A new front in the chip wars is emerging in East Asia. Last month, the US expanded restrictions on China’s access to semiconductor technology, raising concerns throughout the region that previously profitable export relationships may soon have to be re-evaluated. As such, from Japan to South Korea, Singapore to Vietnam, countries across the East Asian littoral feel like they’re being forced to pick a side.
Indeed, the deepening rivalry between Washington and Beijing over access to key technologies is already having a marked impact on East Asian markets. After the US Chips Act was announced, more than $240bn was wiped off the technology sector’s global market value as shareholders began to fear the break up of decades-old semiconductor supply chains. Data on regional chip imports explains the shock to the regional chip system. In 2020, China imported $10.8bn in semiconductor devices, primarily from Japan ($2.54bn), but also from Taiwan ($2.24bn), South Korea ($1.16bn), Malaysia ($764m), and Singapore ($754m).
But out of this volatility emerges a significant opportunity for established and emerging players in Southeast Asia to fill the void in supply caused by US efforts to isolate China from the chips market. Countries such as Malaysia and Japan, for example, are preparing themselves for a surge in investment in their semiconductor production facilities. Smaller nations like South Korea, however, are more reticent about the uncertainty ahead. For China itself, the country is already feeling the pinch from these trade restrictions - chip imports declined by 12.4% in September, and new figures from CEIC for October indicate this trend continuing in the medium term.
No country in the region is perhaps more affected by the chip wars than Taiwan. Chris Miller, author of Chip War: The Fight for the World's Most Critical Technology, argues that one of the main reasons why China has signalled plans for invasion is to potentially capture Taiwan’s most prized economic national asset - the foundries run by semiconductor giant TSMC. Producing some 54% of the global chip supply, seizing these production hubs would immediately afford the People’s Republic technological self-sufficiency in the semiconductor space. In the meantime, however, mainland China remains heavily reliant on TSMC’s output, depending on the company for approximately 70% of its domestic chip production.
Against this backdrop, it is unsurprising that Taiwan has firmly set its sights on the Chip 4 Alliance, a regional bloc uniting the US, South Korea, and Japan that seeks to enhance cooperation between members on the development of new chip technology while restricting China's access to the Asian semiconductor market. “We will use that platform to strive to safeguard our companies’ interests,” said Taiwan’s deputy economy minister, Chen Chern-chyi.
A wholesale commitment to cutting off China from the global market for semiconductors, however, could lead to significant costs for the wider Taiwanese economy. In the last five years, the People's Republic has consistently remained the island’s biggest trading partner, with a total estimated trade value of $515bn, according to the Taiwan Bureau of Foreign Trade. Cutting off Taiwanese chip exports to the mainland – which, in 2021 alone, accounted for 62% of Taiwan's exports, at an approximate value of $155bn – may have dire ramifications for its overall trade balance with the People’s Republic.
The US is also keen to bring larger East Asian countries like Japan into the Chip 4 Alliance, emphasising the potential economic benefits of joining the new trading bloc. Japan joining the group, former assistant commerce secretary Kevin Wolf recently speculated, would “result in even better cooperation between Japan and the United States and fewer restrictions on joint development and production of advanced node items”.
Perhaps unsurprisingly, China has proven less than pleased by the prospect of Japanese support of US ambitions for the chip market in the region, predicting an exodus of foreign capital from its neighbour across the Yellow Sea. “If Japan succumbs to US pressure on export restrictions and gives up the Chinese market, international investors may lose interest in Japan and stop their planned investment or even pull their capital out of the country,” said the Global Times, a state-affiliated news outlet, earlier this month.
These fears appear to be unrealised. Japan is rapidly ramping up its domestic chipmaking production capabilities, with more than 600 billion yen worth of investments announced so far. Earlier this month, the Japanese government revealed an investment of approximately $500m towards a new semiconductor venture called Rapidus led by Sony Group Corp and NEC Corp. This new investment comes off the back of multiple investment pledges to TSMC, Kioxia Corp, Western Digital Corp, and Micron Technology, as the country lures Western capital to its shores.
Despite inevitable turbulence in supply chains across the region, at least one Japanese company has expressed relative optimism about the future of the region’s semiconductor market. Lasertec, which effectively monopolises the manufacture of inspection systems for advanced chipmaking equipment, recently forecasted a 33% rise in its net profit to roughly $225m - a tenth straight quarter of record net profit - by next June, and is planning to quadruple its capital investments, according to Nikkei Asia. "Our exposure to the Chinese market in terms of sales is 10% or less," Okabayashi said. "At this point, the impact on our business is limited."
Others have a less rosy outlook on prospective restrictions on semiconductors sent to China. A representative of one major chipmaking equipment manufacturer in Japan said that if the production of advanced semiconductors were to stop in China, it would create a ripple effect by reducing demand for one of Japan’s foremost exports - its cutting-edge production equipment.
South Korean companies like Samsung and SK Hynix are some of the biggest semiconductor manufacturers in the world. One sign of the country’s ambitions to grow this part of its economy – and perhaps, also, of the important role it could play in US plans to curb regional chip exports to China – was the decision in May to hold the first meeting between US president Joe Biden and newly elected South Korean president Yoon Suk-Yeol at a Samsung semiconductor plant. Recent events, however, indicate that Washington will have a tough time trying to convince Seoul about the merits of its regional chip strategy.
