Southeast Asia’s Semiconductor Play

In September 2009 Temasek Holdings, one of Singapore’s state-run investment funds, divested its 62 percent stake in a company called Chartered Semiconductor Manufacturing. Founded in 1987, Chartered was a key part of Singapore’s long-term ambition to gain a strategic foothold in global semiconductor and computer chip supply chains. To a large extent, the plan worked. By 2009 Singapore accounted for about 12 percent of global integrated circuit (IC) exports, and Chartered was the third largest semiconductor foundry in the world.

But it was also losing money and market share.

Singapore’s IC exports contracted by 13 percent from 2007 to 2009. Squeezed by intense global competition, particularly from Taiwan’s TSMC, Temasek decided to exit the position and sold its shares to UAE-backed GlobalFoundries for $1.8 billion. Given the firm’s operational challenges, there was a clear financial logic to the decision. But if Temasek had perfect foresight, they perhaps would have held their position a little longer. Within a few years the global semiconductor industry was primed for a resurgence in terms of profits and geopolitical significance.

GlobalFoundries, the firm that acquired Chartered in 2009, posted a net profit in 2023 of over $1 billion. It is one of the world’s top producers of semiconductors, and as a result occupies a key position on the global technological frontier.

According to Harvard’s Atlas of Economic Complexity (from which most of the data for this article is sourced), total global exports of integrated circuits were valued at $982 billion in 2021, the last year for which they maintain a complete dataset. Singapore still remains a significant player in the production and export of integrated circuits, but by 2021 its share of the global export market had fallen to 9 percent.

Why are integrated circuits such a hot topic these days? Mainly because the world runs on them.

ICs, which we commonly just call computer chips, are an essential component of virtually every type of electronic device, from microwaves to the most sophisticated artificial intelligence. Recent advances in high-level computing have accelerated the demand for processing power, and as a result control of IC supply chains has become very profitable and an area of global strategic competition. With the majority of production concentrated in the Asia-Pacific region, integrated circuits are acquiring ever greater currency as a geopolitical flashpoint, and this is creating a window of opportunity for countries that are eager to move up the value chain.

Semiconductor Supply Chains, Explained

The terms semiconductors and integrated circuits are often used interchangeably, but are not exactly the same. Semiconductor generally refers to the material itself, such as a silicon wafer, upon which an integrated circuit is built. The circuit itself is composed of a dense set of interconnected electronic components, and this is what actually creates the processing power that drives all modern digital devices. As chip technology has progressed over the years, integrated circuits have gotten smaller and denser, leading to increases in processing power. In this article, the terms semiconductor and integrated circuit are used to refer to the finished computer chip.

Global semiconductor and IC supply chains are complex and fragmented. Producing and developing the most advanced chips is extremely capital-intensive, requiring large investments in equipment, materials, research and design. As such, no single company produces all components of an integrated circuit from start to finish. Instead, a few companies around the world specialize in one or more key links in the chain.

The process begins with the design software. Because the most powerful integrated circuits pack billions of components into a tiny wafer, they can only be designed using sophisticated computer software. There are three main companies in the world that make this kind of specialized software. Two of them are American (Cadence and Synopsys), and the third is an American company called Mentor Graphics that was acquired by Germany’s Siemens in 2021. Without this software, designing modern integrated circuits is impossible.

Using this specialized software, companies then create proprietary chip designs. This link in the chain has also historically been dominated by the United States. According to a report by the Center for Strategic and International Studies in 2021 the U.S. controlled about 43 percent of the global IC design market. South Korea, a close U.S. ally, was the second largest player with around 21 percent market share.

Designing integrated circuits is complex, requiring heavy investment in research and high levels of human capital such as education, training, and knowledge transfers. This is why only a few companies in the world are able to dominate this crucial and high value-added link in the global semiconductor supply chain.

