By Dr Lili Yan Ing, Secretary General of International Economic Association (IEA) and ERIA's Lead Advisor, Southeast Asia Region, and Ms Ivana Markus, Research Associate: One of the current escalating issues between the two major powers, China and the US, is the global semiconductor race. It has caused divisions within the global supply chains, such as the increased reshoring of manufacturing processes. As a result, countries globally are making readjustments and competing for a more significant role in this growing technology sector. This is just the beginning of a global race that would affect several ASEAN countries like Malaysia, the Philippines, Singapore, Thailand, and Vietnam, that are currently navigating this complex semiconductor competition.

Semiconductors serve as critical parts for several industries, including artificial intelligence (AI) applications, electric vehicles, and other advanced technologies. In terms of market dominance, the US accounted for  47% of the global semiconductor market in 2020, followed by South Korea (20%), Japan (10%), EU (10%), and Taiwan (7%) (Statista, 2021). Globally, the major players in terms of market revenue include Samsung, Intel, SK Hynix, Qualcomm, and Micron Technology in 2022.

The global semiconductor race between the US and China has escalated since October 2022 when the US announced an export control policy on artificial intelligence (AI) and semiconductor technologies to China. Through these restrictions, the US aims to limit China’s access and ability to produce certain advanced chips. The US does not only ban China’s access to high-end AI chips, but also choke point technologies, such as AI chip design, electronic design automation software, semiconductor manufacturing equipment, and equipment components. The new rules will not only hinder China from enhancing its capabilities in the semiconductor industry but also make China more reliant on its domestic suppliers to maintain its growth. Responding to the US export controls, Japan and the Netherlands have also implemented new rules to control semiconductor technology exports to China, citing national security reasons.

In retaliation, the Ministry of Commerce of China placed restrictions on the exports of key semiconductor raw materials, namely gallium and germanium, on 3 July this year. The two materials are mainly used in the manufacture of several high-tech productions such as chips, solar panels, and electric vehicle (EV) batteries. While the magnitude is seen as narrower in scope than the US’ restrictions, China’s export ban on these three elements will have a bigger impact on the market and supply chains.

Amid the ongoing global semiconductor race, ASEAN, a grouping of nations that together constitute the world’s fifth largest economy, has the potential to play a significant role as ASEAN offers strengths that can enhance its position in the semiconductor industry. ASEAN represents a region with several advantages such as growing manufacturing capabilities, skilled workers, and supportive government policies, which can further attract investments to become a vital production hub for semiconductors.

While American and Chinese exports for semiconductors globally accounted for US$28.4 billion and US$220 billion in 2022, respectively, the ASEAN region’s semiconductor exports accounted for more than US$165.3 billion in 2022, compared to US$52.3 billion in 2017. In addition, the revenue of the ASEAN region’s semiconductors market is projected to reach US$101.8 billion this year, illustrating its vast potential in this specialised supply chain. In particular, countries such as Singapore and Malaysia are already playing a significant role in the global supply chain, accounting for 11% and 7% of the global semiconductor market share respectively. Singapore has built up notable capabilities in wafer fabrication constituting 5% of global wafer capacity, whilst Malaysia is a key global player in assembly, testing, and packaging activities.

In 2021, ASEAN’s Foreign Direct Investment (FDI) inflows increased by 42% to US$174 billion, after a sharp decline in 2020. FDI in electronics, including semiconductors, provided a strong investment growth to record in 2021. The global disruption in the semiconductors supply chain led to a further expansion of ASEAN’s electronic and semiconductor operations, particularly in Malaysia, the Philippines, Singapore, Thailand, and Vietnam. 

Trade between the bloc’s member states and the US surged from US$135.1 billion to US$452.2 billion. ASEAN exports to the US nearly quadrupled from US$87.9 billion to US$356.7 billion over the same period with its semiconductor exports increasing by around 80% reaching US$9 billion. At the same time, trade between ASEAN and China reached US$975.3 billion in 2022, an astounding 24-fold increase from 2000. ASEAN countries’ exports to China increased by a factor of 18 during this period, from US$22.2 billion to US$408.1 billion with semiconductor exports in particular rising to US$26.6 billion in 2022, 176% increase from 2017. Thus, the strengthening trade and investment relationships with both the US and China and the growing geopolitical tensions between these major powers put ASEAN countries in an advantageous situation.

Navigating the complex US-China rivalry is a daunting challenge for ASEAN. Therefore, for ASEAN, choosing a side is not a viable option. Given that ASEAN economies are heavily interconnected with the US, Europe, China, and other East Asian markets, the bloc must maintain a neutral stance, avoid taking sides, and instead, enhance collaboration. Diverse trade and economic partnerships could enhance ASEAN’s opportunities as well as improve ASEAN’s trade and investment.

Indeed, ASEAN needs to keep its position as a neutral ground, not only in the semiconductor industry but also in all sectors. ASEAN needs to prioritise further its investment in research and development, manufacturing capabilities, production capacities, and skills to enhance its potential for semiconductor innovation and manufacturing. However, for ASEAN to capture a part of the high-tech equipment and supply chain, strategic moves focused on its foundation are also important. First, investment in research and development, particularly AI research, could support ASEAN’s semiconductor production capability and capacity. Second, ASEAN needs to improve and streamline its regulations and standards as a region to establish clear regulatory frameworks and facilitate trade. Last, with ASEAN’s population dividend, investment in education and training programs is the key strategy for ASEAN to develop a skilled workforce to unleash ASEAN’s potential in the long-term development of the semiconductor industry in the region.

This opinion piece was written by Secretary General of International Economic Association (IEA) and ERIA's Lead Advisor, Southeast Asia Region, Dr Lili Yan Ing, and ERIA's Research Associate, Ms Ivana Markus, and has been published in ISEAS ASEANFocus September Issue. Click here to subscribe to the monthly newsletter.

Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the Economic Research Institute for ASEAN and East Asia.