United States President Donald Trump administration’s reciprocal tariffs (RT) driven macro factors are expected to weigh on Malaysia’s semiconductor sector, Maybank Investment Bank said Friday.

The research house said in a note that although the RT announcement was previously well-flagged, the breadth and magnitude of its implementation is a negative surprise.

“With higher than-expected global RT rates underpinning our worst-case scenario for the sector, we believe the macro uncertainties conjured by the US’ RT regime is long-run negative for the industry and will afflict domestic outsourced semiconductor assembly and test (OSAT),
automatic test equipment (ATE) and fabric attached storage (FAS) actors,” it said.

Underpinning its thesis are four key macro drivers, namely (i) the onset of a deflationary demand cycle from cost-push inflation, a global capital expenditure (capex) slowdown from investment uncertainties, new headwinds for industrial activity growth in China that threatens its recovery trajectory; and the loss of Malaysia’s attractiveness as a preferred foreign direct investment (FDI) destination for foreign multinational corporations (MNCs).

According to Maybank, the imposition of global RTs will effectively raise selling prices of consumer electronics and automotive products in the US that could potentially lead to a marked slowdown in demand from the world’s largest consumer-centric economy.

It noted that Malaysia’s leading OSAT and ATE public listed companies (PLCs) have the largest exposure to these two sub-sectors.

“We expect sharp decreases in end-demand for consumer electronics and autos to directly translate lower volume loading for OSAT players，

”The impact will likely be exacerbated by the nature of contracts that OSATs have with their MNC customers whereby take-up volume is not guaranteed but instead determined on a rolling forecast basis,” it noted.

Meanwhile, Maybank highlighted that the imposition of blanket RTs on all US trading partners creates investment uncertainties that pose a drag on MNCs’ capital expansion plans.

It believes the potential for countries to negotiate discounted rates adds a further layer of complexity which does not bode well for business continuity and capex planning for global businesses.

“Having already witnessed some Malaysian ATE and FAS PLC end-customers defer sizeable orders in the second half of 2024 from presidential election-related uncertainties, we believe the lethargic momentum is set to continue in the near-to-medium term as the President’s team seeks direct negotiations with trading partners’ representatives to lower the imposed tariff barriers,” it said.

A slump in global semicon capex would likely have a direct impact not only on existing contracts in hand, but also on the future revenue streams of Malaysian ATEs/FAS players, it added.

With an effective tariff rate of 66 percent now imposed by the US government on Chinese imports (from 11 percent at the end of the Biden administration), Maybank also expects a steep curtailment of China’s industrial growth recovery momentum that could inevitably trickle-down to Malaysian ATEs.

According to the research house, China represents the largest geo-segment by revenue for a majority of Malaysian ATEs.

In FY24, eight out of 11 ATE PLCs counted China as its primary export market.

It noted 2024 saw the intensification of supply chain localization as the Chinese government ramped up its technology self-sufficiency drive which in turn, directly affected demand from leading domestic ATEs.

“The imposition of RTs on China serves as a double whammy for domestic ATEs who now don’t only have to ramp-up marketing/research and development (R&D) spend to compete with Chinese actors serving the captive domestic market but also have to contend with declining aggregate industrial demand from a RT-led global growth slowdown,” it noted.

On April 2, the Trump administration announced via executive order the imposition of unilateral RTs on goods imported from all its trading partners ranging from 10 percent to 49 percent.

Excluding Singapore (10 percent), the RT rates for key nations positioned in global semiconductor supply chains ranged from 24 percent to 46 percent.

A 24 percent RT rate was levied on Malaysia. While exemptions were granted for semiconductors, a closer examination of the accompanying Annex II document reveals that semiconductor production and testing equipment, a key sub-sector was excluded from the exemption list.

As articulated by White House officials during the press conference, future sector-specific tariff imposition for semiconductors should not be ruled out.

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