General

(Part 1) Semiconductors production – the fierce competition of the world’s superpowers and the rise of potential steeds.

Trường Lăng

December 7, 2022

General

(Part 1) Semiconductors production – the fierce competition of the world’s superpowers and the rise of potential steeds.

Trường Lăng

December 7, 2022

What is known as core technology – semiconductors – hold a vital position in global economic development. Thus, the manufacturing and producing this component is not an easy task, and without doubt, not any country has the capacity to do so. Yet, as the importance of the semiconductors is increasingly widely recognized, nations worldwide have made great attempts to independently produce the chips. 

The burgeoning demand for semiconductors with perceived challenges in production capability

Semiconductor chips are the brain of any electronic appliances and advanced technologies, from television, smartphones, and computers to AI, 5G, and blockchain. This means they enable machines and appliances to perform key functions, namely data processing, storage, input and output management, among others. 

In recent years, the outbreak of the Covid-19 pandemic has strongly accelerated the movement of digital transformation on a global scale. Due to the social distancing policies in different countries, along with the travel restrictions, users have increased their demand for technological appliances. According to Deloitte’s experts, across the consumer electronics sales categories, computers (+34%) and TV sets (+12%) have grown much faster than smartphones (+1%) in the past three years globally

Pat Gelsinger – CEO of Intel Corporation – assessed “We have seen the growing demand for semiconductors from the world’s growing digital trends. This process has been fueled during the pandemic and it spurred demand for semiconductors.” With demand on the rise, countries with capacity in semiconductor production are dominating the market and becoming the main global supply. 

However, manufacturing this core component is challenging!

This can be attributed to the sophistication in the making process of a semiconductor chip, which requires a diverse number of high-tech and advanced machines in the production chain. Along with that, a semiconductor is combined by rare and special input material. Thus, setting up a semiconductor production plant is a huge investment. 

At the same time, the pandemic and most recently, the conflict between Russia and Ukraine have disrupted the global supply chain, severely affecting the production and distribution of the semiconductors. Meanwhile, major players in the market are now moving towards advanced chips due to the high profit margin. As a result, the supply of the semiconductors for daily electronic devices is in dire shortage. 

In short, semiconductor production turns out to be the battle game of big fish and superpowers. 

The current runners-up in the fierce competition of producing semiconductors.

The USA – the birthplace of semiconductors 

The USA used to dominate over 50% of the semiconductor market thanks to the advantages of the first-mover. Yet, Taiwan and Korea soon took the lead, reducing the USA’s market share to 12%. 

With the slogan “the American invented Semiconductor, the American will bring Semiconductor back home”, the USA has been attempting to regain its power in the market. Accordingly, the government has passed new policies on high-technology production, which stipulated the $USD 52 billion investment in initiatives, designs and manufacturing of semiconductors. 

In addition, through the Science and Chips Act, the US also officially competed with China. The country offers diverse incentives, along with laying the restrictions on countries that cooperate with China, while calling for setting up manufacturing plants in the US.

Korea and Taiwan – big player in the game

Taiwan is leading the world with 92% when it comes to producing advanced semiconductors (Boston Consulting, 2021). At the same time, its local semiconductor manufacturer – TSMC has contributed to 54% of the global market share, dominating the market. This country also ranked second in the world for its investment budget in semiconductors.

Just behind Taiwan, Korea is the homeland of the largest world manufacturers, Samsung and SK Hynix Inc., to name a few. In Quarter II, 2021, Korea invested $USD 6,62 billion, up 48% over the same period in 2020 and ranking second globally. Besides, the Korean government planned to finance 950 billion won (approximately USD$ 700 thousand) to research and develop electrical and automotive chips from 2024 to 2030. Additionally, 1,25 trillion won (equal to over USD$ 875 million) will be spent on artificial intelligence chip development by 2029.

China – Big investor in semiconductors production

A report by the global industry association SEMI shows that in the second quarter of 2021, China invested USD$ 8.22 billion in chip-making equipment, up 79% year-on-year and up 38% over the first quarter of 2021.

