US Plans Export Controls on AI Chips to Malaysia and Thailand, Targeting China's Backdoor Access
In a sunlit office complex in Kuala Lumpur this March, four Chinese engineers arrived with an unusual cargo: 60 hard drives containing 80 terabytes of AI training data. Their mission—to train large language models on Malaysian servers equipped with advanced Nvidia chips—represents exactly the kind of activity the U.S. government is now moving to curtail.
Today, the Commerce Department drafted new rules that would restrict shipments of high-performance AI chips to Malaysia and Thailand, marking a significant escalation in America's technological containment strategy. The move targets what officials describe as a "shadow infrastructure" that has emerged as Chinese firms seek workarounds to existing U.S. export bans.
Table: Key Reasons for U.S. Concerns Over China’s Rapid AI Development, Especially in Large Language Models
| Reason | Description |
|---|---|
| Loss of Tech Leadership & Economic Power | Threat to U.S. dominance in global AI markets and innovation, risking economic influence. |
| National Security & Military Use | Fears that Chinese AI could bolster military, surveillance, and cyber warfare capabilities. |
| Global Influence & Standards | Concern that China could set global AI norms, spreading authoritarian values and governance models. |
| Data Security & Censorship | Worries about embedded censorship and surveillance in Chinese AI models, threatening privacy and free expression. |
| Disinformation & Foreign Interference | Risk of AI-powered propaganda, deepfakes, and manipulation of public opinion by foreign actors. |
| Limits of Technology Controls | Chinese ability to innovate around U.S. export controls, challenging U.S. efforts to limit China’s AI progress. |
| Ethical & Governance Differences | Divergent approaches to AI governance, with U.S. prioritizing privacy and China emphasizing state control. |
The Malaysian Loophole: How Hard Drives and Shell Companies Bypass Sanctions
The practice has become increasingly sophisticated. Chinese AI developers have established local entities in Kuala Lumpur with Malaysian directors to reduce regulatory scrutiny. After Singapore tightened its controls, operations shifted to Malaysia, where companies have rented hundreds of servers with advanced Nvidia chips.
"This is the new data silk road," explains an investment analyst who specializes in Asian technology markets. "When digital transfer is monitored, physical transport becomes the alternative. It's remarkable how quickly the industry adapts to regulatory constraints."
Malaysia's Ministry of Investment, Trade and Industry has acknowledged these reports and is conducting investigations, though it maintains that servers with Nvidia chips aren't classified as controlled goods under Malaysian law.
Trump Administration Shifts Export Control Strategy
The draft rule emerges amid broader policy changes under the Trump administration, which recently scrapped the Biden-era "AI Diffusion Rule" that would have implemented a three-tiered system of export controls based on country risk assessments.
Instead, the current approach focuses on country-specific negotiations and restrictions, particularly targeting nations suspected of diverting chips to China. The administration appears to prefer "is-informed" letters because they bypass public rule-making processes and can impose immediate license requirements on violators.
Explosive Growth Draws Regulatory Attention
What triggered the regulatory response? Customs data reveals a staggering 3,400% year-to-date increase in GPU shipments to Malaysia, confirming its status as the overflow hub for Chinese AI training operations.
"When you see that kind of spike, it's a red flag," notes a former Commerce Department official. "The numbers tell a story that's impossible to ignore."
Power Play: Rising Costs and Shifting Investments
Adding to the complexity, Malaysia recently announced a 10-14% power tariff increase, raising operational costs for data centers just as regulatory hurdles loom. This double squeeze could reshape the regional data center landscape.
The tariffs are expected to "accelerate capacity migration to Thailand and Vietnam for low-latency ASEAN workloads" and hurt returns on new data center projects in Malaysia's Johor region, according to the market analysis provided by industry experts.
Meanwhile, Thailand has approved $2.7 billion in fresh data center investments, positioning itself as an alternative hub—though it may soon face similar U.S. scrutiny.
Corporate Impact: Who Wins, Who Loses
The proposed restrictions would create a ripple effect across technology stocks. Analysts project varying impacts on major players:
- Nvidia: Potential 3.5% reduction in data-center segment earnings if shipments are capped at 30% of 2024 levels, though domestic demand for next-generation chips could offset losses
- Super Micro: More exposed with a projected 6% earnings hit due to its significant rack-scale shipments through Malaysia
- Time dotCom: Facing up to 20% downside in a bear case scenario despite its fully pre-leased Johor data center
- Equinix: Largely insulated, with Malaysian operations representing just 2% of EBITDA
Three Paths Forward: The Market Roadmap
Industry analysts outline three potential scenarios for the next 12 months:
- Baseline Scenario (55% probability): AI chips continue flowing to vetted Malaysian and Thai hyperscalers under end-use declarations
- Hard Clampdown (25% probability): Complete ban on advanced accelerators to both countries, pushing Chinese demand to other regions
- Diplomatic Solution (20% probability): A trilateral agreement between the U.S., Malaysia/Thailand, and Taiwan that normalizes chip flow under verification protocols
Hidden Opportunities: The Contrarian View
While market attention focuses on potential losers, some companies are positioned to benefit from the regulatory shift.
Taiwanese contract data center builder Elitegroup stands out as an "under-owned winner" with 22% of its fiscal year 2025 revenue coming from U.S. "sovereign AI" campuses and minimal Malaysian exposure. Trading at 11 times estimated 2026 earnings, it represents a potential value opportunity amid the disruption.
Investors might also consider the regulatory push toward alternative AI chip architectures. Companies like Cerebras and Graphcore could see increased interest as their designs potentially face fewer export restrictions while still delivering high performance.
The Long Game: Beyond the Current Crisis
The emerging restrictions signal a broader shift in global technology policy. Experts anticipate that beyond GPU hardware controls, "compute-as-a-service" licensing could become the next regulatory frontier, potentially covering large-scale rental of high-bandwidth memory systems to Chinese entities.
This evolving landscape is also accelerating the development of sovereign AI infrastructure, with U.S. subsidy tranches likely to prioritize secure domestic computing capacity in the next fiscal year.
Investment Perspective: Navigating the Uncertainty
For investors looking to position themselves ahead of these developments, analysts suggest several strategic approaches:
- Consider a delta-neutral pairing: long ARM Holdings (whose IP licensing remains largely unaffected) against a hedged Nvidia position
- Monitor Vietnamese data center operators like FPT Digital and Viettel IDC for potential beneficiaries of regional capacity shifts
- Approach Malaysian data center REITs with caution, particularly those with significant Chinese AI client exposure
"The critical insight is that this isn't about choking Malaysia or Thailand—it's about closing China's last GPU escape valve," explains a senior technology policy analyst. "Well-audited, transparent operations will likely continue receiving chips. It's the shadow infrastructure that faces existential risk."
Disclaimer: This analysis is based on current market information and regulatory developments. Past performance does not guarantee future results. Investors should consult financial advisors for personalized guidance before making investment decisions.