Will the chip crumble?

DESPITE the looming threat of high tariff on semiconductors – it has now risen to a possible 300% from the earlier 100% –Malaysian semiconductor companies’ valuations continue to hold up.

US President Donald Trump wants significant parts of the technology supply chain moved to the United States and plans high import tariffs to encourage that.

From recent price movements, it is evident that some investors remain nervous.

However, it is interesting that no one research house has called an outright sell on the local technology sector.

That said, BIMB Research, which has a neutral rating on the industry, has begun to raise caution in its latest report.

Maybank Investment Bank Research, which had a neutral call on the sector, blended some positives into its report in the second week of August, pointing out that local tech companies’ long-term visibility remains intact, adding that there was a semblance of stabilising trends despite tariff concerns.

The United States is still a major export destination, directly or indirectly, for many Malaysian-based semiconductor companies.

Many of them are outsource partners for US-based technology firms, including the likes of Apple.

The US government announced plans earlier this week to eventually buy more stakes in strategically-orientated companies, opening the way for further change here.

The Trump-led administration had bought a 9.9% stake in Intel Corp at the end of August.

Despite these analyst reports, which appear to have the aim of temporarily placating any immediate investor concern, the issue of the threat posed by US tariffs remains unresolved while the rhetoric continues.

The next question is whether these types of outsourced technology manufacturing truly have too high barriers to entry for them to be replicated.

Or is this just a premise that would change, especially with the advent of artificial intelligence (AI)?

AI lowers barriers to entry slightly

AI can aid, to a certain extent, any plans for disruption here in this industry.

According to Microsoft’s Copilot, AI is capable of accelerating chip design through simulation, layout automation, and predictive modelling whereby start-ups can now prototype faster without needing significant research and development teams.

AI models can also simulate fabrication processes and predict yield outcomes, helping new entrants avoid costly trial-and-error.

Copilot notes that it can also help with supply chain intelligence whereby it is able to analyse global logistics, material sourcing, and demand forecasting – critical for fabrication planning and risk mitigation.

But the biggest barrier to entry here is still the highly capital-intensive nature of machinery and factories that chipmaking requires, with years of engineering manpower to hone such skills.

Key major companies in the Malaysian technology supply chain such as Inari Amertron Bhd were last valued at 32.3 times historical price-to-earnings ratio, ViTrox Corp Bhd at 74.4 times, Frontken Corp Bhd at 49.4 times, Malaysian Pacific Industries Bhd at 22.8 times and Unisem (M) Bhd at 81 times.

Stephen Innes, managing partner at SPI Asset Management, says Malaysia is still considered a country that’s friendly to the United States and may not be in the line of direct fire for now.

“The reason Bursa technology names aren’t flinching is because markets have learned to fade the tariff-theatre headlines.

“Everyone knows reshoring is a multi-year slog, and Malaysia sits firmly in the ‘friend-shoring’ lane, not the firing line.

“Penang has carved out a moat in backend assembly and test, commanding roughly 13% of global share with Intel, Infineon, and Micron doubling down in recent years.

“Add in the fact that tariffs usually come with carve-outs and phased rollouts, and you see why investors aren’t panicking – they’re betting that Malaysia’s role as a trusted node in the supply chain stays intact,” Innes tells StarBiz 7.

Even if US demand is manufactured back in the United States, Innes doesn’t believe it is the end for Malaysian semiconductor firms.

He points out that the US government’s plan for reshoring appears to be focused on leading-edge wafer fabrication plants and a sliver of advanced packaging, not the full spectrum of backend and memory assembly where Malaysia thrives.

“Even if some US volumes move, Malaysian players are moving up the value chain – think SiC (Silicon Carbide) power semiconductors in Kulim, or Intel’s advanced packaging in Penang.

“And here’s the kicker: tariff rules of origin often follow where the wafer is fabricated, not where it’s packaged.

“That means doing backend in Malaysia doesn’t necessarily change the outcome, which gives local players a cushion even as the United States rebuilds at home,” Innes says.

Whether or not assembly and testing can really make the move to the United States, Innes says it is easier theorised but messy in practice.

“Packaging and testing is a cluster business – you need tool makers, materials suppliers, small and medium enterprises, and thousands of trained engineers working in sync.

“The United States is trying (Amkor Arizona, Intel in Ohio), but it’s a long, capital-intensive road with yield risk and talent bottlenecks.

“Malaysia’s ecosystem is already up and running with decades of experience; you can’t just forklift-move that capacity overnight.

“That’s why despite the rhetoric, the backend shift won’t happen quickly enough to undermine Malaysia in the medium term,” Innes notes.

Meanwhile, he says the threat of 300% tariffs may realistically see a gentler outcome of carve-outs, phased application, and potentially exemptions for “friendly” supply chains.

“If the US government actually pulled the trigger, it would be a cost shock across downstream electronics, squeezing margins or forcing price hikes.

“For Malaysia, the read-through is mixed: for those companies which are heavily tied to the United States, AI computing could see some demand friction, while those anchored in automotives, industrials, and power devices – where Malaysia is expanding hard – would be more insulated,” he adds.

Innes suggests that investors stay with companies with more diversified revenue streams and tilt towards power or auto semiconductors and advanced packaging.

Players with US partnerships that can potentially qualify for exemptions also have more value.