The heavy investment in semiconductor manufacturing is part of China’s strategy to become a technology powerhouse. The country has been trying to find a way out of dependence on foreign manufacturers in the semiconductor sector for decades. 

According to the National Bureau of Statistics of China (NBS), China’s production of integrated circuits (ICs) and industrial robots increased by 16.2% year-on-year in 2020. However, China is still not able to be self-sufficient in chip sources. In just 2020, China spent USD$ 350 billion importing chips for other manufacturing industries. Mainland China’s manufacturing industry is still dependent on advanced chips of Intel (USA), Samsung (Korea) or TSMC (Taiwan).

The challenges remain for China as the country is under the US Law – restricting countries from cooperating with China – and its own zero-Covid policy. This will have a certain impact on the supply chain of several nations on relationships with China.

ASEAN – the rising player in the semiconductors production game

When semiconductor manufacturing was halted by a hard strike of Covid-19 pandemic and its global supply chain was once seriously disrupted, the world semiconductor makers recognized the risk of over-depending on China. Thus, they are moving towards new promising destinations. ASEAN is the most potential one! 

ASEAN is uniquely positioned as a neutral region with a well-established and diverse semiconductor ecosystem. Since the 1970s, ASEAN knows semiconductors, and its governments continue to support investments in this sector

Amarjeet Singh – EY Asean Tax Leader; Partner, Ernst & Young Tax Consultants Sdn. Bhd.

In recent years, the ASEAN semiconductor industry has received a boost from FDI, increasing exports and integration into global value chains. According to the UN Comtrade, in 2019, US$200 billion semiconductor export volume came from ASEAN region, with 5 out of 11 ASEAN members being the top 15 global semiconductor exporters. Plus, ASEAN was also the second-largest semiconductor exporting region globally, accounting for 22.5% share of the world semiconductor export.

The astonishing figures in the semiconductor industry in ASEAN can be explained by the joint contribution of its members to the industry. In particular, Malaysia, Singapore, Vietnam, the Philippines and Thailand are at the forefront of R&D and IC design. At the same time, Malaysia and Singapore are regional leaders in wafer manufacturing, and equipment manufacturing. Malaysia, the Philippines, Thailand, Vietnam and Indonesia excel at  ancillary manufacturing, while Singapore and Thailand lead in engineering software. In this way, the whole region is creating a great value on the global semiconductor value chain.

Figure 1: The spread of semiconductor specializations across the region (Source: EY)

Moreover, the government in each country is encouraging the development of high technologies and emphasizing on the production of semiconductors. For instance, under the Making Indonesia 4.0 roadmap of the Indonesian government, the electronics sector is one of Indonesia’s five targeted essential sectors. This sector attracted FDI inflow in excess of USD$ 3,3 billion from 2010 to 2020. 

In addition, major semiconductor manufacturers and ASEAN members have cooperated to set up their manufacturing plants and R&D centers. Particularly, foreign chipmakers have been establishing manufacturing operations in Malaysia since the 1970s, and the country has developed a position in the global supply chain as a major semiconductor assembly, testing and packaging location. At the same time, Samsung has also been constructing a new USD$ 220 million R&D center in Vietnam to develop products as well as in new technologies such as artificial intelligence, the internet of things (IoT) and big data. Meanwhile, Intel has invested USD$ 1.5 billion USD since its establishment in Vietnam. At the national level, the US and Malaysia have signed a memorandum of understanding (MoU) on collaborating to strengthen semiconductor supply chain resilience and promote sustainable growth. 

Conclusion

The context of semiconductor competition is changing as the world manufacturers in the industry are finding their ways to dominate the game. With the unprecedented appearance of Covid-19 pandemic, key players have sought solutions to diversify their semiconductor supply chain, which give rise to ASEAN. 

Yet, despite offering tremendous favorable conditions for the top semiconductor makers, the region still presents several challenges. The questions have been raised by various manufacturers “Which destination should I choose to settle down my business?” “How can I navigate myself through the local environment?”…. With 12-year practice in diverse industries and majors and a team of well-informed professionals in local markets and legal systems, Viettonkin can help you find out the answers in this article. Stay tuned and Let us be your trustworthy partner

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