Maybank Investment Bank has remained cautious on Malaysia’s technology sector amid US tariff uncertainties.

The research house said in a recent report that against the backdrop of emergent systemic risks (Sino-Western decoupling, US reciprocal tariff policy and fiscal deterioration, escalating Middle East conflict etc. that has threatened the integrity of global semicon supply chains, the WSTS surprisingly maintained its 2025 global semicon growth forecast of 11.2 percent in early June.

“While growth is expected to be driven by sustained demand robustness for logic and memory chips in artificial intelligence (AI) and data center (DC)/ cloud infrastructure applications, lagging edge ICs such as (i) microcontrollers, (ii) discrete chips, and (iii) optoelectronics are expected to see YoY declines in the low single-digits,” it said.

Meanwhile, other legacy integrated circuits (ICs) namely (iv) analog and (v) sensors, are only expected to grow moderately (less than about 5 percent) this year.

“With all five sub-categories accounting for a bulk of Malaysia’s assembly, test and packaging capacity, we maintain the view that domestic semicon companies (outsourced semiconductor assembly and test [OSAT]/automated test equipment [ATE]) are unlikely to experience a meaningful trickle-down from continued global growth in leading edge ICs (<7nm) in the second half," Maybank noted.

According to the research house, the challenges being faced by Malaysia’s semicon firms in the second half are two-fold.

On costs, local OSATs are already feeling the effects of unitary margin compression from increases in labor-related levies passed in last year’s budget.

ATE margins are also under threat from selling, general, and administrative expenses (SG&A) increases from intensifying competition within the captive Chinese market.

On demand, reciprocal tariffs (assuming a 10 percent universal baseline tariff on all future US imports) will likely afflict inflationary pressures and further stunt China’s industrial recovery momentum.

“Both markets remain key destinations for Malaysian OSAT, ATE and FAS exports. Continued global tariff uncertainty could also prolong multinational corporations (MNCs)’ capex decisions, posing risks to domestic ATE and FAS orderbook replenishment rates," it said.

Underpinned by generous government support, it noted Chinese competition in the OSAT/ATE space remains stiff, while domestic semicon PLCs’ general over-reliance on legacy growth sectors (automotive, industrial, and consumer electronics) still grappling with a multi-quarter inventory overhang poses additional headwinds to a meaningful demand recovery.

"While we anticipate growth expectations for domestic semicon (ATE/OSAT/FAS) to remain throttled in the second half, we do not foresee any near-term risk of surprise loss making quarters as blended plant utilization rates are likely to continue hovering above breakeven (about 55-65 percent) – premised on a continuation of the status quo,

"We continue to remain optimistic on companies with front-end foundry exposure that allow it to act as de facto proxies to the AI/DC growth narrative," it added.

Meanwhile, Maybank retained its cautiously optimistic outlook stance on the electronic manufacturing services (EMS) sector for the remainder of 2025.

It noted that structural drivers, namely global supply chain diversification, remain intact, underpinned by intensifying geopolitical tensions (particularly USChina decoupling), elevated tariffs on Chinese goods and selected RoW markets, which increases the urgency to derisk manufacturing footprints.

As global brands adopt “China+1” strategies, it opined that Malaysia stands out as a key beneficiary, supported by its mature electrical and electronics (E&E) ecosystem and competitive cost structure.

"In parallel, the sector remains supported by technological shifts, with the proliferation of AI and accelerated digitalization driving outsourcing demand across the supply chain," it noted.

Although EMS players highlighted that near-term earnings visibility remains murky due to lingering supply chain frictions, USD weakness, and potential pullbacks in US consumer electronics spending, Maybank maintained its positive longer-term stance on the sector.

"For now, we favor EMS names with greater exposure to industrial electronics, where demand is more resilient and less susceptible to cyclical swings," it said.

According to the research house, ongoing foreign direct investment (FDI) flows and increased urgency to diversify supply chains should underpin future growth.

Meanwhile, Maybank's outlook for the Malaysian software space remains positive amidst favorable structural tailwinds in relation to digital adoption.

With the digital economy set to contribute 22.6 percent of Malaysia’s gross domestic product (GDP) in 2025 and deliver about 500,000 new jobs, it noted the Malaysian government has accelerated efforts to achieve regional leadership in cybersecurity, digital content and AI innovation.

Poor sentiment (led by external event drivers) plaguing the technology sector in Malaysia since the turn of the year.

These events include the imposition of then-outgoing US President Biden’s AI Diffusion Rule in mid-Jan (since rescinded by the Trump administration) that would’ve effectively stunted Malaysia’s promising growth trajectory in the booming DC market, and the introduction of Trump’s aforementioned reciprocal tariffs in early April.

Meanwhile, poorer-than-expected fourth quarter of 2024 earnings delivery and a weakened semicon outlook dashed hopes of a sustained near-term price recovery.

Tariff-induced macro and supply chain uncertainties aside, Malaysian ATEs/OSATs had an operationally poor in the first half of 2025 from a heady concoction of structural issues:
overhead margin pressures (OSATs – labor; ATEs – SG&A), capex deferrals by key ATE/FAS customers, and lethargic OSAT NPI accretion from a prior underinvestment in advanced packaging capex.

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