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India, Vietnam may benefit as chipmakers shift from China amid US curbs

An illustration with glowing numbers, code and circuit on a black background.

Yuichiro Chino | Even | Getty Images

US restrictions on chip exports to China are the latest shakeup prompting companies to consider moving some of their chip manufacturing capabilities to nearby Vietnam and India.

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 chip making powerhouse 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.

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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.

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As such, they would want to move somewhere nearby so that production and yields can be as efficient as possible, says 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 stay away from risky situations… the more uncertainty there is, the more these companies will flee to greater certainty’, said Nicolaas.

Southeast Asia can also be seen as more attractive than chip-producing 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 Cornell University’s Tech Policy Lab, told CNBC. .

1.Vietnam

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.

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A photo of a computer circuit board in Vietnam.

Maika Elan | Bloomberg Creative Photos | Getty Images

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.

2. India

India is also emerging as a manufacturing base for these chipmakers because it has a growing pool of design talent in microprocessors, memory subsystems and analog chip design, KPMG’s Kuijpers said.

Labor is plentiful and costs are also low in India, he added. However, the country’s lack of productive capacity makes the country less attractive.

“While India has tried to set up manufacturing units in the past, the initiatives have encountered numerous obstacles, including the high investment costs for start-up costs,” he 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.

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“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 lack 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.”

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