ASEAN’s potential in semiconductor manufacturing


We assess ASEAN’s potential in semiconductor manufacturing, in the context of the Covid pandemic, China-US tensions, global semiconductor race, and regional free trade expansion.
Ma Tieying23 Sep 2021
  • Singapore is best positioned in this region to attract semiconductor FDI
  • Malaysia has the potential to move up the value chain, …
  • … from chip assembly and testing to fabrication
  • American firms currently are the main investors in ASEAN’s semiconductor industry
  • South Korean and Taiwanese firms are likely to expand their footprints in the years ahead
Photo credit: AFP Photo


Background

Covid pandemic: The Covid pandemic has exposed the vulnerability of global production networks during crisis, prompting companies to strengthen their supply chains. According to a survey conducted by McKinsey in 2Q 2020, 93% of companies plan to increase the resilience of their supply chains after the pandemic, including dual sourcing of raw materials (53%), increasing inventory of critical products (47%), near-shoring (40%), and regionalizing supply chains (38%).

The impact of Covid on global semiconductor supply chains is relatively moderate. Taiwan and South Korea, the world’s major chip production bases, have managed the Covid crisis relatively well and avoided serious disruptions in their supply chains. Still, considering the risks of other future shocks, the fact that global semiconductor production is highly concentrated in a handful of countries warrants a strategic review.

China-US tensions: The geopolitical tensions between China and the US also prompt companies to reassess supply chains. Some companies seek to adopt the ‘China+1’ strategy, maintaining China as the primary production base, while increasingly looking for additional production locations. A survey by PwC and AmCham in 2019 showed that 64% companies plan to diversify their supply bases due to the China-US trade dispute.

Semiconductors are a focus area of China-US tensions. The US raised tariffs on the imports of China-made semiconductors during the first phase of the trade war in 2018. It also restricted the key technology supply to Huawei and SMIC through the entity list. These measures affected the foreign semiconductor firms that produce in or export to China. TSMC, UMC, Samsung, SK Hynix, Intel, Micron all have production facilities in China. According to IC Insights, of the USD22.7bn worth of ICs manufactured in China in 2020, foreign companies produced USD14.4bn, accounting for 64%.

Global semiconductor race: The major countries including China and the US are racing to increase semiconductor investment, in the context of the surge in global chip demand and growing importance of the semiconductor sector. In Southeast Asia, Thailand approved tax incentives for semiconductor investment in July, granting a 10-year corporate income tax exemption for investment in wafer fabs, and an 8-year tax exemption for the assembly, testing, and advanced printed circuit board projects with machinery investment of at least THB1.5bn. Vietnam has set ambitious targets for building a digital economy, increasing its GDP contribution to 20% by 2025 and 30% by 2030. To achieve these targets, part of the plan is to shift into the high value-added electronics manufacturing, including semiconductors.

Regional free trade: Free trade continues to be promoted in Asia. The Regional Comprehensive Economic Partnership (RCEP), which covers the ASEAN-10 countries, China, Japan, South Korea, Australia and New Zealand, was signed in November 2020 and is expected to take effect next year. Measures under the RCEP, such as unified rules of origin and common rules on intellectual property, will help to further lower the costs of sourcing and exports and reduce the uncertainties on high tech investment. This will likely make it easier for MNCs to build regional supply chains that leverage each country’s advantages, e.g., distributing wafer fabrication in countries with mature manufacturing capabilities like Singapore, and distributing chip assembly and testing in countries with low labor costs like Vietnam.

Semiconductor supply chains in ASEAN

The ASEAN region has moved into semiconductor manufacturing over the past decades, through attracting FDI, boosting exports and integrating into the global value chains. Of the world’s USD874bn exports of electronic components in 2019, ASEAN-6 countries exported USD191bn, accounting for 22%. Singapore contributed the largest share of 10%, followed by Malaysia at 6%. From 2000 to 2019, electronic component exports from ASEAN registered a compound annual growth rate of 5.6%, with the fastest growth seen in Vietnam (25.5%), followed by the Philippines (7.4%) and Malaysia (5.9%).

