How can South-east Asia’s microchip industry prevent future shortages?

- Global shortage of microchips has intensified in recent months

- The automotive industry has been particularly affected by supply gaps

- South-east Asia is a key producer of microchips, with Malaysia being a leader in the segment

- Efforts are under way to diversify and streamline South-east Asia’s microchip production

Initially sparked by supply chain disruptions associated with the Covid-19 pandemic, a worldwide shortage of microchips has intensified in recent months, largely due to a new round of lockdowns in South-east Asia. Given the impact on strategically important sectors like automotive, efforts are under way to prevent similar issues in the future.

Microchips – also known as superconductors – are the “brains” inside electronic devices. They manage a host of systems in vehicles, for example, including electric windows and driver-safety features.

Demand for microchips rose sharply during the early stages of the pandemic in response to increased sales of devices such as laptops, phones and televisions. This, combined with an abrupt drop in production due to factory closures and supply chain disruptions, led to a major shortage worldwide.

The dearth of microchips intensified in recent months as producers in Asia implemented lockdowns in response to the Delta variant. This came at a particularly ill-timed moment for the automotive industry, stymieing its ability to capitalise on a recent surge in consumer demand.

In August car sales in China fell by almost 20% year-on-year due to a shortage of vehicles. Elsewhere that month, US dealerships added fewer than 1m new vehicles, a drop of 72% from the 3.6m added in August 2019.

While Japanese auto giant Toyota’s supply chain and large stockpiles of equipment proved to be relatively resilient following the Fukushima disaster in 2011, the superconductor shortage has impacted its operations.

The company – currently the world’s biggest carmaker – reduced its global production by some 430,000 units in September, and plans to cut production by another 333,000 in October. It hopes to partially offset this lost volume by the March 31 end of its financial year, to finish the period 300,000 vehicles shy of its original 9.3m target.

Production trends in South-east Asia

Part of the problem is that Toyota, like many other automotive firms, sources its microchips from South-east Asian producers, principally in Malaysia and Vietnam.

Indeed, South-east Asia’s semiconductor firms account for around 27% of global packaging and testing.

Malaysia is a major producer in the region. More than 50 semiconductor multinationals have invested in the country, making it the world’s seventh-largest exporter, with around 7% of all superconductors passing through Malaysia for production, packaging or testing, according to data from the US-based Semiconductor Industry Association.

Having initially escaped the worst effects of the pandemic, Malaysia was severely impacted by the Delta variant in 2021. As of early October the 32.4m-strong nation had reported nearly 2.3m cases and 26,759 deaths.

In June the government imposed a nationwide lockdown, although it designated electronics companies as essential and allowed them to continue operating at 60% capacity. Nevertheless, this resulted in a reduction in supply and increase in demand, aggravating the already severe global shortage.

Malaysia’s microchip industry is seen by many as crucial to overcoming the ongoing bottleneck.

Mei-Hua Wang, the minister of economy for Taiwan, another major producer of microchips, told international media in October that the global shortage could only be resolved by Malaysia resuming full operations as soon as possible. “Now the focus is on Malaysia resuming production as soon as possible,” she said. “If their capacity can slowly come back, this problem can be slowly dealt with.”

Future-proofing the industry

It is widely expected that the microchip shortage will result in greater integration between producers and automotive companies.  

An early indication of this was when the Taiwan Semiconductor Manufacturing Company (TSMC) – one of the world’s biggest producers of chips, alongside South Korea’s Samsung – announced plans to build new factories in the US and Japan. 

Boosting production levels is another avenue of interest to stave off future shortages.

Microchip factories around the world increased their capacity by 8% between early 2020 and September 2021, and aim to expand it by more than 16% by the end of 2022.

The TSMC recently announced it had increased its output of a key component of automotive semiconductors by 60% in 2021. The company is also working to modernise its just-in-time supply chain management method and increase demand visibility. Similar modifications are being proposed across the segment.

At the same time, the industry is exploring a transition from single- to multi-axis operations. Prior to the pandemic, the microchip industry was highly compartmentalised – a situation that countries such as Malaysia and Taiwan were able to leverage to their advantage, but which laid the foundations for the current pandemic-related disruptions.

While China is well placed to take advantage of such a shift, with many anticipating it will move ahead with developing its own microchip industry, it may also prompt other emerging markets to expand their market share.

Vietnam, for instance, has been working to develop its local industry, which is set to grow by $6.2bn between 2020 and 2024, at a compound annual growth rate of almost 19%, according to research firm Technavio.

In addition to developing local ecosystems, the government has courted foreign investment. In January Intel announced that it had invested an additional $475m in its Vietnam facility, taking the total to nearly $1.5bn.

Locally produced semiconductor supply in Vietnam could be a key competitiveness draw for manufacturing and industry players that rely on these parts, including traditional and electric vehicle producers, as well as an attractive alternative to China for those pursuing China+1 supply chain strategies as part of their post-pandemic recovery plans.

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