As geopolitical tensions continue to rise, the global semiconductor supply chain must add new locations outside of existing ones to meet customer requirements. In the past, semiconductor manufacturing was concentrated in the Greater China region (China and Taiwan). However, under the trend of de-risking and globalization, the demographic dividend and cost advantages in Southeast Asian (SEA) countries and India, which are also mostly members of multilateral trade agreements such as the RCEP and CPTPP, have made it the next important semiconductor development base.
With its strengths in packaging and testing, Malaysia is actively expanding into semiconductor manufacturing and design. Singapore is the only country in SEA with foundry manufacturing and the most complete semiconductor supply chain. Vietnam and the Philippines have a competitive advantage in terms of cost and labor and have been in recent years actively developing their testing and packaging capabilities, among other areas. India has a large domestic market to attract investments and strong capabilities in design, innovation, and talent. The governments of these countries also have lucrative incentive programs to get the attention of semiconductor market players. Overall, SEA and India have built a solid foundation in the semiconductor supply chain and are aggressively looking to expand into high-value-added areas such as wafer fabrication and design.
But, do Southeast Asia and India have the right conditions to capitalize on semiconductor market opportunities in the future? IDC believes that to develop its foundry industry, six major challenges need to be addressed in the short term:
- Infrastructure – At present, the primary issue for the development of the industry in SEA countries is the availability of adequate infrastructure, including reliable power supply, water resources, transportation networks, and telecommunications, all of which are critical to semiconductor fabrication. Compared to other electronics manufacturing industries, the semiconductor industry’s technical operations and manufacturing are more complex and problems such as power outages will result in huge losses. Among SEA countries, Singapore is the only one that is currently attracting fabs with its well-developed hydroelectric infrastructure and high degree of coordination in power supply. Vietnam’s power shortage has led to discussions between Samsung and power companies to cushion the impact, leading the government to emphasize that it will strengthen research spending and investments in power plants. Malaysia has also stressed the importance of infrastructure investment in its newly released National Semiconductor Strategy.
- Talent/Labor Force – The availability of skilled and well-trained labor has always been critical to the development of the semiconductor manufacturing industry. Fabs need to have a strong talent pool in engineering, materials science, and electronics. In foundries, semiconductor process engineers are at the center of this demand. Engineers need to be able to manage the entire process of wafer/chip manufacturing, improve processes, assess and manage risks/problems, perform testing and monitoring analysis, and introduce new processes. They also need to build analytics, provide analytical data, and help integrate requirements and material selection to establish the optimal balance between quality, yield, and cost. The knowledge and experience of engineers definitely affect the outcome of the entire manufacturing operation and obviously, the cultivation of relevant talents cannot be accomplished overnight.
- As talent is key to semiconductor development, Malaysia has planned to train and upgrade the expertise and capabilities of 60,000 highly skilled engineers. The Vietnamese government is expected to allocate USD1.06 billion (VND26 trillion) to implement a semiconductor talent training program for 50,000 semiconductor engineers. India’s Semiconductor Incentive Program also plans to train 85,000 engineers in the next 10 years.
- Customer and Supply Chain Ecosystem – Proximity to key customers, supply chains and target markets reduces transportation costs, lead times and transportation risks, and allows for faster response to customer demand and supports just-in-time production. Semiconductor supply chains require an ecosystem of raw materials and logistics to support local investment. In foundry, for example, a fab with a capacity of 30,000-40,000 wafers/month will need at least 10 nearby material suppliers, even if they are not in the vicinity of the fab. To support this supply chain, it must have a strong/efficient port or air cargo system with high throughput. An end-to-end semiconductor supply chain and a well-prepared ecosystem is important and takes time to build.
- Geopolitical Stability – In the past, the semiconductor industry emphasized the division of labor among specialties, but with the tense U.S.-China relationship, customers are more concerned about the resilience of the supply chain than ever before. Today, countries are actively developing their own self-sufficient semiconductor supply chains to reduce dependence on others. With geopolitical factors interfering, the location of production and the stability of the supply chain have become important considerations.