Singapore is the most important semiconductor manufacturing base in this region. It is home to Micron’s global operations headquarter, three memory wafer fabs, and an assembly and test facility. It is also home to Infineon’s Asia Pacific headquarter, managing the key functions including R&D, supply chain, sales and marketing. Meanwhile, GlobalFoundries and UMC both have fabs in Singapore, producing chips up to 40nm process. The large OSAT companies including ASE and JCET also have assembly and test facilities in Singapore.

Malaysia plays an important role in the assembly and test segment of the semiconductor value chain. The leading IDMs like Intel, Micron and Texas Instruments have established assembly and test facilities in Malaysia. The major OSAT companies including ASE and TFME have plants located in Penang.

The majority of foreign semiconductor firms investing in ASEAN are from the US. South Korean and Taiwanese semiconductor firms have a smaller footprint in ASEAN than in China. TSMC, Samsung and SK Hynix have not yet established chip plants in this region.

The potential ahead

In order to assess ASEAN’s potential in attracting greater FDI in semiconductor manufacturing, we construct an attraction index. This is a weighted average of the z-scores of 9 indicators, including labor cost, labor skill, electricity price, infrastructure, ICT adoption, macroeconomic stability, institution, market size, and cross-border trade. In our view, a well-trained workforce, reliable power supply, and stable macro environment are particularly important for semiconductor manufacturing, which requires strict product quality control, large electricity consumption, and high fixed investment costs.

Singapore scores the highest among the ASEAN-6 countries in our attraction index. It has strong human capital, first-class infrastructure, and a sound economic and institutional environment. Despite an aging population and expensive labor costs, the high automation rate in Singapore should help to contain the overall production costs. In addition, thanks to its comprehensive free trade network and superior geographic location, Singapore should continue to attract foreign semiconductor firms to set up headquarters to manage their regional operations and supply chains.

Malaysia scores the second highest in ASEAN, with above-average performance in most of the nine indicators. In addition to the existing chip assembly and testing, Malaysia should be positioned to attract FDI in chip fabrication and move up the semiconductor value chain in the long run. In the short term, however, the supply chain disruptions from the Covid pandemic may delay the process for foreign firms to expand semiconductor investment in Malaysia.

Other ASEAN countries are underperformers. Indonesia has advantages in labor and electricity costs and market size, but it lags in other indicators. Vietnam’s advantages are primarily labor cost and ICT adoption. To attract semiconductor FDI in these countries, it would still require significant progress in the governments’ education and infrastructure investments and economic and institutional reforms. Nonetheless, the labor cost advantage of these countries may provide an opportunity for them to attract FDI in chip assembly and testing. This segment of the value chain requires relatively large amounts of labor inputs and emphasizes the labor cost factor.

American firms currently play the major role in investing in the semiconductor sector in ASEAN. They are able to expand the existing production facilities in the short term, to meet the increase in the region’s chip demand. GlobalFoundries already announced in June to further invest USD4bn to construct a new fab in Singapore, to meet the increase in chip demand.

South Korean and Taiwanese semiconductor firms are likely to increase investment in ASEAN in the longer term. Their production facilities are mainly located in the home countries and China at present, which suggests the need for decentralization in the context of the pandemic and China-US tensions. TSMC already announced last year to invest USD12bn to build a 5nm fab in Arizona. Samsung also confirmed a USD17bn plan to construct an advanced fab in the US. More recently, TSMC said that it is evaluating the feasibility of building its first chip plant in Japan. The company is also reportedly considering a plant in Germany, which would be its first in Europe. It will not be surprising to see South Korean and Taiwanese semiconductor firms further expand footprints to the ASEAN region – in the relatively less advanced technology areas – in the years ahead.


To read the full report, click here to Download the PDF.

Ma Tieying 馬鐵英, CFA

Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]


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