Malaysia’s government says that it will tighten its regulations on semiconductors after coming under pressure from the U.S. to prevent the country from being used to facilitate the illicit flow to China of restricted Nvidia chips used to develop artificial intelligence (AI).
In a report published yesterday, the Financial Times quoted Trade Minister Zafrul Aziz as saying that the Trump administration had demanded that Malaysia closely track the movement of high-end Nvidia GPUs into and out of its country. In a bid to hamstring China’s AI progress, the Biden administration tightly restricted the export of the most sophisticated AI chips, and the tools used to produce them, to China.
“[The U.S. is] asking us to make sure that we monitor every shipment that comes to Malaysia when it involves Nvidia chips,” Zafrul told the FT. “They want us to make sure that servers end up in the data centers that they’re supposed to and not suddenly move to another ship.”
As per the report, Zafrul said “that he had formed a task force with Digital Minister Gobind Singh Deo to tighten regulations around Malaysia’s burgeoning data centers sector.” This has expanded considerably over the past five years, relying on huge quantities of advanced Nvidia chips.
In early February, several media outlets reported that the U.S. Commerce Department was initiating investigations into whether the Chinese AI company DeepSeek had gained access to restricted Nvidia chips, and whether these chips had been sourced from third parties in countries including Malaysia and Singapore.
The Hangzhou-based company released its R1 model in January, claiming that it was able to achieve equivalent results to the leading U.S. models, though at much greater efficiency and just a fraction of the cost. This immediately prompted a historic shedding of value from U.S. tech stocks, and accusations from U.S. AI giants that the firm could not have achieved such progress without access to cutting-edge Nvidia chips.
As I noted in February, there have been concerns about the “leakage” of restricted chips to China from almost the moment that the export restrictions were put in place. In August of last year, The Information reported that “a large-scale industry has evolved to get Nvidia’s most cutting-edge chips to Chinese buyers, via a network of smugglers using shell companies and phony data centers.”
But the “DeepSeek shock” has added urgency to the issue for the U.S. government. Recent events have also prompted scrutiny of Singapore, which accounted for a suspicious 22 percent of Nvidia’s global sales in 2024. In a letter to National Security Adviser Mike Waltz, U.S. lawmakers called for a review on whether Washington should strengthen controls on shipments through third countries, including Singapore, that “pose a high risk of diversion.”
In its annual report, released earlier this month, Nvidia said that its customers had used Singapore to “centralize invoicing while our products are almost always shipped elsewhere.” Singapore’s government said that it expected U.S. companies to adhere to both U.S. export regulations and Singapore’s own domestic legal framework, and pledged to crack down on chip smuggling. This bore fruit on March 3, when Singaporean police arrested nine people, three of whom were later charged with deliberately misrepresenting the final destination of U.S.-manufactured servers.
Singapore’s Home Affairs and Law Minister K Shanmugam subsequently told the press that these servers, which were shipped to Malaysia, may have contained high-end Nvidia GPUs. “Whether Malaysia was the final destination … we do not know for certain at this point,” he said.
The fact that Malaysia has come under pressure from Washington suggests that the U.S. is redoubling its efforts to prevent the diversion of advanced GPUs to China from third countries. However, given the complexity and attenuated nature of global supply chains, it is unlikely to be able to patch up the leaks fully. As Trade Minister Zafrul Aziz told the FT, “Enforcement might sound easy, but it’s not.”
