Employees coming into Intel’s superior PG8 foundry on the Malaysian island of Penang should take elaborate security precautions. Not that they’re those in danger.
First, workers don blue shoe coverings, adopted by a hairnet, plastic hood, facemask, bunny swimsuit, latex gloves, and eye goggles. Lastly, plastic boots are positioned over these already-covered sneakers with a particular strap tucked into the wearer’s socks to “floor” them. For it’s not only a stray hair or pores and skin flake that may be lethal to Intel’s newest synthetic intelligence (AI) semiconductor chips—even the static shock from an unsuspecting pinky can measure 10,000 volts and fry their delicate circuitry.
“Static is a unit killer,” says Phynthamilkumaran Siea Dass, Intel’s director of meeting check manufacturing in Penang, as he leads TIME by means of interlocked doorways into PG8’s cleanroom. “And we actually don’t like killing models.”
It’s meticulous care emblematic of the precision engineering happening lately on Penang, a tropical island perched off peninsular Malaysia’s west coast that for hundreds of years was synonymous with betel bushes, earlier than the late 18th century arrival of British colonizers remodeled it right into a flourishing buying and selling submit. Immediately, Penang rivals South Korea and Silicon Valley as an important hub producing the semiconductor chips that energy the AI revolution.
As part of this drive, Intel is investing $7 billion in new amenities in Penang, together with a sophisticated packaging web site codenamed “pelican” for transformative “3D” semiconductors—which stack chips on prime of one another to spice up efficiency—set to open early subsequent yr. As semiconductors chips themselves have exponentially superior, so has the complexity of the backend work needed for his or her deployment. Immediately, Intel makes use of its Penang and sister amenities within the close by Kulim Hello-Tech Zone to assemble and check dozens of merchandise together with its Core, Xeon, and newest AI-enabled Meteor Lake chips.
“Malaysia is a really, very essential location in Intel’s provide chain the place we aren’t solely doing manufacturing, meeting, and testing merchandise, however we even have design,” says Keyvan Esfarjani, an government vp and chief world operations officer for Intel.
And it’s not simply Intel; chipmakers and suppliers together with Micron, AMS Osram, and Ferrotec are all investing large in Malaysia as corporations look to decouple provide chains from China (a development dubbed “China+1” diversification). In the meantime, Chinese language counterparts are additionally organising store right here partly with a view to sidestepping U.S. tariffs and export controls, thrusting backend hubs like Malaysia to the forefront of the $520 billion world semiconductor trade.
In July, overseas buyers plowed $1.3 billion into Malaysian bonds, the most important month-to-month influx in a yr. On Aug. 8, German semiconductor large Infineon Applied sciences AG opened the world’s largest 200-mm silicon carbide energy fabrication plant in Kulim as a part of a $7.7 billion enlargement. Penang alone attracted $12.8 billion in overseas direct funding (FDI) in 2023—greater than the whole it acquired from 2013 to 2020 mixed—from corporations offered on its strong infrastructure, a long time of engineering experience, in addition to perks like 15-year tax breaks.
“Chinese language, U.S., and European corporations are all converging right here,” Penang Chief Minister Chow Kon Yeow tells TIME in his Georgetown workplace. “We welcome all investments and are impartial within the sense that we don’t take sides.”
But geopolitics continues to bubble within the background and lots of surprise for a way lengthy nations like Malaysia can play all sides, with some trade teams fearing the U.S. might begin limiting merchandise and gear inbuilt Malaysia by regionally primarily based Chinese language corporations. It’s a fragile steadiness; whereas the U.S. is the highest supply of FDI to Malaysia, China has been its largest buying and selling associate for 15 consecutive years. Prime Minister Anwar Ibrahim has been fiercely essential of Washington’s backing of Israel over the Gaza disaster, and a latest survey discovered 75.1% of Malaysians thought the nation ought to align with China if pressured to decide on between the superpowers.
