Challenges and opportunities in the Southeast Asia semicon sector

Image courtesy of SEMI Southeast Asia

According to American trade organisation Semiconductor Industry Association (via The Economist), 80% of global chipmaking capacity currently resides in Asia. Taiwan’s semiconductor industry, by itself, has accounted for about $115 billion in 2020, and is expected to grow by 8.6% in 2021.

However, Southeast Asia’s fragmented semiconductor market has made it challenging for the region to compete with the giant semiconductor industries in Taiwan and South Korea. Given this context, trade organisation SEMI recently held a panel discussion during its SEMICON Southeast Asia conference to discuss how the region can come together to establish a more competitive niche for itself.

Moderated by HSBC Singapore’s Chief Investment Officer James Cheo, the panel was composed of the following:

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  • Ajit Manocha, President and CEO, SEMI, United States
  • Angelica Mapua Cayas, Governor, Board of Investments, Philippines
  • Chanin Khaochan, Deputy Secretary General, Board of Investment, Thailand
  • Terence Gan, Senior Vice President, Semiconductors, Singapore Economic Development Board, Singapore
  • Sikh Shamsul Ibrahim Sikh Abdul Majid, Executive Director, Manufacturing Development, Malaysian Investment Development Authority (MIDA), Malaysia
  • Do Thi Thuy Huong, Executive Board Member, Vietnam Electronics Industries Association, Vietnam

Issues faced by the industry

To start off the discussion, Ajit Manocha provided a backdrop on the state of the global semiconductor industry. He started with the ongoing chip shortage, which he thinks won’t be an easy fix. “The new (semiconductor) fabs cost $10+ billion and it will take three to four years before they are fully productive,” Manocha explained.

“The good news is that many new investments have been made,” he shared. “There are 50 new 300mm fabs and 22 18-inch fabs coming in the next four years – a total of 72 fabs by 2024. This has never happened in my lifetime. I’ve been in the industry for almost four decades, and I’ve never seen announcements of so many fabs. Some of them may not materialise, but even if half of them happen, it’s still a unique announcement.”

Manocha also talked about the cause of the shortage. He believes that COVID-19 accelerated the problem as it accelerated the pace of digital transformation.

“This pandemic has led to working from home, telehealth, remote monitoring of factories, and so on. The demand for CPUs for computers, laptops, and mobile devices is through the roof – not only from consumers but also from governments to track the information about the pandemic,” he pointed out.

The SEMI President and CEO also touched on the following issues:

  • Disruptive emerging technologies (e.g. artificial intelligence, 5G, high-performance computing, autonomous machines) are leading to long-term industry growth. Manocha expects the industry to grow to $1 trillion in the next 10 years.
  • A talent shortage, which Manocha thinks is “the most serious problem today.” He specifically thinks there is a dearth of STEM-based talent.
  • Supply chains are heavily disrupted because of geopolitical issues and export control regulations in the United States.

Manocha believes that the industry’s challenges are also opportunities, especially for Southeast Asia as the region continues to capitalise on shifting supply chains.

How each country is doing

The discussion proper started with each panelist talking about the current situation in their respective countries. Angelica Cayas, for instance, reported that the Philippines’ semiconductor industry is the top contributor to the country’s total exports, accounting for around 62% of around $40 billion in 2020. The Philippines also has a sizable labour force with about 790,000 college graduates from engineering, IT, and science-related fields.

Terence Gan, meanwhile, revealed that Singapore accounts for close to 5% of the global fab capacity. “We are a big supplier of specialty products such as NAND flash from Micron, high-brightness LEDs from Lumileds, VCSELs from Broadcom and AMS, and RF filters from Qualcomm,” Gan shared.

Malaysia’s electrical and electronics industry, said Shamsul Ibrahim, has been the backbone of the country’s manufacturing sector. “At this point, 5 out of 15 of the global semiconductor companies by annual sales, namely Intel, Infineon, Micron, Texas Instruments, and STMicroelectronics are currently operating in Malaysia,” said Ibrahim.