- Tax Incentives and Government Regulations – Since semiconductor is a capital-intensive industry, local government tax credits will be one of the main incentives for fab companies to consider investing in a country, which is currently one of the tactics used by SEA and India to attract foreign investors.
- Semiconductor Manufacturing Working Culture – Different parts of the semiconductor industry chain have different operating mechanisms and cultures. In the case of chip manufacturing, which SEA and India semiconductor manufacturers are actively looking to develop, the production line usually operates 24/7. Employees must not only be willing to work in shifts but should also possess a culture of “immediate response” when problems arise. In a high-yield, high-productivity fab, where process engineering/operation and quality are the top priorities, line management is very stringent because any small mistake can result in a huge loss (e.g., lead to wafer scrap) or a safety issue. Engineers and production line personnel need to ensure smooth operations and to be on-call even during off hours. Although SEA and India already have more manufacturing experience and talent than the U.S., where most of the talent is oriented to software, IDA/IP, and Fabless, it may still be difficult to establish the talent and cultural mindset for semiconductor manufacturing in this sub-region in the short term.
Chip Design Challenges: Talent and Innovation Capabilities
In addition to chip manufacturing, IC design is also an area that SEA and India are looking to develop. Increasing the number of chip-relevant start-ups is undoubtedly a key driver in attracting global semiconductor companies. India, Malaysia, and Vietnam have set up different incentive programs or established parks in the hope of attracting and expanding innovation and design capabilities.
In terms of long-term development, IDC believes that an entrepreneurial ecosystem needs to be established, which includes the government and venture capitalists that will support R&D capacity, without which, it will be difficult to attract high-density capital. After the ecosystem is established, if vertical solutions (agriculture, health, payment, etc.) and automotive/electric vehicles, artificial intelligence, and its related applications can be built, SEA and India will be able to further synergize the development of semiconductor chips, which is probably one of the advantages that can be developed in the sub-region, especially with the support of its huge domestic demand market.
However, it will take time to build semiconductor industry talent and ecosystem. IC design engineers need to have a university degree in Electronics Engineering, Electrical Engineering and information software development. Logic IC engineers may learn faster with the help of EDA/IP tools, but Analog IC engineers who must deal with noise (e.g., automotive, Internet of Things), will need to rely on experience. It takes at least 3-5 years for an IC design engineer to be able to run a project independently, and an even longer learning curve for an analog IC design engineer.
At present, Malaysia, Vietnam and India are working towards the development of their chip design capabilities by attracting foreign investments and overseas start-ups, which I think is a very smart approach. As it takes a long time to train relevant talents, it will be more effective to train them through foreign aid rather than locally. Because of its higher salary, immigration policy, and tax advantages, Singapore has developed faster than other South Asian countries in acquiring outstanding overseas engineers.
Challenges for Packaging and Testing and OSAT: Further Expanding Capabilities
Compared to chip manufacturing, packaging and testing/OSAT is more labor-intensive, an advantage for these countries. However, to expand on existing foundations, more consideration is needed to attract chipmakers. Often, OSAT vendors follow the lead of foundry’ locations to ensure logistics and operating costs remain low. In the future, if SEA and India can establish or attract chipmakers locally, it will help to improve their OSAT environment. Of course, it is also important to attract IDMs to set up packaging and testing plants, which is also the development direction in most of these countries.
Conclusion
Under the influence of geopolitics, the U.S., Europe, China, Japan, Korea, and Southeast Asia are beginning to launch their own semiconductor policies, placing more emphasis on the autonomy, security, and controllability of their own supply chains. Under the “push” and “pull” strategies of governments, the traditional market-based competition model for semiconductors is changing, and Southeast Asia and India have been recognized as an important potential base for the next stage of development. Semiconductor is a highly capital and technology-intensive industry, and its R&D and manufacturing require the support of a complete supply chain. Infrastructure, utilities, technology, capital, talent, and ecosystems are all long-term challenges for Southeast Asian countries to successfully develop their semiconductor design and chip manufacturing sectors beyond testing and packaging.
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