Intercepted for 20 Years: How Malaysia Is Reviving Amid the U.S.-China Rivalry?

In Mid-December, on a Thursday, a meeting room on the second floor of the Shangri-La Hotel in Shanghai’s Pudong district was filled with activity. Lee Ting Han, a member of the Johor State Assembly in Malaysia, had been working non-stop the entire day. As part of the state delegation accompanying the Chief Minister, his mission was clear: to persuade more Chinese companies to invest in Johor. During their eight-day stay in Shanghai, much of their time was spent in this very room, meeting with Chinese companies one by one for private talks. Malaysia’s largest bank, Maybank, organized the trip and clearly had its own interest in attracting Chinese clients.From early morning to evening, seven Chinese companies entered the room, each given 40 minutes for a one-on-one meeting with Johor’s top decision-makers. Outside the room, the festive Christmas carols from the hotel lobby could be faintly heard, yet the representatives from the Chinese companies and Malaysian officials communicated in hushed tones. “A few companies are just one step away,” a Malaysian official told Fortune. “They’re here to confirm a few final details with the Chief Minister.” The companies came from industries like semiconductor materials, specialty chemicals, precision electronics, and aerospace materials.After the last company left the meeting room, Johor’s Chief Minister, Datuk Onn Hafiz Ghazi, rose to leave, surrounded by his entourage. He shook every hand that was extended to him, saying in English, “Welcome to Johor.”

Standing next to the Chief Minister was Lee Ting Han, a tall “90s” ethnic Chinese from Malaysia’s largest political party, the Malaysian Chinese Association (MCA). He handles investments, trade, consumer affairs, and human resources for the state government. Fluent in Mandarin, Lee can communicate directly with Chinese companies. He and I returned to the meeting room, where materials, sticky notes, and coffee cups scattered across the table.The U.S.-China Trade Tension and Supply Chain Restructuring: The global supply chain is undergoing a “de-risking” transformation, and Chinese companies are accelerating their overseas expansion. This, Lee said, is a window of opportunity Malaysia must seize. “The last time, China’s entry into the WTO ‘intercepted’ our industrialization process. This time, we hope to achieve Malaysia’s ‘re-industrialization’ by absorbing China’s manufacturing outflow,” he said with a smile.A Disrupted Industrialization Process: “At the beginning of this century, Malaysia’s industrialization was progressing, but when China entered the WTO, funds and technology all flowed to China. The Chinese market was so big that we basically didn’t need to continue,” Lee said. After Malaysia gained independence in 1957, it began developing its light and resource processing industries. In the 1980s, Malaysia started receiving industrial transfer from Japan, Europe, and the U.S., accelerating industrialization. By 1997, before the Asian Financial Crisis, manufacturing accounted for 23% of GDP.

But after China joined the WTO in 2001, global capital and technology rapidly flooded into China. From 2010 to 2020, Malaysia’s manufacturing sector’s GDP share didn’t grow, and there were signs of “deindustrialization.” Neighboring countries like Vietnam and Thailand even surpassed Malaysia in attracting foreign investment.The U.S.-China Trade Tension Brings New Opportunities: In recent years, the U.S.-China trade conflict and the pandemic-induced global supply chain reorganization have given Malaysia a new chance. Unlike 40 years ago, it is no longer about absorbing U.S. or Japanese industries, but Chinese manufacturing. More importantly, it wants to learn from China’s model of upgrading manufacturing—no longer just re-exporting goods or accepting single-point foreign investments but developing its own supply chains in key sectors.”In Malaysia, we say we want to shift from ‘Made in Malaysia’ to ‘Made by Malaysia,'” Lee said. “The former refers to traditional re-export trade, where goods are just assembled here, offering little added value. The latter is about attracting large companies to invest and bringing their entire supply chains with them—what we really want is to learn from China’s model.” However, Malaysia is clear about its position—it only wants to occupy the middle of the supply chain, avoiding both the low and high ends. “We can’t do low-end assembly anymore because our costs are higher than our neighbors. We can’t do high-end either because core technologies are controlled by China and the U.S.,” Lee said.

As a “middle power” country caught between the U.S. and China, Malaysia knows it has no ability to participate in the competition between these two superpowers. Its best strategy is to focus on industries that can serve both.Malaysia’s Strategy: A Middle Ground: “Our strategic goal is to make sure that no matter how the global situation changes, we will always have our place. We won’t be on the wrong side or pick the wrong side,” Lee said. Malaysia’s government’s “2030 Industrial Blueprint” has identified five key industries: aerospace, data centers, electronics manufacturing, specialty chemicals, and medical devices. On their Shanghai trip, Johor officials met with Chinese companies from these sectors and encouraged them to bring their upstream and downstream industries to Johor.The Driving Forces Behind Chinese Investment in Malaysia: According to Lee Ting Han, there are two core drivers behind Chinese companies’ expansion into Malaysia in recent years. The first is tariffs. Chinese companies setting up factories in Malaysia and labeling their products as “Made in Malaysia” face much lower tariffs when exporting to the U.S. compared to exporting from China. The second, subtler but possibly more important, is the desire to reduce the “Made in China” proportion in their products. This reflects the growing “China+1” trend in global supply chains, where multinational companies and Chinese firms are setting up second production bases in Southeast Asia to mitigate risks.