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India and Vietnam could benefit as chipmakers leave China amid US restrictions

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U.S. restrictions on chip exports to China are the latest shake-up prompting companies to consider moving some of their chipmaking capacity to neighboring Vietnam and India.

Still, experts told CNBC that the Biden administration’s semiconductor export restrictions on China are unlikely to upset the global picture of chipmaking supremacy.

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The number of recent queries to KPMG from clients and prospects about expanding chipmaking capabilities across Southeast Asia has increased 30% to 40% from before the pandemic, said Walter Kuijpers, a Singapore-based partner of the professional services firm.

“Companies see benefits in separating supply chains rather than having a single point of trust…Recent geopolitical developments should accelerate these strategies that are already underway,” Kuijpers said.

In October, the United States began requiring companies to obtain licenses to export advanced semiconductors or related manufacturing equipment to China. These companies also need Washington’s approval if they use American equipment to manufacture specific high-end chips to sell to China.

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Semiconductor companies have tried to find workarounds.

Taiwanese chip manufacturing powerhouse TSMC and South Korean rivals Samsung and SK Hynix have reportedly won one-year waivers to continue sending US chipmaking equipment to their facilities in China.

Dutch semiconductor tool maker ASML said its personnel in the United States were not allowed to provide certain services to advanced semiconductor manufacturing plants, or fabs, in China.

Moving from China to Asia

The brakes are the latest in a series of upheavals for the $600 billion global semiconductor industry.

In recent years, chipmakers who were once attracted by China’s competitiveness in chipmaking have faced rising labor costs in China, supply chain disruptions due to Covid-19 restrictions and increased geopolitical risk.

These China-focused chipmakers are now finding new impetus to replicate these production lines elsewhere. Equipment depreciation is the highest cost for these wafer manufacturing plants.

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As such, they would like to relocate somewhere nearby so that production and yields can be as efficient as possible, said Jan Nicholas, executive director specializing in the semiconductor industry at Deloitte.

He said Southeast Asia has become a natural fit for factories looking to relocate outside of China.

“When you make such important investment decisions, which have such a long lifespan 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 Nicholas.

Southeast Asia may also be seen as more attractive than chip-making powerhouses such as South Korea and Taiwan due to the region’s perceived neutrality amid ongoing trade tensions between the United States and China. 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 Tech, told CNBC. Cornell University Policy Lab.

1. Vietnam

Vietnam has become an alternative production base to China for global semiconductor manufacturers. The country has poured billions of dollars into investments to establish research and education centers, attracting major chipmakers to shop there.

A photo showing a computer circuit board in Vietnam.

Maïka Elan | Bloomberg Creative Photos | Getty Images

Samsung, the world’s largest memory chip maker, 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 like Samsung can invest in manufacturing alternatives that bring many of the benefits of manufacturing facilities in China, but without the political baggage,” Kreps said.

2. India

India is also emerging as a production base for these chipmakers, as it has a growing pool of talent in microprocessor design, memory subsystems and analog chip design, Kuijpers said. from KPMG.

Labor is plentiful and costs are also low in India, he added. However, the country’s lack of manufacturing capacity dampens its attractiveness.

“While India has tried to set up manufacturing units in the past, the initiatives have faced many hurdles including high capital investments for setup costs,” he said. .

China firmly in the lead

Despite Asia’s growing attractiveness for chipmakers, experts point out that China still retains a lead over regional economies in terms of competitiveness in chipmaking.

In its “Made in China 2025” plan released in 2015, the country laid the foundation for technological self-sufficiency in chip manufacturing.

Its domestic chip sector is also supported by growing demand for chips in applications such as 5G, autonomous driving and artificial intelligence, KPMG’s Kuijpers said.

Today, China remains a major player and a major producer of semiconductors, especially for low-end chips. According to some estimates, China is the third largest producer of semiconductor chips, with a market share of around 16% of global semiconductor production capacity, ahead of the United States but behind South Korea. South and Taiwan.

“China has spent a lot of time developing this skill set…it will take about the same amount of time for someone else to figure this out because the skill set doesn’t come immediately,” Nicholas said.

Not everyone agrees that Vietnam or India will be the direct beneficiaries of US restrictions on Beijing.

“It is doubtful that Vietnam and India can benefit from US export controls on China, as they do not have manufacturing capabilities,” said Yongwook Ryu, international relations researcher for East Asia. Is at the National University of Singapore.

However, he added that “a country or a company that can produce quality chips at competitive prices – in other words, a nation or a company that can replace China or Chinese chipmakers – can become a big winner in the future”.

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