Navigating the tariff fog in chip sector

THE US tariff dispute poses a significant threat to Malaysian semiconductors.

Some of Malaysia’s most valuable companies are located in this sector, which is deeply integrated into the global supply chain.

The central questions now are: what the final tariff rate for semiconductors will be, and whether existing exemptions will remain in place.

On Tuesday, the US announced a 25% tariff on Malaysia (up from 24% previously), set to take effect on August 1, 2025.

However, certain sectors like semiconductors will be subject to separate tariff arrangements which US President Donald Trump has indicated since April.

That same month, he initiated a Section 232 investigation into imports of semiconductors and related products.

The findings will guide decisions on whether tariffs or other trade restrictions are necessary to safeguard the United States domestic supply chain.

To recap, Trump announced a 90-day period for negotiations which ended on July 9.

During this period, the 24% tariffs were lowered to a baseline 10%.

However, some semiconductor products were exempted, and this has remained in place following the latest tariff announcements by Trump.

However, it is uncertain if these exemptions will continue, as the Section 232 investigation, which may take up to 270 days to complete, is still ongoing.

The administration has indicated it plans to expedite the process, with US President Donald Trump stating this week that he will “soon” announce tariffs for the semiconductor industry.

For now, Datuk Seri Wong Siew Hai, president of the Malaysia Semiconductor Industry Association (MSIA) says that local chip firms are holding back on investment and expansion, as they await clarity on tariffs.

According to Wong , the Section 232 investigation “could be the light at the end of the tunnel” for the sector, as there is still a possibility that the existing exemptions will remain in place

“Right now, companies can keep shipping as usual. But that could change come Aug 1 – nobody is sure yet.

“There’s always the risk that the exemptions may be removed. If you take a more optimistic view, the Section 232 investigation could take some time to conclude, which means current exemptions might remain in place longer,” he tells StarBiz 7.

Wong anticipates sectoral tariffs for semiconductors to be lower than 25%. He emphasises that local semiconductor companies cannot absorb these tariffs, stating: “In fact, we should not even attempt to – if we do, we will have no profit left

However, a senior analyst says the impact would depend on whether companies have cost pass-through mechanisms with their customers.

“If companies have no cost pass-through agreements, then earnings are highly likely to turn negative,” he says

Companies like Inari Amertron Bhd and electronic manufacturing services players have such agreements, he adds.

“ViTrox Corp Bhd, an automated test equipment player, is unlikely to have cost pass-through as the market is competitive and the group can only compete on quality and technological levels,” he says.

Tradeview Capital fund manager Neoh Jia Man, however, anticipates semiconductor sectoral tariffs to have a similar 50% rate as the copper, steel and aluminium sectors, which he says is still manageable.

“If the same sectoral tariff rate applies to all countries, it levels the playing field.

“It would take years for US firms to fully establish alternative supply chains. If competing countries don’t have an established supply chain like ours, then demand stays relatively inelastic – at least for the next few years,” he says.

In 2024, Malaysia’s electrical and electronics (E&E) exports to the United States amounted to RM119.86bil, accounting for more than 60% of the country’s total exports, with semiconductors comprising a large portion.

About 65% of E&E exports are produced by US companies operating in Malaysia, mostly finished products or components shipped back to the parent company.

While no one has a crystal ball, SPI Asset Management managing director Stephen Innes suggests Trump’s broader strategy could offer clues as to which parts of the supply chain are more likely to face higher tariffs.

“This is not blanket protectionism – it is selective pressure. Trump is using tariffs and export curbs as levers to keep allies close and China boxed out.

“For traders, that means the risk is not in broad semiconductor operations – it is in the edges like artificial intelligence chips, export-sensitive technology, rerouting flows. Watch where the White House draws the “strategic” line. That is where the tariff heat will show up next,” he says.

Bank Negara notes that 83% of Malaysian exports to the United States are price-inelastic, so demand should hold steady in the short term despite tariffs. These include electrical machinery, computer hardware and scientific equipment.

However, it is understood that while tariffs are essentially paid by US importers, local Malaysian companies may still be pressured to absorb part of the cost to remain competitive.

Hence, Wong argues that when the cost of doing business increases sharply as a result of tariffs, demand for semiconductor products will likely drop.

This is why margin buffers could be key as tariff headwinds threaten to pressure margins.

“Bloomberg data indicates that 31% of listed technology companies in Malaysia achieved earnings before interest, taxes, depreciation and amortisation margins above 20%, compared to just 12% in Vietnam.

“This could help partially mitigate the impact of Malaysia’s higher tariff disadvantage relative to Vietnam,” Kenanga Research says.

With Vietnam gaining the upper hand by securing a relatively lower tariff rate from the United States and India’s growing presence in high value-added semiconductor work, these countries may add competitive risk and pressure on Malaysia’s sector.

While Innes agrees that Vietnam and India do pose “legitimate competitive pressure”, he says it is not a zerosum game.

“Malaysia still commands respect in advanced backend work. Even with tariffs, Malaysian technology firms will find pathways into US supply chains – either directly or through third-party routing

“The sector’s role in global backend operations makes it hard to sideline completely.

“Demand may soften at the margin, but in key niches like packaging and testing, the value-add is hard to replace quickly,” he says.

The real risk, Innes highlights, is not an exodus but complacency. “If investment stalls, others will catch up faster,” he cautions.

That said, Phillip Nova senior analyst Danish Lim points out the ecosystem in both Vietnam and India is less mature than Malaysia’s, especially in the outsourced semiconductor assembly and test space.

“Both face challenges such as talent availability and infrastructure development,” he says.

Hence, he believes that as the semiconductor space becomes more globally competitive, market share erosion will be gradual, not abrupt.

Despite the lingering uncertainties, Malaysia’s E&E export base still looks resilient in the long run.

“Tariff noise will create short-term volatility, but structurally, the global demand for semiconductors isn’t going anywhere,” Innes says.