Southeast Asia's semiconductor lifeline under threat amid regional rivalry

Southeast Asia has built a US$258 billion semiconductor export industry. But a criminal smuggling scandal, US export control pressures, and China's push for self-sufficiency are converging to put the industry under strain, according to new research published by the Lowy Institute.

The Lowy Institute Analysis, entitled Between the superpowers: Southeast Asia's strategic supply chain dilemma, by Robert Walker (Opens in new window), identifies semiconductors as the region's most important strategic supply chain, accounting for more than a quarter of global chip exports.

But that position is increasingly precarious. Last year, smuggling operations across Singapore and Malaysia were found to be circumventing US semiconductor export controls, triggering Malaysia to introduce its own restrictions and prompting the Trump administration to consider further controls.

The episode exposed how Southeast Asia's role as a connector economy between the US and Chinese blocs — long an economic asset — could become a liability.

Meanwhile, geoeconomic competition is dampening Chinese demand for foreign chips. China's semiconductor imports from Southeast Asia have fallen almost 22 per cent since their 2021 peak, as Beijing pursues domestic self-sufficiency.

“Geoeconomic forces impacting Southeast Asia’s semiconductor ambitions are pulling in opposing directions,” writes Robert Walker.

“The global semiconductor market could reach between US$1 trillion and US$1.8 trillion by 2030, representing an enormous opportunity the region risks squandering.”

“Southeast Asia should focus on maximising the benefits of semiconductor-related investments driven by derisking strategies, deepen intraregional trade, and ensure economic security and export control issues do not jeopardise its position.”

Walker's research also analyses critical minerals, solar photovoltaic manufacturing, and electric vehicles and batteries in the region. He finds that solar PV has been effectively shut out of the US market following punishing anti-dumping duties, and that critical mineral industries have delivered limited economic spillovers despite enormous investment.

Walker's assessment of EVs and batteries is more cautious. While the sector remains underdeveloped and foreign investment has yet to deliver commensurate returns, he identifies a window of opportunity for the region and recommends it as a policy priority alongside semiconductors.

KEY FINDINGS

• Southeast Asia’s strategic supply chains — spanning renewable energy and emerging and critical technologies — have been exceptional growth drivers, now representing more than 20 per cent of the region’s exports and half of its foreign investment.
  
• As a “connector” economy between the US- and China-led blocs, Southeast Asia’s strategic supply chains are increasingly exposed to geoeconomic tensions. With the two powers progressively decoupling, the region must learn to limit the worst spillovers, including when it becomes a direct target.
  
• Industrial policy could help offset escalating geopolitical constraints, but not all strategic supply chains are of equal importance. Critical minerals deliver limited value, and solar photovoltaic manufacturing faces stagnation. Governments should resist pressure to subsidise either, directing scarce fiscal and institutional resources instead to regional supply chains for semiconductors and electric vehicles and batteries.
  
• Regional coordination — on semiconductor investment, electric vehicle ecosystems, skills pipelines, and critical mineral governance — would help ASEAN governments align national policies and cultivate these industries for the long term. Collective, accelerated decarbonisation would add further demand-side benefits.

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