up in Malaysia and rely on those factories, it would actually be counterproductive for the US to install more restrictions because it would be against their own interests. That said, there are still other risks in all this. There is a huge trend around the globe going on in terms of onshoring and bringing factories back home. Chips act in the US, for instance. It could end up being cheaper for these companies, and they could get more lucrative or better subsidies if they set up in the US. So that is also another risk for Malaysia here. But again, this is why they’re trying to make themselves so indispensable to these companies now.

Michela Tindera
So what happens if Malaysia isn’t able to capitalise on this moment here? As far as being able to keep attracting companies and growing the talent pool.

Mercedes Ruehl
If Malaysia fails to capitalise on this moment, the risk is that there are other countries in the region that are competing to build their own semiconductor industry. So in south-east Asia, there are other challenges like Vietnam, but also India. And in many cases, their governments are offering more incentive to companies or may also have more skilled engineers at their disposal. So, for instance, Micron, the big US company, they told me when I was in Penang that they were getting offered something like 70 cents in the dollar in terms of subsidies in India. That is very appealing for companies. That said, I don’t think we’re looking at a situation where Malaysia is a big loser in some way. I think it’s very clear they’re going to continue to get the foreign direct investment. They have the existing ecosystem. They have everything they need to continue to let that ecosystem continue to grow. It’s just a question of whether they can really take this next big step up into the higher value, more lucrative part of this chip supply chain and let that trickle down effect benefit their economy.

Michela Tindera
Well, Mercedes, thanks for being on the show.

Mercedes Ruehl
Thank you very much.

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Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.