Talking to TIME on the sidelines of the Infineon launch, Anwar harassed that Malaysia sought to profit from the commerce warfare with out being dragged into it. “Some say perhaps we’re tilting considerably,” he stated. “I’d say no, we keep a really fiercely unbiased overseas coverage and proceed to interact [all sides]. However it’s not simple to navigate this; folks develop into very uptight about being with us or with them.”
It was 1972 when Intel—the world’s largest chipmaker by income—selected Penang for its first abroad manufacturing facility. Dubbed A1, that preliminary manufacturing facility was constructed on the location of a paddy subject so off-grid that the automobile carrying Andy Grove—Intel’s legendary future CEO and TIME’s 1997 Man of the 12 months—bought caught in a lavatory throughout an early web site inspection and needed to be dragged out by native workers.
Over half a century later, Intel’s amenities throughout Penang and Kulim are dwelling to some 15,000 workers, working each to the clatter of commercial equipment and hum of climate-controlled places of work. Inside its shimmering clear rooms, wafers are precision sliced into particular person chips, mounted on a resin substrate, pumped with epoxy underfill, coated with metallic plates, heat-treated, and examined for defects. The one reminder from Intel’s mud-spattered native origins is Grove’s well-known saying—“solely the paranoid survive”—emblazoned on a stairwell wall.
It’s a maxim that neatly captures right now’s industrial zeitgeist following a pandemic and simmering expertise warfare which have upended world commerce, prompting a frenzy of “friendshoring” or “nearshoring”—fairly than prioritizing prices, partnering with nations extra politically aligned and nearer geographically—ostensibly to instill resilience into provide chains. On this regard, semiconductors are essential—a typical automobile comprises over 1,000 chips—and are poised to get extra so following latest advances in AI.
Given right now’s geopolitical local weather, “what non-China buyer would settle for a provide plan that’s anchored on China?” says Hassane El-Khoury, CEO of Arizona-based Onsemi, a $31 billion producer of energy semiconductors with operations in over a dozen nations together with India, Malaysia, and Vietnam. Immediately, Onsemi goals to supply its merchandise through two fully distinct provide chains inside the identical firm, which “may be very, very favorable from a buyer perspective,” he provides.
Nonetheless, at current Taiwan produces over 90% of essentially the most superior semiconductor nodes and China’s repeated threats to invade the self-governing island is a trigger of serious anxiousness. In response, the 2022 U.S. CHIPS and Science Act allotted $39 billion to semiconductor producers to subsidize the opening of American foundries, together with practically $28 billion shared between Intel, TSMC, Samsung, and Micron, alone.
“The semiconductor ecosystem is essential and in case you take out one participant you may cripple the entire thing,” says Daniel Nenni, co-author of Fabless: The Transformation of the Semiconductor Business. “So any sort of repetition or redundancy we will construct in is at all times factor.”
Southeast Asia can be seeing a glut of funding with over $70 billion unveiled by the world’s prime tech corporations in latest months. Malaysia has specifically emerged as a hub for cloud and AI knowledge facilities, with latest pledges of $6 billion from Amazon Internet Companies, $4.3 billion from Nvidia, $2.2 billion from Microsoft, $2.1 billion from Bytedance, and $2 billion from Google.
As well as, the rise of “chiplets”—microprocessors of various efficiency and windfall fused collectively into bespoke chips—has boosted the intricacy and significance of back-end semiconductor work. With AI capabilities right now being infused into every thing from vehicles to fridges, there’s an explosion in demand for superior chips. Nonetheless, AI chips are extraordinarily costly and overkill for extra mundane capabilities, making the flexibility to bundle small, superior chips with a lot older, fundamental nodes a internet win for performance and price. “Superior packaging is turning into increasingly more necessary and the place plenty of the motion goes,” says Willy Shih, a professor at Harvard Enterprise Faculty.
