German Geo-Economic Strategy And Malaysia: Partnership Or Dependency? – OpEd |
Germany’s renewed engagement with Malaysia is not a bilateral curiosity but a symptom of a deeper rupture in the global semiconductor order. When Stefan Rouenhoff, parliamentary state secretary at Germany’s Federal Ministry for Economic Affairs and Energy, visited Penang in November 2025 as part of a business delegation to Malaysia’s semiconductor sector, the visit carried weight that extended well beyond investment promotion. It signalled that Europe’s most powerful industrial economy is actively repositioning itself in a post-pandemic, post-unipolar supply chain world, and that Malaysia is being courted as part of that repositioning.
The scale of existing ties provides context. Nearly 800 German companies employing over 65,000 people operate in Malaysia, with strong representation in semiconductor manufacturing alongside firms such as Allianz, BASF, SAP and Mercedes-Benz. According to the Malaysian Investment Development Authority, Germany was Malaysia’s second-largest foreign investor in 2024 at RM32.2 billion, trailing only the United States at RM32.8 billion. The delegation toured Infineon’s facilities in both Kulim and Bayan Lepas, holding discussions on investment trends, upcoming expansions, and bilateral cooperation frameworks. Early discussions also touched on a Germany-Malaysia memorandum of understanding to formalize closer governmental and industrial cooperation.
Yet the significance of the visit lies less in its immediate outcomes than in what it reveals about the pressures reshaping German geo-economic decisions, and what those pressures demand of Malaysia in return.
The European Vulnerability
Germany’s interest in diversifying semiconductor supply chains is inseparable from the trauma of recent supply chain failure. The Covid-19 pandemic exposed Europe’s deep vulnerability when chip shortages forced German carmakers to slash production to levels not seen since the mid-1970s. The automotive industry alone is estimated to have lost approximately USD210 billion globally in 2021. That crisis was not accidental but a predictable consequence of decades of deindustrialization in semiconductor production. Europe’s share of global chip manufacturing collapsed from 30 percent of global capacity in 1990 to just 12 percent by 2019, leaving it dependent on Asian production networks centered on Taiwan and, increasingly, China.
In response, the European Union’s EUR43 billion Chips Act, targeting 20 percent of global chip production by 2030, is ambitious but widely regarded as insufficient against the scale of the challenge. China’s semiconductor investment push has exceeded USD100 billion since 2014. More critically, Europe currently has no fabrication facility capable of producing sub-7 nanometer chips, the advanced nodes required for artificial intelligence, high-performance computing, and next-generation automotive systems. Those chips are manufactured almost exclusively by Taiwan Semiconductor Manufacturing Company and South Korea’s Samsung, leaving Europe exposed to any disruption of cross-strait stability.
Germany is also deploying institutional mechanisms to accelerate outward investment engagement. A recently appointed special envoy for investment will serve as a single point of contact for foreign direct investment into Germany, a response to industry feedback. The Important Projects of Common European Interest framework provides additional financial incentives for technology and manufacturing investments across EU member states. A German Accelerator, already operating in Boston, Tel Aviv, Silicon Valley and Singapore, is under exploratory consideration for Malaysia, potentially in Penang, though feasibility, demand and ecosystem readiness remain under review.
Rouenhoff has been explicit that economic and political cooperation now carries equal weight, shaped increasingly by geopolitical tensions and supply chain risks. A 2025 survey by the Malaysian-German Chamber of Commerce, conducted among 430 member firms, found that 54 percent reported negative effects from US trade policy, while 46 percent saw no direct impact. Notably, 64 percent had no direct US business exposure, suggesting that risks are felt primarily through supply chain realignment rather than direct tariff exposure, a distinction that matters for how Malaysia positions its value proposition.
Malaysia as a Geopolitical Hedge
Germany’s engagement with Malaysia sits within a wider geopolitical reordering. As Ooi Kee Beng, executive director of the Penang Institute, argued in December 2025, what presents as a global trade slowdown is more accurately understood as a necessary stage in the decolonisation of Western-centric supply chains, making way for a genuinely multipolar economic order. For Southeast Asia, this shift opens new room to manoeuvre. Malaysia presents itself as the obvious beneficiary: neutral, politically stable, and deeply embedded in the semiconductor value chain, accounting for approximately 13 percent of the global semiconductor assembly, testing and packaging market.
Prime Minister Anwar Ibrahim has repeatedly marketed Malaysia as the most non-aligned location for semiconductor production, an explicit hedge against instability in Taiwan or unreliability in China. The strategy is coherent as far as it goes. From a risk-diversification perspective, Germany is making rational choices by deepening engagement with Malaysia. The bilateral relationship is real, the industrial infrastructure exists, and the geopolitical logic is sound.
