De-risking presents opportunities for Southeast Asia as chip companies diversify their supply chains amid the increased prevalence of ‘black swan’ events.
The world’s reliance on semiconductors has been growing over the last decade as we are becoming ever more dependent on technologies like electric vehicles (EVs) and artificial intelligence (AI). At the same time, ‘black swan’ events, such as natural disasters and the recent pandemic, have become more frequent in recent years. This has highlighted the fragility of the chip industry and its global supply chain. Semiconductor chips have become an area of national strategic importance, and governments across the world are competing to strengthen their supply chains.
Adding to the complexity of the problem, the US-China rivalry has intensified with the US announcing restrictions to limit China’s access and ability to produce certain advanced chips. In return, China has retaliated by restricting exports of key semiconductor raw materials. As US-China trade tensions continue, companies are de-risking to reduce excessive dependency on any one country. Some have adopted a “China Plus One” strategy, diversifying their businesses out of China to limit supply chain disruptions and establish additional production hubs in other countries.
Amid these uncertainties, Southeast Asia (SEA) has an advantage in its uniquely neutral position, with a semiconductor ecosystem that has strength throughout the value chain. The share of manufacturing in total FDI for SEA countries has been rising steadily in recent years, boosted by the production of semiconductors and electronic components that have received the most investor attention.
Figure 1: Foreign direct investment (FDI) in the semiconductor industry by destination country, 2016-2022
Note: “Other” refers to 59 countries where FDI in the semiconductor industry has been tracked
Malaysia is one of the beneficiaries of de-risking strategies and has become the sixth-largest chip exporter in the world. The Malaysian government has made an effort to attract big names like Intel and ams Osram by offering tax holidays and building industrial parks and warehouses specific to the needs of chip companies.
Besides Malaysia, Singapore’s robust infrastructure, skilled workforce, and supportive government policies also make it an attractive investment destination. The Singapore government is prioritising the growth of its manufacturing sector by 50% by 2030. Today, Singapore already accounts for around 5% of wafer fab capacity and 20% of semiconductor equipment output globally.
Moreover, at a time when companies face major challenges in securing talent, SEA is set to increase its working-age population with post-secondary schooling to 65 million in 2030, compared to 37 million in 2015. Access to a skilled, cost-competitive workforce will also attract companies to expand their footprint in the region.
As advanced semiconductor companies set up operations in SEA, technology transfer and knowledge sharing will potentially accelerate the growth of the local semiconductor ecosystem. For instance, GlobalFoundries is an active partner to Singapore’s research institutions, with ongoing R&D projects with Nanyang Technological University and the National Research Foundation.
The APAC’s semiconductor industry is undergoing significant shifts with de-risking strategies and SEA emerging as a key player. The China Plus One approach is enabling companies to diversify their supply chains and enhance their resilience. SEA countries like Malaysia and Singapore stand to gain from this trend with their favourable business environment and growing semiconductor ecosystem.