This article first appeared in The Edge Malaysia Weekly on May 4, 2026 - May 10, 2026

HYPERSCALERS are pouring enormous capital expenditure into building infrastructure such as data centres to support the development of artificial intelligence (AI) in autonomous, agent-driven systems.

The new wave of capital expenditure is cascading down to front-end semiconductor equipment and supportive service industries such as the local precision engineering sector.

Ground checks with industry executives indicate that order flows have strengthened significantly since March, fuelled by rising demand from wafer fabrication equipment (WFE) makers.

Global leaders Lam Research Corp and Applied Materials Inc — together controlling an estimated 60% to 80% of the world’s deposition tools market — have indicated that their capacity is effectively booked through 2027, a clear signal of sustained demand visibility. Deposition tools alone account for roughly 25% of total WFE spending, underscoring the scale of the opportunity.

At the time of writing, four tech giants — Microsoft Corporation, Alphabet Inc, Amazon.com Inc and Meta Platforms Inc — have all reported strong earnings and revenue beats in their latest quarter, with cloud emerging as a key growth driver.

Google Cloud revenue surged 63% year on year (y-o-y) to US$20 billion, while Amazon Web Services (AWS) grew 28% to US$37.6 billion. Microsoft Cloud expanded 40% to US$54.5 billion, underscoring the scale and acceleration of enterprise AI adoption.

At Meta, revenue growth of 33% was instead driven by its core advertising business, supported by AI-led improvements in engagement and ad targeting.

This momentum is translating into a clear step-up in capital spending commitments. Alphabet, Microsoft and Meta have all guided for higher capex, largely tied to sustained investment in AI infrastructure and next-generation data centre capacity.

Against this backdrop, upstream semiconductor equipment demand is strengthening.On April 22, Lam Research reported strong quarterly results for the period ended March 29, 2026, beating Wall Street estimates. Revenue rose 9% sequentially and 24% y-o-y, while earnings surged 41% from a year earlier. The outperformance prompted management to raise its WFE outlook to about US$140 billion for 2026, up from US$135 billion previously.

More importantly, the rising demand is no longer confined to only certain segments, but is now spread across logic, memory and advanced packaging. Customers are accelerating tool deliveries as additional cleanroom capacity comes online.

Applied Materials, which recorded sequential growth in both sales and earnings in its latest results in February, has echoed this optimism, projecting more than 20% growth in its semiconductor equipment business this year, with momentum expected to be weighted towards the second half.

The company highlighted structural demand drivers, including gate-all-around transistor architecture, high-bandwidth memory (HBM) and advanced packaging.

These are not incremental technological upgrades but a step-change in manufacturing complexity — requiring tighter tolerances, more sophisticated materials and significantly higher precision engineering standards.

For Malaysia’s precision engineering firms, the surge in demand is being matched by capacity expansion across Malaysia and Singapore by both global equipment makers, which started roughly five years ago.

Lam Research is building a second facility in Malaysia, nearly matching the scale of its 800,000 sq ft Batu Kawan plant established in 2021 at a cost of RM1 billion. The new facility, expected to be completed in the second half of this year, is designed to support demand through 2027 and beyond.

Meanwhile, Applied Materials continues to expand its Singapore operations, anchored by a S$600 million (RM1.86 billion) facility in Tampines, with plans to double manufacturing capacity by 2030.

These investments extend beyond proximity to customers. They reflect a broader structural reconfiguration of semiconductor supply chains, with Southeast Asia emerging as an increasingly critical manufacturing hub.

With these expansions coming online, Malaysian precision players are seeing stronger order flows and higher utilisation.

The public-listed precision metal players involved in the supply chain of either Lam Research or Applied Materials, or both, include UMS Integration Ltd (KL:UMSINT), UWC Bhd (KL:UWC), Kobay Technology Bhd (KL:KOBAY), CPE Technology Bhd (KL:CPETECH), Coraza Integrated Technology Bhd (KL:CORAZA), Wentel Engineering Holdings Bhd (KL:WENTEL) and Ambest Group Bhd (KL:AMBEST).

When contacted by The Edge, executives from six companies confirmed that order flows have strengthened markedly since March, alongside higher utilisation rates and increasingly tightening production schedules.

However, visibility remains relatively short — only three to six months — reflecting the cyclical nature of the semiconductor industry.

For AMS Advanced Material Bhd (KL:AMS), which supplies semi-finished aluminium and copper products to the precision engineering players, orders have grown between 15% and 30% quarter on quarter (q-o-q), with visibility extending into September.

Still, managing director Keh Teng Yang adopts a measured stance, noting that while demand surge is evident, long-term forecasts remain uncertain, given historical volatility.

The timing of the current upswing raises a key question: why are orders accelerating now, given that AI-driven data centre investments began as early as 2023?

According to Kenanga Research analyst Tan Woon Pin, the answer lies in delayed conviction.

In 2023 and early 2024, the technology sector was still emerging from a downturn characterised by excess inventory and overcapacity. Companies were cautious about committing to aggressive expansion, wary of repeating pandemic-era overbuild.

Only after it became clear that AI demand was structural — rather than cyclical — did capital expenditure accelerate meaningfully.

The lag is typical in the semiconductor industry: WFE orders usually follow fab expansion decisions with a delay, while downstream suppliers — such as precision engineering firms— experience the impact even later.

Citing Lam Research’s estimates, Kenanga notes that every US$100 billion in AI data centre investment translates into roughly US$8 billion in WFE spending. The firm forecasts WFE demand (excluding China) to grow 18% in 2026 and a further 9% in 2027, supported by new fab capacity coming online from the second half of this year.