However, the limits of Malaysia’s position are more precarious than the diplomatic enthusiasm suggests. The 13 percent market share in assembly, testing and packaging represents back-end semiconductor work, the least profitable segment of the value chain. The fundamental problem is not the scale of Malaysia’s participation, but how little surplus value is retained domestically. Profit margins and intellectual property sit upstream in integrated circuit design and system integration, segments where Malaysia remains largely absent. In 2022, 99.2 percent of investments in Malaysia’s electrical components sector came from foreign sources, with domestic investment accounting for just 0.8 percent. Foreign investment incentives are strong, but incentives for domestic firms to scale and retain intellectual property remain weak. Malaysia is on the treadmill as a provider of land and labor while foreign investors capture the value.
Malaysia’s National Semiconductor Strategy directly acknowledges this problem, targeting movement upstream into IC design and advanced packaging. The strategy envisions creating ten Malaysian companies with revenues exceeding USD1 billion and 100 semiconductor-related companies approaching RM1 billion in revenue. Yet as of mid-2024, only 13 companies had emerged as potential national champions, with just nine generating over RM500 million annually. Competitors are not waiting. Thailand, Vietnam and the Philippines are advancing their own semiconductor aspirations, and within the same category of neutral, cost-competitive destinations, Malaysia’s differentiation remains nascent.
German investment will matter only if it transfers knowledge that enables Malaysian companies to move beyond contract manufacturing. Whether the current trajectory achieves that outcome is an open question.
The Talent Trap and the Value Chain Problem
Malaysia’s semiconductor ambitions face an acute constraint in talent. The country produces an estimated 5,000 to 20,000 engineering graduates annually, against industry demand for approximately 50,000 skilled semiconductor engineers. The National Semiconductor Strategy targets training 60,000 high-skilled engineers by 2030, but talent retention is deteriorating faster than supply can be built. Nearly 1.86 million Malaysians have already left the country, driven largely by wage differences with Singapore. Malaysian semiconductor engineers earn approximately RM5,166 monthly; their Singaporean counterparts frequently earn double that figure, even after adjusting for cost-of-living differences.
The German Dual Vocational Training program, which the Penang Skills Development Centre is working to strengthen and brand more visibly in partnership with the Malaysian-German Chamber of Commerce, trains graduates specifically for German companies operating in Malaysia. However, its value for building Malaysian intellectual property and locally owned businesses remains ambiguous, and the program serves the labor needs of established foreign firms more directly than it builds domestic capability.
Malaysia is not short of graduates, and the skills mismatch is not simply a supply problem but an alignment failure. The 2025 Hays Asia Salary Guide found that 64 percent of Malaysian organisations experienced moderate to extreme skills shortages. Department of Statistics Malaysia data for 2024 shows approximately 1.6 million graduates employed in positions below their qualification level, a figure that simultaneously indicates oversupply in lower-skilled roles and acute undersupply in high-skilled ones. The pattern has held for years despite repeated government attempts to fix it.
Economist Geoffrey Williams has warned that mandating higher starting salaries for TVET graduates could backfire if employers respond by hiring non-graduates rather than absorbing higher labor costs. The government has targeted RM2,500 to RM3,000 against the current earnings of RM1,800 to RM2,000. A 2023 survey found that 60 percent of Malaysian employers expressed concern about retaining top talent, while graduates simultaneously struggled to secure high-skilled employment. The deeper problem is not wages or graduate numbers but how the talent policy aligns with industrial ambition. The policies formed around talent development must be targeted at what Malaysia wants to build rather than training people for jobs that already exist.
Partnership or Dependency?
Germany’s renewed geo-economic engagement with Malaysia reflects a rational response to vulnerabilities in European semiconductor supply chains. From a German perspective, the bilateral relationship ticks the right boxes: established industrial presence, political stability, geographic positioning, and a government openly marketing itself as a neutral alternative to Taiwan and China. The engagement is genuine, and Germany’s investment figures cannot be ignored.
But strategic partnerships are asymmetric until proven otherwise. Fifty years of foreign semiconductor investment have given Malaysia a deep industrial infrastructure and substantial employment. What it has not given Malaysia is domestic capability, intellectual property, or a position in the profitable end of the value chain. The question that Germany’s renewed interest poses most sharply is not whether Malaysia can attract investment, but whether Malaysia can convert foreign capital into lasting domestic capability. That requires a different policy mix than the one currently in place, including stronger domestic investment incentives, genuine IC design ecosystem development, talent retention mechanisms that compete with Singapore, and explicit conditionality on knowledge transfer within foreign investment frameworks.
In a world where major industrial economies are scrambling to diversify supply chains, Malaysia’s position is advantageous, with a window to move up the value chain before competitors close the gap. Whether Malaysia moves through it or remains a well-positioned but ultimately substitutable node in someone else’s supply chain will be determined by the choices made in the next decade.
This article is an expanded and substantially revised version of a piece published in Penang Monthly, April 2026.