6 minute read 9 Feb 2022

Semiconductor supply chain shortages are abound, the ASEAN diverse ecosystem could provide significant relief to the global challenges 

When semiconductor chip supply is down, ASEAN could be the answer to the crunch

When semiconductor chip supply is down, ASEAN could be the answer to the crunch

Ken Englund
By Ken Englund

EY Americas Industry Markets Leader, TMT

Focused on helping technology, consumer electronics, internet, social commerce and software companies solve critical business issues.

6 minute read 9 Feb 2022
Related topics TMT Technology
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Semiconductor supply chain shortages are abound, the ASEAN diverse ecosystem could provide significant relief to the global challenges. 

In brief:

  • Global chip shortage continues to hamper productions and supply chains.
  • Attention increasingly turns to ASEAN and its diverse ecosystem of manufacturing competencies in this sector.
  • ASEAN is uniquely positioned as a neutral region and its governments continue to support investments in the semiconductor industry.

Geopolitical tensions, rigid supply chains, high barriers to entry and the shock of the COVID-19 pandemic have led to a global chip shortage that has hampered the production of everything from mobile devices to cars.

With long-term demand for chips also expected to rise, we have observed a range of responses from top-tier semiconductor manufacturers to expand production capacity, including investing in new facilities and building outsourced capacity buffers.

For suppliers in the right place at the right time, that growth will be automatic. But there will also be tough decisions that need to be made immediately for companies not already on preferred supplier lists. Coupling that with long-term considerations of resiliency and diversified production networks in the supply chain, complexity increases exponentially.

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Semiconductor exports from ASEAN

2nd

largest semiconductor exporter globally, commanding a 22.5% share of global semiconductor exports

Against this landscape, attention increasingly turns to ASEAN and its diverse ecosystem of manufacturing competencies in this sector. This guide provides insights into factors driving the spotlight on ASEAN production options in the semiconductor industry.

The recently released EY report, “When the chips are down” shares deeper insights into the investment opportunities across the ASEAN region.  The downloadable pdf report can be accessed in the resources section to the left.

► Long-term growth amid global chip shortages

► Sustainable responses to meet immediate needs

► Expanding production capacity in ASEAN

 

Long-term growth amid global chip shortages

How did we get here and what’s next?

Pandemic accelerated a shift in demand: As the world adjusts to remote working and doing more online, demand for chips that power devices, connectivity, databases, and analytics has increased. However, the auto industry has recovered more quickly than anticipated, leading to an exacerbated shortage of both advanced and legacy node chips.

Techno nationalism: Prior to the pandemic, governments across the world were increasingly cognizant that the chip sector is strategic, leading to greater market interventions, including industry protection, subsidies and trade disputes.

New growth and segmentation levels: Demand for chips is now no longer driven by a single application (unlike PCs or smartphones in the past), but by a multitude of applications and end markets which go beyond PCs or smartphones including cloud, servers, internet of things (IoT), 5G, automotive, and AI. With each application requiring different functionalities and manufacturing technologies, the industry is witnessing an unprecedented level of segmentation and trends pointing toward structurally higher semiconductor demand.

Overall recovery: Demand is clearly outpacing supply now that application and end market segments are recovering. Although cyclical volatility in this sector is common, adding

capacity to an already stretched supply chain will take careful planning.

Technology trends will drive R&D expenditure: New materials, innovative manufacturing processes for increasingly complex chip designs and advanced integrated circuit (IC) packaging technologies will continue to drive R&D expenditure. Market leaders are also gearing R&D initiatives toward high growth end markets such as 5G, AI and IoT and have already begun to identify new ways to monetize their products.

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We are seeing record levels of investment in manufacturing and R&D as the rise of 5G and next generation technologies promises to sustain higher chip demand for years to come.
Ken Englund
EY Americas Industry Markets Leader, TMT

Sustainable responses to meet immediate needs

1. Addition of manufacturing capacity: Major manufacturers across the globe have scaled up their investment plans to meet long-term demand for advanced node technologies from 10nm and below that are needed for 5G, AI, advanced memory and high-performance server applications.

2. Sustainable investments and practices: The advent of environmental, social and governance (ESG) awareness and the risk of future climate-change-driven supply chain disruption, emphasized by the recent drought in Taiwan, has seen manufacturers in the wafer and energy-intensive semiconductor industry renew their focus on green management and sustainable practices.

3. Changed inventory and sourcing policies: The risk of a component shortage has fueled investments to permanently build up larger inventories of key components, which in turn has increased demand for improved warehousing and logistics solutions. Customers are adapting their sourcing policies and diversifying their supplier footprint to minimize dependency on single sources of supply.

4. Increased visibility through digital transformation: All companies want to gain better insights into the whole supply chain. Companies want visibility on the end-to-end supply chain. Data analytics and AI should help set up early warning systems.

Expanding production capacity in ASEAN

ASEAN has strength and diversity across the value chain and is deeply integrated within global value chains
 
ASEAN is uniquely positioned as a neutral region with a well-established and diverse semiconductor ecosystem. Since the 1970s, ASEAN knows semiconductors, and its governments continue to support investments in this sector
Amarjeet Singh
EY Asean Tax Leader; Partner, Ernst & Young Tax Consultants Sdn. Bhd.

As reflected during the 2020–21 chip shortage, a substantial amount of new capacity needs to be built globally in the coming years. The industry is expected to require a doubling of capacity by 2030 to meet and keep up with the expected 4% to 5% average annual growth in semiconductor demand. Now more than ever, a new paradigm for competitive resilience is necessary for companies to position their supply chains for the long haul without reverting to pre-pandemic practices.

As businesses reconsider the location of additional manufacturing capacity or secondary manufacturing sites and where they source their raw materials, components or parts, semiconductor executives should consider asking the following:

  • How can the business minimize the cost impact from exiting current supply sources and potential disruptions?
  • What other risks do we need to consider and mitigate?
  • How can we transform at speed and still build value-led sustainability?

The key areas to understand include:

  • Capital investment and timeline to upgrade or build new facilities.
  • Exit strategy from existing supply sources and potential disruptions.
  • Incentives opportunities for new locations and incentive implications for down-scaled locations.
  • Taxable presence, registration and compliance obligations for diverse range of taxes.
  • Revised transaction flows for customs, international trade and indirect tax purposes.
  • Impact of new supply chain and manufacturing capacity on current transfer pricing policy.

Actions:

  • Assess feasibility across portfolio and opportunity for expanding certain manufacturing activities abroad in alternative locations.
  • Evaluate risks and costs involved, including setup and exit from current location (if applicable).
  • Benchmark anticipated incentive offers.
  • Create optionality based on possible scenarios. 
  • Engage stakeholders in the organization.

Summary

Now more than ever, a new paradigm for competitive resilience is necessary for companies to position their supply chains for the long haul without reverting to pre-pandemic practices. The ASEAN region’s diverse ecosystem of manufacturing competencies in the semiconductor industry may be the answer. 

About this article

Ken Englund
By Ken Englund

EY Americas Industry Markets Leader, TMT

Focused on helping technology, consumer electronics, internet, social commerce and software companies solve critical business issues.

Related topics TMT Technology
Upvote