Asia's Semiconductor Powerhouses Can Thrive in the AI Era

 High-income and developing economies in East Asia and Southeast Asia together account for more than 80% of global semiconductor manufacturing. This makes the world dependent on the region’s semiconductor exports and the region’s economic prospects partly reliant on the health of global semiconductor demand. 

After contracting sharply at the end of 2022, exports from Asia’s main semiconductor manufacturing economies picked up over 2023, according to the April 2024 Asian Development Outlook report. This pickup was driven by a boom in artificial intelligence (AI), which increased demand for microprocessors and memory chips. Microprocessors execute the complex algorithms and computations required for AI training. Memory chips store the vast datasets that AI algorithms need to access and hold the instructions and data to be processed. 

The launch in November 2022 of ChatGPT, a free-to-use AI language model, ushered in a global race to develop new AI models, which has significantly increased demand for these microchips. This has boosted profits and equity valuations of US companies like NVIDIA and Advanced Micro Devices, which design these products, and increased shipments from Asia, where most of the production takes place.

Samsung and Sk Hynix, both headquartered in the Republic of Korea, are the world’s two largest manufacturers of memory chips. But Asia is not all about big manufacturing hubs. Japan is home to some of the biggest companies supplying manufacturing equipment and materials for the broader semiconductor industry, while the People’s Republic of China is the global leader in the production of photovoltaic cells, another type of semiconductor.

Malaysia, the Philippines, Thailand, and Viet Nam are also involved in the global semiconductor value chain. These economies import semiconductors from East Asian economies and re-export them after carrying out assembly, testing, and packaging. Singapore additionally manufactures advanced microchips and, together with Hong Kong, China, also imports and re-exports semiconductor components to third countries after sorting and repackaging.

The global semiconductor industry is at a critical juncture. Its medium-to-long-term prospects look bright. This is because  semiconductors have numerous applications–not only in AI, but also in other emerging technologies like 5G telecommunications, and electric and autonomous vehicles, among others. On the other hand, governments around the world are rushing to try luring semiconductor production on to home soil, which may come at the expenses of the big manufacturing hubs that are currently located in East Asia. 

The US government has earmarked about $40 billion in grants to incentivize domestic production, while the Japanese government is trying to boost domestic production of advanced microprocessors through subsidies and public-private partnerships. These efforts seem to be working, with large firms planning large investments in both the US and Japan. 

Against this background, Southeast Asian economies may benefit, even if they lack the financial firepower of more advanced countries to incentivize investments into new production plants through subsidies and tax credits. Their younger, more abundant, and lower wage workers can attract investments from large semiconductor manufacturers in East Asia as they diversify their production base. Anectodical evidence suggests that this is already taking place, with the state of Penang in Malaysia attracting almost $13 billion in semiconductor-related foreign direct investment in 2023, more than the total from 2013 to 2020 combined. 

But gains do not need to be limited to Southeast Asia. India, which contributes about 20% to the global semiconductor design workforce but currently does not manufacture chips on its home soil, has also devised policies to attract big manufacturing firms. Semiconductor powerhouse Micron has already started the construction of a $2.5 billion manufacturing facility in the state of Gujarat, while other firms have announced new investments.

 To keep harnessing their semiconductor manufacturing potential, governments in the region should continue devising policies that attract foreign direct investment, increase spending on research and development, and invest in human capital development, as semiconductor manufacturing requires highly skilled labor.

This blog is based on research conducted for Asian Development Outlook (ADO) April 2024.