Meanwhile, capex from the Magnificent 7 stocks — Apple, Microsoft, Alphabet, Amazon, Meta, Tesla and Nvidia — is projected to exceed US$700 billion in 2026, representing 11% y-o-y growth. Upward revisions to consensus forecasts for 2026 and 2027 signal sustained commitment to next-generation tensor processing unit (TPU) and graphics processing unit (GPU) data centre clusters.

For Malaysian precision engineering firms, this points to a potential demand runway extending at least through 2027.

Malaysia’s role in the semiconductor supply chain is long established, but its strategic importance is rising.

Penang — often dubbed the Silicon Valley of the East — hosts a dense ecosystem of multinational firms and local suppliers, providing integration across multiple tiers of the value chain.

Equally significant is Malaysia’s geopolitical positioning. Amid escalating US-China tensions, global manufacturers are increasingly adopting the China+1 strategy to diversify production risk. Malaysia’s neutrality makes it a compelling alternative.

Kenanga’s Tan notes that this positioning is translating into tangible opportunities, as global players seek reliable partners outside China. Over time, this strategy has evolved into a more structural framework: “China for China, ex-China for the rest of the world.” Malaysia is firmly embedded in the latter.

Despite the positive outlook, risks remain.

One immediate concern is potential disruption to helium supply, particularly in the event of geopolitical tensions in the Middle East. The Strait of Hormuz accounts for nearly one-third of global helium supply.

Helium is critical in semiconductor manufacturing, especially in lithography and cooling processes. Any disruption could trigger a bullwhip effect, amplifying upstream shocks downstream.

However, industry executives believe the risk is manageable.

UMS Integration’s executive director and group financial controller Stanley Loh Meng Chong notes: “Companies have diversified sourcing strategies and built buffer inventories of critical gases. These measures are designed to keep production stable.”

Similarly, SFP Tech CEO Dr Chang Chee Jia says the impact would likely be gradual. “If helium shortages occur, fabs may reprioritise projects or stretch installation schedules … it is not an overnight shock,” he tells The Edge.

Malaysian precision engineering companies are indirectly exposed, as they do not consume helium directly but depend on upstream fab activity.

Export restrictions stemming from US-China tensions have hit several Malaysian electronics manufacturing services (EMS) tied to advanced chips. However, the impact for precision engineering firms is less severe.

Most Malaysian players support Western multinational clients with local operations, with revenue largely denominated in ringgit. While forex exposure exists through equipment imports, this provides a partial natural hedge.

UMS’s Loh highlights that supply chain diversification may in fact be beneficial, as production shifts out of China towards Southeast Asia.

CPE Technology’s executive director and group chief financial officer Hun Jiang Yann adds that Malaysia continues to benefit from its ecosystem, talent pool and supportive policy environment, positioning it well amid global realignment.

Overall, companies remain focused on regulatory compliance while supporting customer requirements across markets.

The most significant long-term risk is technological obsolescence. As semiconductor equipment evolves, each new node demands tighter tolerances, greater complexity and higher reliability. Suppliers must continuously upgrade capabilities or risk being displaced.

This dynamic is reshaping the industry, favouring larger, better-capitalised players. UMS Integration, for instance, has invested about S$155 million in upgrading its Malaysian facilities — highlighting the higher barriers to entry.

Beyond hardware, digital capabilities such as automation, predictive analytics and digital twins are becoming essential to improving yield and reducing defects.

Having multinational corporations as customers also requires extensive qualification processes and significant upfront investment in high-spec cleanrooms, further raising entry barriers.

Raw material costs — particularly aluminium, copper and specialty alloys — remain a challenge. Companies are adopting various strategies to mitigate this.

Oxford Innotech managing director Ng Thean Gin says: “We operate on a purchase order basis … customers have been receptive to adjustments, largely because demand is strong.”

Wentel Engineering, meanwhile, focuses on inventory management. “By building stockpiles when prices are favourable, we smooth out cost movements over time,” says its CEO Chuah Chong Syn.

However, not all costs can be passed through. Labour, logistics and ancillary expenses often need to be absorbed, making productivity improvements and automation critical to maintaining margins.

Amid the buoyant sentiment, precision metal counters have already priced in much of the current upcycle.

Over the past month, most names in the segment have rallied close to 30%, with outliers such as Ambest Group and CPE Technology having seen their share price doubled.

This has pushed valuations to demanding levels, with both stocks trading at forward price-earnings ratios (PER) of 18.7 times and 28.9 times respectively. For comparison, the sector median PER stands at 20.1 times.

The re-rating comes despite structurally thin margins across the segment. Net margins typically sit in the low teens, and for many players, remain in single digits — reflecting their positioning within lower-value engineering support activities.

In contrast, higher-value segments such as automated test equipment (ATE) continue to command stronger profitability. Vitrox Corp Bhd (KL:VITROX) has posted net margins of nearly 20%, while Mi Technovation Bhd (KL:MI) averages around 15%.

Meanwhile, Greatech Technology Bhd (KL:GREATEC) and Pentamaster Bhd (PENTA) — which previously delivered margins in the 15%-20% range — have seen profitability moderate into the low teens.

Within precision metal players, only a handful stand out. Northeast Group leads with net margins of 17.2%, followed by UMS Integration at 16.6% and Wentel Engineering at 16.3%.

This divergence highlights that while rising order flows are lifting the sector, only firms with scale, technical capability and deeper integration into customer processes are able to convert volume growth into meaningful margin expansion.

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