THE IMPACT OF GEOPOLITICS

Samantha Amerasinghe mulls over the future of the global semiconductor industry

Geopolitics plays a critical role in the semiconductor industry, which is projected to surpass US$ 1 trillion by the end of this decade. As the prospect of former US president Donald Trump winning the White House in November lingers, it’s necessary to analyse and discuss whether Asia’s dominance in the global semiconductor industry is strong enough to withstand the potential threat of his ‘America First’ policy.

Japan, South Korea and Taiwan are at the forefront of the semiconductor industry, and have seen robust growth in exports of AI related semiconductors and their equipment. This has been fuelled by strong global tech demand mainly from the United States and China.

South Korea has gained the most from the artificial intelligence boom as chipmakers have benefitted from the recent increase in AI tech investments in the US. In the first half of this year, South Korea’s chip trade boomed, boosted by favourable prices and the surprisingly high growth in chip trade with America, mostly driven by a strong demand for AI chips.

Microchip exports and imports grew 52.2 percent and 8.3 percent respectively – but in terms of volumes, exports rose 35 percent while imports fell 30 percent.

AI related investment in the US is likely to continue at least until mid-2025. Although much of the growth is driven by strong demand, we’re seeing increasing differentiation between Asian countries.

Vietnam is emerging as a more important trading partner in the semiconductor industry and seems to be the biggest winner in the escalating US-China trade war, as chipmakers look to diversify their supply chains and lower their risk.

And Vietnam’s role has grown significantly while India also seems to have entered the semiconductor scene.

China and Hong Kong still take centre stage in the semiconductor industry while South Korea’s trade in volume terms with these regions has been shrinking since 2022.

Nevertheless, its trade with the People’s Republic of China (PRC) and Hong Kong combined still accounts for more than 76 percent of the total chip trade in terms of value – and in volume terms, about 52 percent of aggregate trade.

The largest memory chipmakers in the market have enjoyed stellar sales, and reports indicate that AI chipsets are already sold out for this year – and almost sold out for 2025 – as many businesses look to expand their artificial intelligence services. As a result, memory chip exports are expected to accelerate even faster for the remainder of this year.

Major AI chip purchasers are diversifying their suppliers to maintain stable supplies and remain profitable. It’s not surprising therefore, that Samsung Electronics is likely to add its name to the supplier list soon.

Though the emergence of more providers has raised concerns about oversupply, it may not be an issue in the near future due to tight inventories and strong demand for AI technology.

Developed economies have a comparative advantage and play a critical role in the production of semiconductor manufac­turing equipment. Japan leads the market, followed by the US, the Netherlands, Germany and Israel.

Though Japan is not a semiconductor powerhouse compared to South Korea and Taiwan, it has a technical edge in semiconductor manufacturing equipment.

Surprisingly, Japanese exports to China – particularly of semiconductor manufacturing equipment – have increased sharply despite Japan being an active participant in US led sanctions against the People’s Republic on semiconductors.

One would expect that Japanese exports to China would be negatively affected this year but that hasn’t been the case.

Increased efforts by America to slow down the PRC’s semiconductor development have in fact driven Beijing to preemptively purchase chip making equipment to improve technology self-sufficiency ahead of anticipated tougher export regulations in the future.

Though Japanese exports of semiconductor machinery to China have risen, exports to the rest of the world have been jaded. This is because the latter has been ramping up production capacity to maintain its competitive edge, mainly in the post-process stage, which includes packaging and testing.

Semiconductor production will continue to be a contentious issue between China and the US. In the longer term, the United States is looking to reduce its supply chain risks through batch production in friendlier countries.

Due to high labour costs, many companies are investing in post-processing in Japan. The Japanese government has also designated semiconductors as an industry that is critical to its economic security. Investment in semiconductors is also expected to rise in the coming years and Japan will play a more important role in the post-process part.

Trump’s America First strategy could inevitably increase the risks for Asian chipmakers. Nevertheless, evidence shows that depen­dence on Asian chipmakers is so strong that they won’t be easily replaced by US counterparts for quite some time.

Trade tensions will continue to escalate regardless of who wins the 4 November election but a Trump victory suggests that US reshoring efforts will accelerate faster and create greater hurdles for Asian chipmakers.