Southeast Asia's rising semiconductor fortunes

The shift to remote working, the introduction of electric vehicles and a life increasingly lived online are driving the global economy's insatiable appetite for tiny computer chips upon which modern life rests.

As chip suppliers scramble to meet demand for ever smaller and ever more powerful transistors - a market expected to almost double to US$1 trillion (S$1.4 trillion) by the end of the decade - the future-facing industry must contend with a post-pandemic world of labour shortages, great-power rivalries and customers who want to produce the gadgets for themselves.

The US-China tech rivalry, in particular, can both be a boon and bane for countries in Southeast Asia with a substantial chip sector. US efforts to curtail China's semiconductor industry has meant that firms in the industry are looking to expand outside of China.

The US-China strategic rivalry that has led to mounting tension in the Taiwan Strait has also meant that companies are seeking to diversify away from Taiwan by building new plants overseas, including in Southeast Asia. One such firm is Taiwan Semiconductor Manufacturing Company (TSMC), which is building new factories in the United States and Japan but also reported to be considering building one in Singapore.

However, geopolitical tensions add to the risks and uncertainties of doing business with either of the two great-power rivals.

For Southeast Asia's chip-producing countries much is at stake.

Not only do computer chips contribute big chunks of gross domestic product (GDP) and help countries woo high-tech foreign investment and cultivate a talented work force, the industry has also helped underpin the region's reputation as a reliable manufacturing hub.

The ASEAN states of Malaysia, Thailand and the Philippines count on semiconductor production for huge parts of their GDP and exports. In Malaysia it's about 6 per cent of GDP and 40 per cent of exports. Southeast Asia accounts for US$200 billion in exports of chips.

The Philippines' 500 electronics and chipmakers have exported US$19 billion worth of the stuff so far this year - almost 60 per cent of the total annual exports.

But for all its economic heft, rising fuel and other prices may be leaving a dent, prompting demands for government support and subsidies.

Mr Danilo Lachica, who heads industry group Semiconductor and Electronics Industries in the Philippines Foundation Inc (SEIPI) said in a television interview in June that the country lost US$3.6 billion in potential investments due to a law passed by then President Rodrigo Duterte that amended the incentives for investors. They went elsewhere instead for better deals.

"This is US$3.6 billion. That's 25,000 workers that we could have had," Mr Lachica said.

While more advanced front-end chip production is centred on places like Taiwan and South Korea, it's in the back-end assembly - where producers mount chips onto larger components that may eventually find their way into an iPhone or refrigerator - that Southeast Asia is focused on.

This could change, however, as some Southeast Asian countries seek to move up the value chain.

Malaysia's most recent five-year plan that ends in 2025 expects the industry to contribute about 8 per cent of the country's GDP as it shifts its focus to higher-value products and woos investment in design and research.

Vietnam offers tax holidays of at least four years to some technology companies as well as financial support for companies operating in industrial parks aimed at offsetting the cost of training workers.

The trouble is labour shortages will mean even the region's chipmaking powerhouses like Malaysia will struggle to meet their goals in part because Covid-19 blocked the entry of foreign workers.

Malaysia's Semiconductor Industry Association said a survey of half its members found they needed 15,800 workers in 2021. This year it was 23,000.

Although foreign labour has begun to return, Malaysia will need higher-skilled workers in the long run to fulfil its plans to move up the value chain.

"We think Malaysia has room to catch up to the Asian tigers, in terms of talent development and R&D," said DBS economist Chua Han Teng.

"We find that Malaysia's highly skilled labour force is in the middle of the pack, when compared with other Asian economies."

Apart from tapping into international demand for semiconductors, officials are also betting that supporting a home-grown chip industry would be a buffer against future supply shocks.

In June 2021 Thailand introduced incentives, including tax exemptions, to draw investment, as well as research and development, to its semiconductor and electronics industries. Even so, the move came too late to stave off a slight downturn in exports owing to the pandemic. Carmakers in the country will churn out 1.75 million vehicles, down from 1.8 million units a year ago owing to lower export demand and an anticipated shortage of chips for vehicle production.

"Amid the pandemic, the semiconductor industry has experienced a demand hike and companies are looking for more resilience in the global supply chain," said Ms Duangjai Asawachintachit, secretary-general of Thailand's Board of Investment.

Even in Indonesia, which has a tiny semiconductor industry consisting of two Batam-based companies, one of which is Germany's Infineon Technologies, officials spot a chance to attract investment.

"We see rising demand for semiconductors as an opportunity for new investment in the sector. Indonesia needs to grab that opportunity," Industry Minister Agus Gumiwang Kartasasmita told reporters on June 20.

While the richest economies are trying to woo suppliers closer to their customers, such efforts are unlikely to hurt the prospects of Southeast Asia's semiconductor industry, say experts.

The US Chips and Science Act passed in August splashes out US$52 billion on expanding the country's chip production base. The European Union and Japan, too, have pledged tens of billions to subsidise their respective chip industries.

The venture may have mixed results, experts say, owing to the seeming impossibility of recreating at home the vast semiconductor supplier network worldwide.

"It won't have a major impact on the Malaysian suppliers," said Mr Atul Chandna, who oversees Asia- Pacific supply chain issues for consultancy EY, referring to subsidies.

"It will be business as usual for them due to the excellent ecosystem comprising regional contractors. They perform the backend assembly well."

But Washington's efforts to limit its adversaries', including China's, access to advanced chip technology would be considerably more ominous for the regional suppliers should boardrooms find themselves having to choose sides, Mr Chandna said.

"As China builds its advanced semiconductor industry, it is lagging behind the likes of the US or its allies due to the stringent IP (intellectual property) restrictions imposed by the US," he told ST.

"It will be a complicated business decision for regional suppliers to risk losing the latest technology or probable sales volume in order to stay loyal to a particular geographic side."

 

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.