Once the design is completed, it is sent to a foundry for fabrication. Like design, this link in the chain is dominated by a limited number of companies, especially when it comes to the most advanced chips. This is because of the capital-intensive nature and technical complexity of manufacturing the most powerful integrated circuits. The biggest foundries are Taiwan’s TSMC, South Korea’s Samsung, China’s SMIC, as well as the U.S.-headquartered GlobalFoundries, the company that snapped up Singapore’s Chartered Semiconductors 15 years ago. Geographically, the physical production of integrated circuits is heavily concentrated in South Korea, China, and Taiwan.

Semiconductor supply chains are so highly specialized that even the equipment needed to make the integrated circuits comes from just a handful of firms. As of 2023, the Netherlands’ ASML is the only company in the world that produces extreme ultraviolet lithography equipment. These machines, each costing hundreds of millions of dollars, are required to manufacture the most advanced computer chips, such as the ones powering the AI boom.

The final stage is assembly and testing, where the chip is packaged and prepared to be shipped to market. This is the least complex and also lowest value-added link in the chain, so there is less industry concentration and the process is distributed across a wider geographical area. Southeast Asian countries like the Philippines and especially Malaysia and Singapore have significant footprints here. In 2021, Southeast Asia accounted for around a quarter of global IC exports, and much of that was driven by the abundance of assembling, testing, and packaging operations in the region.

Given the importance of semiconductors to global economic activity, it should be apparent from even a cursory overview that the globalized, highly fragmented and specialized nature of IC supply chains is vulnerable to both incidental and intentional disruption. In 2021, the CEO of GlobalFoundries acknowledged this, noting that around “70 percent of all foundry manufacturing takes place in Taiwan, a couple of hundred miles from China, from one company. It’s put a huge risk on the world economy.”

He made these comments during an interview announcing that GlobalFoundries, as part of efforts to reduce supply chain risks, would be building a new $4 billion foundry in Singapore, the very place Chartered Semiconductor got its start three decades earlier.

2016: A Turning Point?

Up until about 2015, concentrating so much global semiconductor production in a few regions dominated by a small number of companies was not perceived as a risky proposition. The industry developed in this way because, given the economies of scale involved, as well as the capital-intensity and complexity of the manufacturing process, a global network of specialized nodes operating under principles of free trade emerged as the most efficient and cost-effective way to structure the value chain.

Why spend vast amounts of time and money developing proprietary chip designs, when you could just license an existing and proven design and send it to a major foundry like TSMC to be made at a competitive price because of the large production volume they were already doing? 

Then something happened. After the election of Donald Trump in 2016, the United States began to take a more antagonistic posture toward China, especially in relation to trade. Chinese exports of integrated circuits, which had previously been relatively modest, began to surge. According to the Atlas of Economic Complexity, in 2016 China exported $63 billion worth of integrated circuits. By 2021, it was exporting $155 billion.

Processing speeds also began to reach levels where major breakthroughs in next generation technology like AI and cloud computing were becoming possible, meaning whoever controlled the production of the most advanced semiconductors would be able to secure an highly advantageous position on the technological frontier. This led to a big boom in the chip industry, with global IC exports leaping from $477 billion in 2016 to $982 billion by 2021.

Suddenly, the United States and China found themselves in a chip war.

Such a competition presumably favors the U.S., at least in the early going. The United States and its allies like South Korea have significant influence over key links in the chain, such as the design software and proprietary chip designs themselves. Chinese foundries also lack the ability to manufacture the most advanced integrated circuits, having specialized until recently primarily in downstream testing and assembly activities, or in production of less complex chips.

The United States has taken additional steps to slow down China’s ability to acquire more advanced chips and designs in any case. A series of export controls have been imposed on Chinese firms over the last several years, with the goal of slowing down their ability to acquire and make cutting edge chips. This has accelerated a push within China to develop more indigenous IC design and production capabilities. However, given the complexity and scale of the manufacturing process, it is likely to take some time before China can develop its own mature IC supply chains independent of the United States. 

