What shifting supply chains for semiconductors mean for Emerging markets in South-East Asia

After the US levied sweeping restrictions against China’s semiconductor manufacturing industry last autumn, opportunities are emerging for other countries to bolster their positions in the supply chain for this critical component of the global economy and linchpin of future technologies like artificial intelligence (AI) and next-generation computing.

Semiconductor diplomacy

The manufacturing of semiconductors is dominated by three countries – China, South Korea and Taiwan – which accounted for 87% of the global market in 2021.

The US and Japan used to lead the industry and are both still major players, especially in designing chips that are outsourced to fabs in China, South Korea and Taiwan – underscoring the complicated levels of interdependence in semiconductor supply chains.

Taiwan’s TSMC produces more than 90% of the world’s most advanced chips

Overall production figures belie the market’s segmentation, however. Taiwan’s TSMC produces more than 90% of the world’s most advanced chips, whereas South Korea is the largest exporter in revenue terms, and China leads in total volume of production and exports.

These big-five producers have been engaging in semiconductor diplomacy to win new markets.

In January the South Korea’s President Yoon Seok-Yeol visited the UAE with the goal of opening new technology companies for semiconductors and competing with China in a key market in the Middle East that is embracing new technologies like AI.

In August the CEO of South Korea’s Samsung met with Prime Minister Pham Minh Chinh of Vietnam and announced a $850m investment to manufacture semiconductor components in the country. In 2021 South Korea’s Amkor Technology began construction on a $1.6bn plant in Vietnam’s northern province of Bac Ninh to manufacture, assemble and test semiconductor products.

Meanwhile, Japanese companies are exploring investment opportunities in India, which is keen to play a larger role in the semiconductor supply chain. International Semiconductor Consortium, a joint venture between UAE’s Next Orbit Ventures and Israel’s Tower Semiconductor, plans to start constructing India’s first fab in February.

In December India’s multinational conglomerate Tata Group announced its intention to invest $90bn in the semiconductor industry across its companies in the next five years, including in fabs for advanced chip manufacturing.

New centres of production

Emerging markets in South-east Asia, including Indonesia, Malaysia, the Philippines, Thailand and Vietnam, are seeking to leverage the CHIPS Act to grow their semiconductor industries and win market share from China in the Asia-Pacific region, which accounts for some 60% of global sales.

Indonesia and the Philippines have been courting new investment from the US in its semiconductor industry after the launch of the Indo-Pacific Economic Framework in May 2022.

Malaysia is already a major producer of semiconductors

Malaysia is already a major producer of semiconductors – with seven plants scattered around the country and a 13% market share in the global assembly and testing of chips – and is actively seeking investment from leading companies like Taiwan’s TSMC to build new fabs in the country.

Meanwhile, at the 2023 North American Leaders’ Summit in January, Prime Minister Justin Trudeau of Canada, President Andrés Manuel López Obrador (AMLO) of Mexico and US President Joseph Biden agreed to organise the “first-ever trilateral semiconductor forum with industry to adapt government policies and increase investment in semiconductor supply chains across North America”.

President Biden and President AMLO also agreed to set up high-level teams to increase cooperation in the chip industry, according to a report from Bloomberg, with the specific goal of supporting the building of a new hub in southern Mexico for Taiwanese semiconductor producers.

Taiwanese router motherboard makers relied on China for an estimated 50% to 70% of their production capabilities last year, but the CHIPS Act is prompting them to look at Thailand and Vietnam as well as Mexico in addition to the facility in Arizona.

Meeting domestic demand

The global market for the sale of semiconductors reached $595bn in 2021, a 26.2% increase from 2020, as the shift to remote work brought on by the Covid-19 pandemic and the shift towards digitalisation increased demand for electronic devices.

However, the disruption of supply chains for the past two years, punctuated by China’s Zero-Covid slowdown, restricted the industry’s growth, resulting in an estimated $500bn in lost sales in the semiconductor industry and other industries it supports. Tepid growth of 1.1% in 2022 translated into just $602bn in sales.

Many expect momentum to continue to stall in 2023, as most memory chip companies, which account for 25% of the market in 2022, have announced reductions in capital expenditure for the upcoming year.

The shortage of semiconductor supply hampered growth across the world, especially in emerging markets with electronics, automotive or defence hardware industries that rely on a steady supply of chips.

For instance, many emerging markets are targeting a share of the global electric vehicle manufacturing market, which is heavily reliant on semiconductors. The easing of the shortage in the second half of 2022 helped Thailand’s car manufacturing sector grow by 15% year-on-year in November to 190,155 units, its highest monthly mark in the last 44 months, according to the Federation of Thai Industries.