Three countries are set to challenge China for chips

Three countries are set to challenge China for chips

Tue, 20th Feb 2024

Article tagsForecastingSupply chainsTradeAsiaChinaIndiaMalaysiaVietnamCountry AnalysisManufacturing

• Malaysia, India and Vietnam are deploying a three-pronged approach to attract investment: tech alliances with the US, knowledge transfer from global chipmakers, and subsidies
• Malaysia's expertise in low-value processes, availability of high-skilled labour and presence of global chipmakers makes it the most attractive to investors
• But China's large domestic market and an established manufacturing ecosystem will ensure that majority of chip production will continue there

An intensifying tech war and ongoing export controls are leading to shifts in supply chains in the global semiconductor market. China has long been one of the largest chip manufacturers globally, alongside Taiwan and South Korea. Foreign companies such as TSMC (Taiwan) or Intel (US) have invested there, taking advantage of a large domestic market, low-cost labour and favourable government policy. This is particularly true for the less advanced chips (14nm and above), which go into smartphones, automobiles and several other consumer electronics products, and are not currently subject to US export controls. China has developed an expertise in manufacturing these chips, alongside packaging and testing. However, ongoing geopolitical uncertainties have led investors to move some manufacturing away from China, as part of a China+1 policy.

Governments in India, Malaysia and Vietnam are very keen to attract this investment in chip production and have adopted a set of common approaches by:

• Enabling knowledge transfer from global chipmakers via joint ventures with local companies
• Forming next-gen tech alliances with the US
• Providing subsidies to attract global chipmakers

As of 2023 Malaysia accounted for about 13% of the world's share of chip testing, packaging and assembly. These are low-value processes, which China currently dominates and emerging markets such as India are keen to enter. Malaysia is set to increase its share of these processes thanks to investments from global chipmakers. Infineon (Germany), a manufacturer of semiconductors for the automotive sector already has two facilities in Malaysia, and in 2023, it announced a US$5.8bn investment in a third chip testing facility. Texas Instruments, a US-based chipmaker, also announced a U$3bn funding for its new production unit here. As an upper middle-income economy, Malaysia attracts high-skilled labour from neighbouring countries. In terms of geopolitics, Malaysia does not choose sides between China, its largest trading partner, and the US, on which it relies for maritime security.

Indian domestic semiconductor firms perform a very small share of chip assembly and testing currently. The government has attempted to attract global companies by announcing a US$10bn subsidy package in 2021, but by 2023 only Micron (US) had pledged a little over US$800m for a testing and assembly unit. Two Indian conglomerates-Tata Group and Vedanta-have been trying to venture into semiconductor production but nothing tangible has so far been announced. However, the general elections in May could provide more momentum to their plans. Meanwhile, the government has successfully formed an alliance with the US for joint research and development and skilling of its workforce for next-generation technologies, including semiconductors. Despite these advantages, policy uncertainty remains a challenge for India's manufacturing ambitions. Incidents such as delayed implementation of production-linked incentive schemes launched in 2020 for other industries could hurt confidence among global chipmakers interested in similar schemes for semiconductors.

Vietnam has benefitted from a shift in tech supply chains with global names such as Apple moving some consumer electronics production away from China. The country is also keen to increase its small share of chip assembly and testing. Conversations with several US chipmakers such as Intel and Nvidia in 2023, however, have not yet converted into funding announcements and remain as investment pledges. On the geopolitical front, Vietnam, like Malaysia, has had to strike a balance between the US, with which it has strong ties, and China, which is a critical trade partner. This makes it a low-risk alternative manufacturing base for chip companies.

Malaysia, India and Vietnam are all deploying a multi-pronged approach to attract semiconductor companies. Malaysia is best positioned to attract further investment, given that global chipmakers and high-skilled labour are already present. Nevertheless, China will continue to be a major player, for three reasons: its large domestic market, its 20-year experience in building chips with domestic and foreign investors, and its ongoing position as a manufacturing hub for products using these chips. Replicating these elements is going to be challenging for any country, but the geopolitical situation which is leading many companies to seek alternatives to China, offers opportunities.

The analysis and forecasts featured in this report can be found in EIU's Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.

Tue, 20th Feb 2024Article tagsForecastingSupply chainsTradeAsiaChinaIndiaMalaysiaVietnamCountry AnalysisManufacturing

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