The Biden administration’s China chip restrictions are the latest in a series of upheavals that are driving chipmakers to move production chains to neighboring countries, experts say.
Among them, Vietnam and India have emerged as cost-effective alternative bases with lower levels of political risk.
Still, experts say China maintains a comfortable lead in chip making over emerging hubs.
U.S. restrictions on chip exports to China are the latest shakeup prompting companies to consider moving some of their chip-making capabilities to nearby Vietnam and India, CNBC reported.
Still, experts told CNBC that the Biden administration’s semiconductor export restrictions for China are unlikely to upset the global state of chip manufacturing supremacy.
The number of recent inquiries to KPMG from customers and prospects about expanding chip-making capabilities in Southeast Asia is up 30% to 40% compared to pre-pandemic levels, said Walter Kuijpers, a Singapore-based partner at the professional services company.
“Companies see benefits in separating supply chains rather than having a single point of trust…Recent geopolitical developments are expected to accelerate these strategies that are already underway,” said Kuijpers.
In October, the US began requiring companies to obtain licenses to export advanced semiconductors or related manufacturing equipment to China. Those companies also need Washington’s approval if they use US equipment to manufacture specific high-end chips for sale to China.
Semiconductor companies tried to find solutions.
Taiwanese chipmaker TSMC and its South Korean rivals Samsung and SK Hynix have reportedly been granted one-year waivers to continue sending U.S. chip-making equipment to their facilities in China.
Dutch semiconductor toolmaker ASML said its personnel in the US are prohibited from providing certain services to advanced semiconductor manufacturing plants or factories in China.
Shift from China to Asia
The curbs are the latest in a series of upheavals for the $600 billion global semiconductor industry.
In recent years, chipmakers that were once attracted to China’s competitiveness in chip manufacturing have faced rising labor costs in China, supply chain disruptions due to Covid-19 restrictions, and rising geopolitical risks.
These China-focused chipmakers are now finding new impetus to replicate those production lines elsewhere. Equipment depreciation is the highest expense for these wafer factories.
As such, they would want to move somewhere nearby so that production and yields can be as efficient as possible, said Jan Nicholas, an executive director focusing on the semiconductor sector at Deloitte.
He said Southeast Asia has become a natural choice for factories looking to relocate outside of China.
“When you make investment decisions that are this big, that have such longevity for a plant, you tend to avoid risky situations… the more uncertainty there is, the more these companies will flee to greater certainty,” said Nicholas.
Southeast Asia can also be seen as more attractive than chip manufacturing powerhouses such as South Korea and Taiwan due to the region’s perceived neutrality amid ongoing trade tensions between the US and China.
“South Korea and Taiwan can’t camouflage themselves, but countries like Vietnam, India and Singapore are positioning themselves as a third way, a neutral bridge between two titans,” Sarah Kreps, director of the Tech Policy Lab at Cornell University, told CNBC. .
Vietnam has emerged as an alternative manufacturing base to China for global semiconductor manufacturers. The country has invested billions of dollars in investments to establish research and education centers, attracting major chip manufacturers to shop there.
Samsung, the world’s largest memory chip manufacturer, has reportedly pledged to invest an additional $3.3 billion in the Southeast Asian country this year. The South Korean conglomerate aims to produce chip components by July 2023.
“Companies that have had manufacturing facilities in China, such as Samsung, can invest in manufacturing alternatives that offer many of the benefits of manufacturing facilities in China, but without the political baggage,” Kreps said.
China firmly in the lead
Despite Asia’s increasing attractiveness to chipmakers, experts point out that China still has an edge over regional economies in terms of its chip manufacturing competitiveness.
In its “Made in China 2025” blueprint, released in 2015, the country laid the foundation for technological self-sufficiency in chip making.
The domestic chip sector is also supported by the growing demand for chips in applications such as 5G, autonomous driving and artificial intelligence, said KPMG’s Kuijpers.
Today, China is still a major player and major producer of semiconductors, especially for lower end chips. By some estimates, China is the third largest producer of semiconductor chips, with a market share of about 16% of global semiconductor manufacturing capacity – ahead of the US but behind South Korea and Taiwan.
“China has spent a lot of time developing those skills… it will take someone else about the same amount of time to figure that out because the skills don’t come immediately,” Nicholas said.
Not everyone agrees that Vietnam or India will directly benefit from US restrictions on Beijing.
“It is doubtful whether Vietnam and India can benefit from US export controls on China, as they do not have strong manufacturing capabilities,” said Yongwook Ryu, a researcher in international relations in East Asia at the National University of Singapore.
However, he added that “a country or company that can produce quality chips at competitive prices – in other words, a country or company that can replace China or Chinese chip makers – could be a big winner in the future.”