According to figures published by South Korea’s Chamber of Commerce and Industry, almost 40% of all semiconductor exports went to China last year, compared to just 3.2% two decades ago. These figures have slightly increased in the first half of this year to 41.1% - roughly equates to $22.49bn - making the People’s Republic the biggest export market for South Korean chips, based on statistics released by the Korea International Trade Association.
As such, the country seems eager to carve out some middle ground for itself in the escalating conflict over chips between Beijing and Washington. In August, China and South Korea announced a ‘Collaborative Supply Chain Council’ to mitigate potential disruptions in the region’s supply chain for semiconductors. Later that month, the South Korean government also attended a preliminary meeting of the Chip 4 Alliance. It’s a cautious attitude that some Chinese commentators have warily endorsed.
“Seoul showed it wanted to maintain mutual trust and steady cooperation with Beijing in industrial chains and supply chains in the face of pressure by the US from the ‘Chip 4 Alliance’,” said Da Zhigang, director of the Institute of Northeast Asian Studies at Heilongjiang Provincial Academy of Social Sciences.
Whether South Korea’s stance will prove sustainable if tensions on technology escalate between Beijing and Washington remains to be seen. For the moment, it seems to be serving Seoul’s economic and diplomatic interests. Last month it was reported that two of the country’s chipmaking giants, Samsung and SK Hynix, were granted a one-year exemption from US export restrictions to China. Both companies have large production facilities in China, with 50% of SK Hynix’s DRAM production capacity based in the country.
Another country that is attempting to balance competing pressures from the US and China is the city-state of Singapore. Attracting foreign investment, especially from major global companies like TSMC, Micron Technology, and GlobalFoundries has been a key plank in the country’s development strategy since independence. As such, any turbulence in regional semiconductor supply chains is keenly felt in the island nation. “Singapore is so small that when elephants fight, the grass gets trampled,” said Edwin Chow, assistant CEO at Enterprise Singapore, a government development agency. “[We] just have to make sure that the elephants don’t step on us.”
Other Singaporean officials have been more critical about escalating tensions in the region. The country’s foreign minister, Vivian Balakrishnan, described US export and import restrictions as “all but a declaration of a technology war.” It’s one that could have an outsized impact on the Singaporean economy. According to the country’s Ministry of Trade and Industry, the semiconductor sector represents Singapore’s largest manufacturing segment, contributing to 7% of GDP last year. Chip exports to China, meanwhile, totalled approximately $754m in 2021, according to data from the Organisation for Economic Complexity.
US sanctions on China’s semiconductor industry could force local companies to buy chips exclusively designed and produced in the US, or totally redesign products that up until now have been exclusively compatible with Chinese equivalents, according to Chow. But these issues might smoothen over in the long run. Earlier this year, US chipmaking giant GlobalFoundries recently announced a $4bn expansion plan in the city-state, to begin in 2023.
Singapore’s neighbours to the north, meanwhile, are more jubilant about China losing out in the chip wars. In an interview with CNBC, the president of Malaysia’s Semiconductor Industry Association hinted at how the country is set to reap the benefits of a disrupted supply chain. “Malaysia and the other countries in Asia will benefit because some of the production that is in China has to find a solution - which is basically moving out of China,” said Wong Siew Hai. “Some US companies which can't ship to China may have to find a solution…I see Malaysia having some opportunities in that area.”
One of the reasons for this optimism is the country’s role in global chip supply chains, as the country reportedly contributes approximately 80% of global back-end semiconductor output. As such, despite the potential disruption, some analysts have described Malaysia’s production capacity as advantageous.
The country’s significant role in global chip supply chains is perhaps best explained by its strong performance after the pandemic. According to a report published by Malaysia’s Central Bank, production activity witnessed a “strong rebound” and has increased beyond pre-pandemic levels since 2020. “Malaysia holds a strategic position in global value chains, being among the larger net exporters of semiconductor products, with a significant share of firms within the semiconductor value chain involved in the production of chips,” said the report.
“As such, strong demand for semiconductors is benefitting a large segment of the industry, outweighing the impact of shortages on segments that use chips as intermediate inputs. In particular, firms involved in front-end semiconductor manufacturing have experienced a surge in orders as they serve to address the global supply gap.”
Perhaps the biggest winner in the chip wars between the US and China, however, could be Vietnam. One of the root causes for the country's emerging role as a hub for chip production is down to China’s zero-Covid policy, which encouraged global manufacturers to start shifting their factories to Vietnam to avoid further supply chain disruptions.
As a result, Vietnam has witnessed a surge of foreign investment in its semiconductor industry. Last year, for example, Intel invested $475m in its largest chip assembly and testing site in Ho Chi Minh City. Meanwhile, this August Samsung announced $3.3bn worth of investments intended to scale-up the production of semiconductor components at its Thai Nguyen factory by July 2023. The company now has six production plants in the country and is reportedly building a new R&D centre in Hanoi. The American chip design software company Synopsys, also said it would shift training for engineers to Vietnam.
The impact of these foreign investments has also seen breakthroughs in Vietnam’s domestic semiconductor production capabilities. According to Reuters, FPT Semiconductor, a unit of the country’s tech giant FPT, recently launched its first line of semiconductor chips. The company is reportedly planning to supply 25 million chips globally by next year.
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