ASEAN Economies in the Tech Supply Chain Sweet Spot?

The U.S.-China trade tensions look likely to remain and have more clearly developed into a race for technological dominance. As a consequence, there have been notable changes in the direction of foreign direct investment (FDI) flows, as well as the types of investments made, seen to be benefiting the ASEAN region. In particular, there has been an acceleration in capacity building activities in newer industries such as electric vehicles and digital economy sectors. Moreover, what may have begun as a China-plus diversification strategy by multinational corporations (MNCs) seems to be morphing into an ASEAN-centric strategy.

The upshot is that ASEAN economies appear to be attaining a higher level of strategic significance for FDI in the evolving trade rivalry. This, however, comes with a major caveat: the region could be subject to greater scrutiny, rendering it even more exposed to adverse spillovers from tit-for-tat protectionist policies and more directly through the tightening of rules of origin requirements in free trade agreements by respective trade rivals. This could place it in a more precarious position.

Currently, firms in the ASEAN region are predominantly electronic manufacturing services (EMS) providers in the tech value chain, ranging from low to medium-tech assembly and testing activities to high value-added R&D, design and assembly. The U.S., Taiwan, South Korea, Japan and China have long dominated the high value-added upstream activities of chip design and wafer fabrication, taking the lead as original brand manufacturers (OBMs). The expansion across the region by semiconductor-related MNCs has been significant and instrumental in building up capabilities across the value chain. Southeast Asian producers’ sphere of influence could be broadening on the back of numerous high-profile MNC investment activities at the higher-end of the tech supply chain gaining momentum over the past year.

GlobalFoundries opened a new microchip fabrication plant in Singapore in September 2023 and Malaysia is set to welcome the world’s largest 200-millimeter Silicon Carbide (SiC) power fab through the investment by Infineon Technologies over the next five years.  Besides this, the ASEAN region’s existing higher-end advanced chip packaging niche is also seen to be gaining higher importance as these activities are seen as a potential go-around in the race to build the smallest and most powerful chip. This strategy of using advanced chip packaging capabilities to stack multiple chips remains an attractive one for China given the cost and time savings.

… governments and private sector players alike recognise the huge economic potential in the status quo strategy of not siding with either the U.S. or China in the ongoing trade tensions. Indeed, these developments may present an opportunity for ASEAN economies to make hay while the tech sun shines.

Most recently, leading U.S. tech company Nvidia announced upcoming major investments in Malaysia and Vietnam to build up Artificial Intelligence (AI) capabilities in the region. This could also pave the way for more investments in this area, helping to further strengthen the high-end electronics industry ecosystem in the region. Tech companies such as AMD have expressed intentions to invest more in the field of AI, as well as emphasising the need to diversify supplier concentration out of Taiwan. In order for the ASEAN region to be a key contender in this area, the building of a knowledge and skills-based foundation is integral at this juncture, which can be catalysed by initial investments such as that of Nvidia’s.

Despite the risks of higher exposure to protectionist policies as a result of becoming more deeply entangled in the global tech value chain, ASEAN economies continue to welcome the positive spillovers from MNC diversification strategies. This is a win-win for both sides, given the significant challenges that ongoing geopolitical tensions pose to longer-term business planning. In a recent business sentiment survey by the European Union Chamber of Commerce in China, 11 per cent of respondents noted that they had shifted investments out of China and 8 per cent were planning to relocate future investments originally slated for China. For U.S. MNCs, a survey conducted by the American Chamber in Shanghai found that 22 per cent of respondents cited uncertainties brought upon by U.S.-China trade tensions as the main reason for scaling down investment activities in China. Forty per cent of those surveyed expressed the desire to redirect or planned to redirect investments elsewhere, especially to the ASEAN region. As a PwC report states, even Chinese firms with a firm footprint in Southeast Asia continue to view the region strategically, with 46 per cent of survey respondents planning to increase investments in the next three years. About 69 per cent of Chinese enterprises also believe that the Regional Comprehensive and Economic Partnership (RCEP) will enhance China-ASEAN economic relations by providing new business prospects.

As the State of Southeast Asia Survey has suggested over the past few years, governments and private sector players alike recognise the huge economic potential in the status quo strategy of not siding with either the U.S. or China in the ongoing trade tensions. Indeed, these developments may present an opportunity for ASEAN economies to make hay while the tech sun shines. To some extent, being in the intermediate part of the supply chain may offer a measure of strategic protection in the current environment. Short of tagging it as some sort of “ASEAN Shield”, it could at least be a silver lining.

2024/7