In fact, Malaysia faces fierce competitors as many nations vie to be the “plus one” in each multinational’s China+1 technique, particularly India, Vietnam, Thailand, and Mexico. Every comes with benefits and downsides. Proximity to the U.S. makes Mexico favored by corporations specializing in American shoppers. India is providing many billions of {dollars} in subsidies, although is hampered by a relatively unskilled labor pressure, onerous crimson tape, and untested infrastructure. Vietnam and Thailand each welcomed large investments by Apple and Microsoft respectively in latest months, however lack a prepared provide of expertise or preexisting tech ecosystem. That is the place Malaysia—already the world’s sixth-biggest semiconductor exporter, packaging 23% of all American chips—excels.
“It is a actually superb semiconductor ecosystem they’ve developed particularly in Penang,” says Peter Hanbury, a semiconductor specialist on the Bain & Co. consulting agency. “It has all of the totally different semiconductor gamers, their producers, device distributors, and meeting assessments.”
Nonetheless, Malaysia is barely too conscious that it can’t afford to relaxation on its aggressive benefit. In Might, Prime Minister Anwar unveiled a three-phase $5.3 billion Nationwide Semiconductor Technique together with the coaching of 60,000 new engineers. “Malaysia realizes you can’t any longer simply supply free land and native employees,” says Siobhan Das, CEO of the American Chamber of Commerce in Malaysia. “It is in regards to the high quality of the folks put into these jobs.”
Whereas the purpose of worldwide corporations is to bolster provide chain resilience, for Malaysia and its opponents the impetus is to maneuver as much as increased worth actions akin to wafer fabrication and built-in circuit (IC) design. And fairly than simply entice overseas corporations, they wish to leverage that funding and experience to foster home champions. “We’re not doing sufficient in IC design and wafer fabrication, as a result of that is the place the value-add is,” Zafrul Abdul Aziz, Malaysian Minister of Funding, Commerce, and Business, tells TIME. “We’re doing 20%—however 80% is what we’re not doing, as a result of truly design is about half of the value-add course of.”
Semiconductor design just isn’t for the fainthearted. In any case, not even Japan or South Korea had corporations rating within the prime 10 IC designers by world income final yr. Whereas prosperous Singapore serves as a design hub for worldwide corporations like Broadcom, Ceres, and MediaTek, it nonetheless lacks any native design trade of be aware. Zafrul is aware of that to harness the potential of design would require loosening immigration coverage for overseas expertise to empower the native workforce. He’s additionally urging the Finance Ministry to bow to calls for to match the subsidies supplied by different nations—even when this implies diverting billions that could possibly be spent serving to native SMEs or different social initiatives. “If we had been ranging from zero, I can perceive [objections],” says Zafrul, who previously served as Finance Minister. “However we’re not that far behind. And in case you have a look at the spillover, that is justified.”
Zafrul factors to how Malaysia has already turned from being a hub for semiconductor assembling and testing into an exporter of kit designed for that function. Native agency ViTrox, based in 2000 by two former Hewlett Packard Malaysia staff, right now sells meeting and testing gear to over a dozen nations together with China and the U.S. However expertise acquisition and retention are key. As a part of its new knowledge middle funding, Microsoft has unveiled plans for an AI Centre of Excellence to offer schooling and coaching to 200,000 younger Malaysians. And as extra corporations converge right here, competitors for the perfect engineers will solely improve.
“The ‘expertise warfare’ just isn’t solely confronted by Malaysia however is definitely throughout this area,” says AK Chong, Intel vice-president of foundry manufacturing and provide chain. “We face sturdy competitors not solely regionally and in addition externally.”
It’s an issue KS Pua is aware of solely too nicely. Famed because the inventor of the USB flash drive, Pua was born in Malaysia however based $3.3 billion flash reminiscence pioneer Phison Electronics Corp. in Taiwan in 2000 after graduating there. Along with his U.S. prospects now demanding that Phison diversify provides away from Taiwan, and lingering doubts over the deserves of India or Vietnam, Pua says he has “no alternative” however to return to Malaysia. Nonetheless, he says he should prepare his personal workers and supply them fairness within the new enterprise—Malaysia AI Storage (Mai Storage)—to forestall them being instantly poached. “Malaysia has an enormous drawback in design,” he says. “It’s troublesome to get designers, particularly IC designers, as a result of they do not have this trade and universities don’t produce this sort of expertise.”