Vietnam, on the other hand, has been number 12 in the world in the electronics industry, said Do Thi Thuy Huong. “As of 2020, the export volume of electronics components, devices, and mobile phones is $97 billion USD, about 40% of the total export volume of Vietnam,” she disclosed.

Impact of the pandemic

According to Cayas, the semiconductor industry is one of those hardest hit by COVID-19 in the Philippines. “The disruptive lockdowns and quarantines have greatly affected manpower and movement and availability. There are even reported cases of COVID-19 transmission within factories. Delays in shipment and supply chain disruptions have been likewise been major concerns,” she said.

To remain competitive, the Philippine government is finding ways to attract more investments in the semiconductor industry. “Last March, our president signed the CREATE law,” said Cayas. “Incentives under it would be made available to projects listed under the Strategic Investment Priority Plan, including electronics and semiconductors, especially those that involve job and value chain creation, national development, R&D, and generation of new knowledge and intellectual property.”

The Singapore industry performed well, said Gan. “Last year, semiconductor companies committed to about $6.8 billion of fixed-asset investments in Singapore. It is the highest level of fixed asset investments by the semiconductor industry ever. Despite the pandemic, companies continue to invest in Singapore and 2020 was a record year,” he observed.

As for Malaysia, Ibrahim said semiconductor companies are allowed to operate at least 60% of their operation. “Once at least 80% of employees have been vaccinated, companies can operate at 100%. We have 50%, so they can operate at 80% capacity. This is basically to allow them to operate and they don’t have to wait for long to resume their full capacity.”

Ibrahim said MIDA is also facilitating approvals for expansions and investments, including those in the electronics and semiconductor industries. “We are working together with the Immigration department, the Ministry of Health, and the Ministry of Finance to allow them to enter Malaysia. We are talking to some companies, foreign and local, to expand and continue investing in the country,” he said.

Trade war and cooperation

The final topic discussed was the U.S.-China trade conflict, which is impacting supply chains worldwide. The main concern was how the issue can create more cooperation within the Southeast Asian block.

Manocha believes that the countries in the supply chain need to work together with the industry to combat the disruption caused by the trade conflict. He compared it with past conflicts like the U.S.-Japan trade war back in the 1980s, which is said to have led to discussions on how to manage government and industry relationships.

“We are convinced that these kinds of issues have to be handled multilaterally and not unilaterally,” said Manocha. “So long as countries cooperate with international laws, SEMI is always there to work with the governments, to support them. In my view, China should be treated as a competitor, not the enemy. We should work in good faith regarding the important compliance of IP, cybersecurity, and so on.”

Cayas said that the U.S.-China conflict has no significant impact on the Philippines. “There might even be opportunities for ASEAN countries as a lot of U.S. manufacturers are now looking to move their facilities from China to Southeast Asia,” she noted.

Cayas also believes cooperation can be fostered in the region through the development of regional centres of excellence and common regulations for strengthening ASEAN in the semiconductor sector. “RCEP (The Regional Comprehensive Economic Partnership) is also a big contributor to greater cooperation in the region as it intends to create more business-friendly environments, encourage closer integration of economies, and provide a more stable and predictable rules-based system of trade.”

Khaochan observed that the conflict has actually been good for Thailand. “Since Thailand is a peaceful country, we are friends with both sides and try to keep the balance,” he said. “Some of the Chinese investors just moved their production to Thailand as a response to the issue. The balancing of relationships is important and I think we are doing well.”

“To the extent that it (the U.S.-China conflict) gets people talking about supply chain resilience, I think it’s good, because then we are making the right investments,” remarked Gan. “But to the extent that it leads to conversations arounds self-sufficiency in the context of a country or region, I’m worried. If you think about the supply chain pre-COVID as parietal optimal, I’m concerned that these conversations would result in a less efficient supply chain.”

“If this region wants to be a force to be reckoned with, we should look at having resiliency and building stronger supply chain networks,” said Ibrahim. “We (Malaysia) have brought universities, the government, and industries closer together, in what we call a triple-helix model. We’d also like to bring other countries in the region onboard to establish a stronger foundation together,” he concluded.

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