By Zachary Abuza
Diversifying supply chains away from China is a boon for Southeast Asia and a priority for the U.S. government. But it can create potential new tensions when those supply chains go toward supporting Washington’s adversaries.
This is especially true with Malaysia.
With the exception of the Philippines, Southeast Asian countries are reluctant to be pulled into a competition between great powers and they have asserted their neutrality.
For the United States, however, there is nothing neutral about supplying semiconductors and other high-tech, dual-use equipment to its rival nations, including those under United Nations sanctions.
Since Russia invaded Ukraine in February 2022, the Biden administration has imposed sanctions on Malaysian, Indonesian and Vietnamese firms supplying products to Russian or Iranian companies.
Such scrutiny is only going to intensify.
The U.S. intelligence community makes extensive efforts to investigate how Russia, Iran and North Korea evade international sanctions and procure dual-use technology. This includes forensic analysis of battlefield weapons and munitions.
For the governments of Malaysia, Indonesia, and Vietnam, fostering economic growth is their top priority but so is maintaining strategic autonomy.
No country has benefited more from the U.S.-China chip war than Malaysia.
Malaysia’s economy is growing, but it has not fully recovered from the coronavirus pandemic. Kuala Lumpur received U.S. $40 billion in foreign direct investment pledges in 2023, finally reeling in some rewards during a respite from its political instability, when it had five different prime ministers from 2018 to 2022.
Malaysia’s semiconductor industry has always been large. About 13% of global chip testing and packaging takes place there. Globally, it is the sixth largest exporter of semiconductors. The Financial Times estimates that 20% of U.S. chip imports come from Malaysia.
Semiconductor exports in 2023 were valued at $81.4 billion.
The government anticipates investments totaling over $100 billion in its semiconductor industry. Last year, pledged investment totaled $12.8 billion, more than the total investment between 2013 and 2020.
Recent investment pledges have been breathtaking.
Intel announced a $7 billion chip packaging facility. Germany’s Infineon announced a $5.4 billion expansion and a third facility. Austria’s AT&S also plans to invest. The leading semiconductor equipment maker, the Dutch firm ASML, announced that it would build a manufacturing facility in Port Klang.
Develop homegrown talent
Malaysia, aware that one of the limiting factors will be human capital, has allocated $5.3 billion to train 60,000 chip designers and engineers over the next five years.
Along with developing its own homegrown talent, Malaysia seeks to strengthen local capacity for all phases of design and production.
Prime Minister Anwar Ibrahim said the government hoped to have at least 10 companies with revenue of between $210 million and $1 billion. The government announced that it and Khazanah Nasional, a sovereign wealth fund, would invest in the region’s largest integrated circuit design park in Selangor.
But all of that is increasingly putting Malaysia in U.S. crosshairs.
Before the Ukraine war, Malaysia supplied Russia with one-third of its semiconductors. At the onset of the war, Malaysia’s ambassador to Russia announced that Kuala Lumpur would continue to supply Moscow. That prompted a rebuke from Washington.
This past May 1, the U.S. government sanctioned a Malaysian firm, Jatronics, for supplying semiconductors to Russia.
Officials in Kuala Lumpur were quick to point out that Jatronics is not a manufacturer, but a trading company operating without an export license.
Meanwhile, Malaysia’s foreign ministry pledged to uphold the country’s international obligations and cooperate with the U.S. Embassy.
Nonetheless, Anwar shot back against U.S. sanctions.
“I offer our nation as the most neutral and non-aligned location for semiconductor production, to help build a more secure and resilient global semiconductor supply chain,” he told attendees at the Semicon Southeast Asia 2024 trade show in Kuala Lumpur last month.
Links to Iran drone programs
Malaysian firms have also been under U.S. scrutiny for supplying Iran’s drone program, itself a key supplier to Russia.
In April 2023, the Treasury Department sanctioned one firm.
In December 2023, it sanctioned four others for selling engines, circuitry, electronics, and other components, formally known as “Common High Priority List items.”
Two Indonesian firms were sanctioned at the same time.
In addition to semi-conductors, there has been a spate of proposed investment in cloud computing and artificial intelligence from Nvidia ($4.3 billion), Google ($2 billion), Amazon Web Service ($6 billion) and Microsoft ($2.2 billion).
The U.S. government is determining how to ensure that these technologies are not used by adversaries. Malaysia is among countries trying to prevent what is considered the extension of U.S. law.
Another area of potential conflict could be Chinese investment in Malaysia’s high-tech sector. In part, this is just sound business, especially as China’s domestic market slows.
But there is ample concern in Washington that Chinese firms in Malaysia, Vietnam and elsewhere are setting up shop either to purchase sanctioned manufacturing equipment or to mask exports to sanctioned countries, including Russia, Iran and North Korea. Malaysia has relations with all three.
The Dutch government, for example, bowed to U.S. pressure and denied ASML an export license to China. The U.S. government has imposed a sweeping ban on the export of certain semiconductors.
Recent investments by Chinese firms include Star Five, which is building a design center, and Tong Fu Microelectronics.
Technology is not the only point of friction. In early May, two senior U.S. Treasury Department officials traveled to Kuala Lumpur as there had “been an uptick in money moving to Iran and its proxies, including Hamas, through the Malaysian financial system.”
Diplomatic and material support for Hamas is unlikely to stop. The war in Gaza has been a bilateral irritant and Washington seems unaware of how deep anti-Americanism is running, both within the government and the opposition. Anwar made a point of meeting with Ismail Haniyeh, the leader of the Hamas militants, in Qatar in May.
U.S. Treasury Department officials have wanted to discuss ship-to-ship transfers of Iranian crude oil in Malaysian waters.
While Indonesia’s small and underfunded Coast Guard has on two publicly announced occasions interdicted ship-to-ship transfers from Iranian tankers, Malaysia seems to have turned a blind eye, despite U.N. sanctions. Indeed, Malaysia exports more oil than it produces.
Governments in Southeast Asia have largely bristled at unilateral U.S. sanctions and the threat of secondary sanctions, including the loss of access to the American and other Western markets. But for the United States, while diversifying supply chains away from China is the goal, there needs to be controls to prevent technology making its way into the hands of adversaries.
Zachary Abuza is a professor at the National War College in Washington and an adjunct at Georgetown University. The views expressed here are his own and do not reflect the position of the U.S. Department of Defense, the National War College, Georgetown University or BenarNews.