Meanwhile, it has been acknowledged that overreliance on Taiwan’s TSMC has created certain strategic vulnerabilities, and a concerted effort is now underway to diversify semiconductor supply chains more generally and spread production networks out across a wider geographical area and amongst a broader number of firms. To that end, GlobalFoundries recently opened its new $4 billion fabrication facility in Singapore, and the United States has been making overtures to other friendly countries in the region. Given the existing IC assembly and testing infrastructure, Southeast Asia could be primed to play an important role in de-risking global semiconductor supply chains. 

Semiconductors in Southeast Asia

The majority of value created by integrated circuit production in Southeast Asia currently comes from assembly and testing, rather than the more complex (and higher value-added) design and fabrication functions. Malaysia and Singapore are the clear leaders in the region, with each country exporting between $84 and $85 billion of integrated circuits in 2021, roughly 9 percent of global supply each.

Lower down on the list is the Philippines, which accounted for about 3 percent of global IC exports in 2021. The country has carved out a position as a reliable assembler of less complex integrated circuits, with exports averaging $25 billion per year from 2017 to 2021. They also form a significant portion of the Philippines’ external trade, with ICs making up about 21 percent of the country’s total exports in 2021.

Somewhat surprisingly, Thailand never developed a strong semiconductor export base. This is curious, given the extent to which Thailand’s economy is structured around exports generally. From 2018 to 2021, Thailand averaged $10.5 billion in chip exports, about 1 percent of the global annual total, while in 2021 integrated circuits accounted for only 4 percent of the country’s total exports. That means semiconductors are not an insignificant part of Thailand’s industrial base, but for an export-oriented country like Thailand, it’s also not a particularly big share of its external trade.

Of all the major ASEAN economies, Indonesia has been the least successful at integrating into global semiconductor supply chains, exporting an average of $600 million worth of integrated circuits a year from 2009 to 2021. In 2021, this represented just 0.2 percent of the country’s total exports. Indonesia has been active in other areas of the technological frontier, such as data centers and clean energy. But so far, it has played a negligible role in the global chip wars.

Vietnam, on the other hand, has benefited tremendously from the de-risking of global semiconductor supply chains. In recent years Vietnam has pursued a very successful export-oriented manufacturing strategy resulting in high rates of economic growth. Low production costs as well as proximity to China and the other major industrialized East Asian economies have attracted huge inflows of foreign investment into Vietnam’s industrial base, including integrated circuits.

Vietnam is not capturing much of the higher-level design and fabrication activities, but its share of final assembly and testing has grown at breakneck speed. In 2009, Vietnam exported $161 million of integrated circuits, equal to 0.25 percent of its total exports. By 2021, that figure had reached $26 billion, accounting for nearly 7 percent of the country’s exports and 3 percent of global IC exports. It seems likely these figures will continue rising in the years ahead as semiconductor supply chains become increasingly diversified.

Whither the Chip Wars?

The United States has continued to turn the screws on China’s semiconductor industry, including attempts to restrict ASML from exporting advanced lithography systems to Chinese firms. This policy is likely to continue no matter who wins the U.S. presidential election in November, although the overall end-game remains somewhat unclear. In any case, it should be noted that this front in the China-U.S. chip war is being waged at a relatively high level specifically targeting advanced semiconductor design and production capabilities.

At a more general level, the de-risking of semiconductor supply chains is creating opportunities for Southeast Asian states that want to expand their role in global production networks. At the same time, it provides a strategic opportunity for the United States to deepen economic engagement in Southeast Asia’s semiconductor industry. This includes more investment in fabrication and assembly facilities, but there’s also scope for greater capacity-building especially in education, upskilling and transfers of technology.

The U.S. has begun establishing a series of formal relationships with semiconductor producers in the region. The U.S. Department of Commerce signed a Memorandum of Cooperation with Malaysia in 2022, aiming to “provide guiding principles for both nations as they collaborate on strengthening semiconductor supply chain resiliency efforts.” That is quite vague, but the main ambition is clearly to produce more integrated circuits and their components in Malaysia with the U.S. aiding in some capacity.