Nonetheless, right now not even subsidies, expertise, and a longtime tech ecosystem are adequate to make sure FDI. Overseas corporations are additionally extremely cognizant of environmental, social, and governance (ESG) metrics for investments. Though Malaysia is politically secure with a secular structure, the Muslim-majority nation of 35 million retains oppressive legal guidelines criminalizing same-sex relations that run counter to virtually each multinational’s dedication to inclusion and preventing discrimination. (Though Das insists “we have by no means actually had a problem” on this regard as buyers “respect what the nation’s profile is.”)
Extra instantly urgent are environmental issues given the semiconductor trade’s sizable energy and water footprint, in addition to the looming inflow of energy-hungry AI knowledge facilities. Owing partly to booming FDI, Malaysia envisions doubling its vitality consumption by 2050—the identical yr it intends to go carbon impartial—however as of 2020 had an vitality combine consisting of 42% pure gasoline, 27% oil, 26% coal, and simply 4% renewables. Zafrul says one answer already underway is the liberalization of the vitality market to permit corporations to purchase clear vitality instantly from non-public renewable suppliers. For one, Nvidia’s new multibillion greenback knowledge middle will associate with native conglomerate YTL Energy Worldwide, which has been enlisted to offer a 500-megawatt on-site photo voltaic facility.
The concentrate on vitality provide is already inflicting shifts. Whereas most hi-tech funding has till now been centered on extra developed peninsula Malaysia, vitality issues are encouraging corporations to take a look at Japanese Malaysia’s two provinces of Sabah and Sarawak, which hug the northern fringe of Borneo and boast bountiful hydropower. Sarawak’s vitality composition is at the moment 70% inexperienced and is on monitor to be 100% inside 5 years, with the province negotiating to promote clear electrical energy to close by Singapore. Though comparatively underdeveloped, an enviable inexperienced vitality combine helped propel Sarawak to rank fourth out of Malaysia’s 13 states for FDI within the first quarter of the yr.
Nonetheless, as nations and areas tussle for a bit of the friendshoring growth, the query stays: how a lot resilience is basically instilled, and at what price? In any case, even when the backend testing and meeting is diversified all over the world, essentially the most superior nodes stay centered on Taiwan. U.S. Secretary of Commerce Secretary Gina Raimondo has stated she goals to carry dwelling 20% of superior node manufacturing by the tip of the last decade. However with Apple alone accounting for a couple of quarter of TSMC’s whole income, even a finest case state of affairs sees American corporations counting on Taiwanese imports for many years to come back.
There are various different chokepoints. Most crucially, solely Dutch agency ASML produces the superior lithography machines that essentially the most superior fabs depend on. And whereas Chinese language aggression has spurred efforts to diversify semiconductor chips away from Taiwan, practically all of the world’s provide of reminiscence chips—one other important part of digital gadgets—are produced in South Korea, which sits below perennial risk from North Korean missiles. “With out reminiscence, there isn’t a logic or chips,” says Nenni. “And North Korea is rather more unstable than China.”
Even the growth of chiplets, whereas economically prudent, isn’t essentially nice for resilience. Hanbury factors to how the latest scarcity of Nvidia GPUs was not on account of a shortage of wafers from TSMC however the specialised instruments wanted for superior packaging. Piecing a number of chips collectively additionally means “having extra single factors of failure,” says Hanbury. “As a result of if a type of 5 little chip bolts would not present up, you could have a problem.”
Finally, current provide chains had been by their very nature already essentially the most cost-effective answer, barring any main contingency, and the friendshoring drive is being pushed by politics fairly than enterprise. However that shouldn’t—and received’t—stop nations like Malaysia from doing their darndest to leverage the development to get a leg-up.
“We now have to actually work sooner,” says Anwar. “And concentrate on attracting investments, coaching, and getting expert employees.”
