Malaysia profits from data centre boom

The AI boom has made global superstars out of a handful of Asian companies such as Taiwan Semiconductor Manufacturing Co, South Korea’s Samsung and SK Hynix, which have enjoyed skyrocketing valuations on soaring demand for the most powerful semiconductors.

Yet under the radar, Malaysia has been an unassuming AI winner.

The country’s role as a hub for lower-end microchip manufacturing and data centre development has positioned it to flourish at a time when many of its neighbours have been buffeted by US tariffs and rising energy prices from the war in the Middle East.

Malaysia’s economy grew 6 per cent in the second quarter compared with a year before, government statistics released on Friday showed, up from 5.4 per cent growth in the first three months of the year.

That was powered by 7.5 per cent growth in the manufacturing sector — much of which is tied to chipmaking — and 6.6 per cent expansion in construction, which is supported by data centre development.

“Malaysia is the exemplar case of how to exploit opportunities from AI supply chain diversity,” said Robert Walker, research fellow at the Lowy Institute think-tank. “Malaysia is seeing the dividends of that strategy now.”

Malaysia’s chip industry dates back half a century. International companies including Intel started setting up factories in the 1970s, lured by a free-trade zone and ports on the Malacca Strait, one of the world’s busiest shipping lanes. The country was dubbed “the Silicon Valley of the East”.

Malaysia subsequently lost ground to Taiwan and South Korea as those countries developed dominant homegrown manufacturers. But it carved out a role as a major hub for “back-end” processes in the semiconductor manufacturing supply chain — chiefly packaging, assembling and testing.

Malaysia accounts for 13 per cent of the market for these back-end processes — second only to China — and is the world’s sixth-biggest exporter of semiconductors, according to the government. The industry accounts for 40 per cent of the country’s exports.

“It is good fortune that the commodity that is highest in demand [semiconductors] is being made in Malaysia,” said Gareth Leather, senior Asia economist at Capital Economics. “It’s not high-end stuff, but demand is so strong they are still doing very well from it.”

Malaysia has also benefited over the past decade from global companies seeking to relocate manufacturing operations away from China to protect themselves from geopolitical blowback, a strategy known as “China plus one”.

As tensions have intensified under US President Donald Trump’s second term, Malaysia has continued to be a beneficiary of international investment. Foreign direct investment rose 41 per cent in 2025 from a year earlier to RM66bn ($16bn), according to Malaysia’s statistics department.

“Geopolitical uncertainty has reinforced the importance of trusted, neutral locations,” said Sam Cheong, head of group foreign direct investment advisory at Singapore bank UOB.

“Malaysia’s proximity to Singapore as a strategic hub, trade relationships, regulatory environment and commitment to rules-based commerce give investors confidence at a time when certainty is in short supply.”

While Malaysia has also been hit by US tariffs, it has received similar rates to its south-east Asian neighbours and far lower ones than China. The latest round of US tariffs unveiled last month also included a carve-out for semiconductors, protecting the Malaysian industry.

“The higher tariffs on China have encouraged trade diversification, and Malaysia has benefited from that reshuffling of supply chains,” said Leather.

One major beneficiary has been the southern Malaysian state of Johor, which has emerged as a huge hub for data centre development. The state has received tens of billions of dollars of investment from companies including TikTok, Nvidia and Microsoft to set up data centres on former palm oil plantations in recent years.

According to research company Baxtel, Johor accounts for 76 of Malaysia’s 187 operational and planned data centres, making it the sixth-biggest market in the Asia-Pacific region.

Last year, Johor also launched a special economic zone with Singapore, which has attracted RM77bn of investment.

But concerns over energy and water consumption have led to protests in Johor and other Malaysian states, where local activists have expressed concerns about the speed of data centre development.

Malaysia’s role in the semiconductor trade has also made it vulnerable to another source of geopolitical tensions: the illicit flow of US chips to China.

Malaysia has frequently been accused by US politicians of being a backdoor for the flow of high-end chips subject to export controls to China.

Last year, Singapore charged three men in a $390mn fraud case related to the suspected sale of Nvidia chips via Malaysia to China. Nvidia has intensified due diligence this year on buyers of its chips in Malaysia.

Under pressure from the US, Malaysia has also tightened regulations on semiconductor flows and increased monitoring of their usage in data centres.

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Malaysia’s official revenues from illicit semiconductor trade would be negligible and far outweighed by the risks, analysts said.

Yet for a country that relies on maintaining good relations with both the US and China, the trade puts Malaysia in a precarious position.

“It is a major vulnerability,” said the Lowy Institute’s Walker. “I can see the US losing patience if there are continual leakages over time.”

He added: “Malaysia should be quite serious about cracking down on those smuggling operations.”

Cartography and data visualisation by Haohsiang Ko in Hong Kong