KUALA LUMPUR, 13 July 2024:  The Institute for Democracy and Economic Affairs (IDEAS) released its Brief IDEAS No. 41 today titled “Semiconductors: Navigating Supply Chain Resilience and Trade”. The paper discusses the post-Covid shift from supply chain efficiency to supply chain resilience by examining Malaysia’s and Taiwan’s relative positions in the semiconductor value chain. The authors argue that expanding multilateral cooperation and deeper trade integration offer significant potential for boosting supply chain resilience amidst rising geopolitical tensions, whereas efforts to reshore manufacturing are costly and limited. 

Both mechanistically and geographically complex, the semiconductor supply chain spans across numerous countries, with Malaysia playing a key role. It is estimated that Malaysia currently supports some 13% of global backend operations (Malaysian Productivity Corporation, 2023), and in 2022, it was the fifth largest IC exporter, behind Singapore and South Korea. 

The paper discusses the disruptions and challenges the semiconductor supply chain faces in building resilience. As much as the semiconductor supply chain is complex and wide-reaching, it is also deeply dependent on specific source countries for parts of the supply chain process. This paradoxical nature of interdependence and concentration embedded within the semiconductor supply chain leads to vulnerability — a flaw thoroughly exposed by the COVID-19 pandemic.  The supply chain is vulnerable to natural and geopolitical disruptions, and recent trends toward  interventionist policies. IDEAS identifies four main challenges to creating resilience within the semiconductor supply chain: high upfront investments, rising costs, lack of skilled labour, and geopolitical tensions resulting in trade restrictions. 

Given the volatility of the geopolitical realm, there are rampant efforts by countries adopting a more protectionist stance for this industry such as the Biden administration’s CHIPS and Science Act (2022) which set aside US$52.7 billion for domesticating the U.S. semiconductor supply chain. However, given the extremely high cost of investment subsidies, the report argues that it is essential for countries in the low to middle end of the semiconductor value chain, like Malaysia, to instead increase multilateral cooperation and deepen trade integration to leverage on the need to strengthen supply chain resilience. There is emerging evidence that trade between countries with trade agreements was more resilient during the disruptions caused by the Covid-19 pandemic than trade between countries without them. Multilateral trade agreements can increase collaboration and mitigate supply shocks and this is more sustainable financially compared to investment subsidies.

These considerations are significant in light of the recently published New Industrial Master Plan (NIMP) 2030, which outlines governmental efforts to increase intra-ASEAN collaboration, combine talent in front-end semiconductor production, and push the industry higher up the semiconductor value chain, allowing Malaysian industries to expand into domains such as IC design and wafer fabrication. This paper notes that these developments in the need for supply chain resilience creates potential for higher investment inflow especially given Malaysia’s intention to move up the value chain. While Malaysia would be unable to compete on the types of reshoring grants and subsidies given by other countries, it can continue to build its role in the supply chain by increasing multilateral cooperation on trade and investment while addressing issues in labour supply. 

In this paper, IDEAS explores supply chain resilience in light of Taiwan’s indispensable role in the semiconductor supply chain, accounting for the largest market share of chip fabrication and 70% of the world’s smartphone chipsets (Chen-Yuan, 2023). To maintain supply chain resilience, it is crucial to increase investment and trade cooperation with Taiwan, though a significant hurdle is posed by China’s opposition to countries establishing any formal relations with Taiwan. Taiwan’s bid to join the CPTPP provides a unique opportunity for participating countries to evaluate accession on an equal footing and behind a united front, especially given Taiwan’s pre-existing relationship with CPTPP member countries. Nonetheless, the situation has been complicated by China’s bid to join the CPTPP just one week before Taiwan submitted its application to join, and China’s vocal objections towards Taiwan’s accession. 

In the case that Taiwan is unable to gain accession to the CPTPP, the paper argues that advantages can still be gained by expanding bilateral or multilateral cooperation on trade and investment. Malaysia and Taiwan already enjoy a robust complementary relationship in the semiconductor industry, with Taiwan being Malaysia’s fifth-largest trading partner for integrated circuits and over 50 Taiwanese multinational semiconductor enterprises operating in Malaysia. Further establishing chip production facilities in Southeast Asia would facilitate supply chain resilience by decentralising chip fabrication outside of Taiwan and ensure the long term resilience of the global semiconductor supply chain. 

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