Malaysia working with Singapore, US against chip smuggling as local AI sector braces for impact

KUALA LUMPUR - Malaysia is working closely with Singapore and the United States to strengthen safeguards against chip smuggling as it braces for expected American controls on high performance artificial intelligence (AI) chips and remote compute deals with lucrative Chinese firms.The Investment, Trade and Industry Ministry (MITI) said in a Nov 13 statement that it is also running checks with local customs to “determine whether any of the chips brought into Malaysia have since been reexported” and if so, whether they were “in accordance with the law.”The statement comes on the back of Singaporean authorities saying on Nov 12 that they “received limited information or assistance” from American counterparts in a 2025 probe into several companies such as Singapore-based cloud computing firm Megaspeed and key officers including Alice Huang, the suspected Chinese spy whose affair with Jensen Huang has led to the latter resigning as leading AI chipmaker Nvidia’s chief executive.MITI also denied in its statement that it has cleared Megaspeed or its local subsidiary of wrongdoing amid a fallout in Malaysia’s hitherto booming data centre sector.Investment, Trade and Industry Minister Johari Ghani had earlier said on Nov 10 that Speedmatrix – the Malaysian arm of Megaspeed, which has been under scrutiny over alleged diversion of artificial intelligence (AI) chips to China – was not under investigation as there was no “credible evidence or a formal request from any foreign authority”. This was in response to explosive revelations over the weekend of Huang’s affair, which has spurred hawkish sentiment in Washington over security concerns of American technology.But MITI clarified that “any verification visits carried out” at data centres where Speedmatrix is a tenant are part of “regular monitoring of the data centre sector and should not be taken to mean that a company has been cleared.”“There has not been any indication of that,” Prime Minister Anwar Ibrahim had also said on Nov 13, referring to Nvidia chips being transited by Megaspeed out of Malaysia.He added that Malaysia has not received any formal request from Singapore or the US on the issue but “we will, of course, collaborate.”“Ours is a trading nation, we welcome investments. We want to make sure the rules are being followed,” he said.Malaysia does not require a licence to import AI chips. But on the back of allegations of chip smuggling earlier in the year, the government has since July 2025 imposed permit requirements for such chips from the US to leave Malaysia. Malaysian regulations also do not require data centres to divulge who their end users are, although industry stakeholders estimate that about half of the 1.4-gigawatt capacity serves the Chinese market. However, Nvidia requires its cloud partners to provide some Know-Your-Customer information and cap their Chinese business to 49% of services offered.Among such partners in Malaysia is conglomerate YTL. Its data centre arm is parked under YTL Power, which has lost an eighth of its market valuation or RM5.5 billion (S$1.7 billion) since markets opened this week on Nov 10 as investors gauge the level of exposure to Megaspeed.“If Megaspeed accounts for a meaningful portion of YTL’s capacity, there will be significant implications around customer concentration, contract enforceability and potential replacement demand,” said one investment analyst who asked not to be named due to commercial ties with YTL.Fallout stalls sector growthThe resulting shockwaves have stalled what has been a booming industry, with data centre investments surging to RM95.8 billion, or 43.9% of total approved investments in the first half of 2026 alone, from a mere RM1.25 billion (0.4%) in 2021.Banking executives told The Straits Times that the brakes have been slammed on about half of all financing deals for upcoming data centre projects in Malaysia, with expectations that delays will last up to six months until there is clarity from Washington.“Of course, DC (data centre) players are saying demand still outstrips supply,” said a top executive from a local investment bank. “But if the GPUs can’t come in, you can’t even offer any compute.”“Some might have to double down on having the right lawyers to strengthen their compliance because the moment the US launches a probe on you, no lender will touch you,” said the executive, who declined to be named due to his involvement in the stalled deals.BlackBox Research chief executive David Black, whose advisory firm has done work in the AI sector, told ST that “there will definitely be additional compliance costs”.“But a total ban on chip exports will be counterproductive. When Americans sit down cold and sober, their main motivation is to retain technological leadership over China and undermining relationships with trusted partners will only push them into Beijing’s embrace,” he added.Checks by ST with local government officials also drew cautious responses.“Right now it’s business as usual but the news has definitely ruffled feathers. But at this point, we can’t do much more than wait and see what the impact on Malaysia will be,” said one official in the digital economy space, who also requested anonymity.Taylor’s University adjunct professor Ong Kian Ming told ST that tougher controls are both a threat and opportunity for Malaysia to position itself as a secure destination for AI investments.“Malaysia can escalate the oversight and powers given to MITI and put in more progressive policies to crowd in domestic demand for AI data centres so there is less dependence on Chinese related demand,” the former deputy investment, trade and industry minister said.“Asean has a role to play in seriously engaging the US on this and the upcoming Asean summit in Manila can be a forum for this, especially with the unveiling of details of the Digital Economy Framework Agreement.”Sign up for our weekly Asian Insider Malaysia Edition newsletter to make sense of the big stories in Malaysia.