In an article for East Asia Forum, then-Deputy Minister of Investment, Trade and Industry Liew Chin Tong wrote that Malaysia aspires to move beyond assembly and into “more [local] front-end activities such as integrated circuit design, wafer fabrication, semiconductor machinery and equipment manufacturing.” Given the United States’ sizable footprint in these areas of semiconductor supply chains, it shouldn’t be too hard for the two countries to find common ground.

In 2023, the U.S. State Department then unveiled a series of partnerships with Vietnam, Indonesia, and the Philippines, with the explicit goal of helping these countries develop and grow their semiconductor industries. These announcements have a little more substance. For one, they are connected to an actual source of funding with a legislative mandate. The International Technology Security and Innovation Fund, created by the CHIPS and Science Act of 2022, provides the State Department with $100 million a year to spend on enhancing semiconductor supply chain security and diversification, and these efforts would fall under that umbrella. 

The partnerships are meant to attract investment and provide technical assistance and upskilling of workers in the semiconductor industries of each country. The first step, which is currently underway, is a review of current industry conditions to get a sense of how best to target and structure capacity building efforts and collaboration.

The choice of partners is also interesting. Vietnam’s IC industry is booming, the Philippines has occupied a steady but somewhat stagnant position at the lower end of the value chain for a long time, and Indonesia has what we might call very ample room to grow. This means they can likely benefit from U.S. collaboration on industry development in different ways. And while the amount of funding is modest in dollar terms, it sends a clear signal about the United States’ intention and ability to become more integrated in the region’s semiconductor ecosystem.

Thailand has not signed onto any formal semiconductor agreement with the U.S., and appears to be pursuing a bit of a different route. According to media reports, the Thailand Board of Investment recently approved a $345 million project to build the country’s first front-end production facility, which would mark a step up from assembly and into fabrication. The project is a joint venture between state-owned oil and gas giant PTT and home-grown electronics firm Hana Microelectronics, meaning for now Thailand seems to be hoping domestic firms will take the lead on industrial development.

U.S. cooperation with Singapore covers a broad range of technologies, likely reflecting Singapore’s more advanced techno-industrial ecosystem and deeper existing supply chain integration between U.S. and Singaporean technology companies, such as GlobalFoundries. In August 2024, the U.S. and Singapore held the Second Critical and Emerging Technology Dialogue where they agreed to work together on developing a number of key technologies including AI and semiconductors. Human capital development, R&D, and innovation for next-generation integrated circuits were singled out as priorities.

What is interesting about the approach the U.S. is taking here is that it is not being presented as a mandate to choose a side in the China-U.S. chip war, something that Southeast Asian countries would not do in any case. Rather, these overtures are framed in a way that appeals to the national and economic interests of Vietnam, Indonesia, the Philippines, and Singapore. For a variety of reasons, semiconductor supply chains are in the midst of a major global reshuffling, and the United States is offering collaborative partnerships that will help receptive Southeast Asian countries take advantage of this shift by moving into more strategic links in the global value chain.

Arguably, the U.S. has been slow to expand its geoeconomic footprint in the region when it comes to other emerging technologies like clean energy or telecommunications. But semiconductors are an area where the United States has something tangible to offer, given its advantages and experience in critical phases of the supply chain.

The partnerships with Vietnam, Indonesia, and the Philippines remain in the exploratory phase but the absorption of more advanced U.S. know-how and technology could make a real difference as Southeast Asian states look to capitalize on the de-risking of global semiconductor supply chains. Leveraging U.S. technology and knowledge in this way to appeal to the economic interests and developmental mandates of Southeast Asian countries is an effective way for the U.S. to deepen economic engagement in the region while furthering its own geopolitical and strategic interests, and that will no doubt hold true regardless of who wins the presidential election in November.