The Role of 'Friendshoring' in Southeast Asia's Semiconductor Industry Amid U.S.-China Tensions
- Hindu College Gazette Web Team
- Aug 25, 2025
- 12 min read
Introduction
The semiconductor industry in the ASEAN region is becoming increasingly significant, driven by its supply chain, competitive labour cost, supportive government policies and burgeoning demand for electronic products. Southeast Asian countries like Malaysia, Singapore and Vietnam have established themselves as hubs for semiconductor manufacturing assembly, attracting foreign investments that adhere to realist theory which would help these countries to reinforce their economic and technological significance on the global stage. The strategic advantage of this region lies in its ability to integrate into the global supply chain offering a blend of cost efficiency and manufacturing capabilities. The region’s central position offers a relative advantage as the major manufacturing and consumer markets like China, Japan and India become accessible which enhances its logistical efficiency. It shows that the success of ASEAN in the semiconductor industry is a result of regional collaborations to develop in the realm of international relations suggested by the theory of constructivism. The semiconductors’ industry has helped the region grow positively by creating platforms for over one million jobs to drive socio-economic development. Semiconductor exports also contribute significantly to regional trade surpluses, strengthening economic stability and complementing the capabilities of countries like Taiwan and South Korea, with the help of continuous investment in infrastructure, Southeast Asia reduces global dependence on a few players.
However, with rising geopolitical tensions there are certain challenges that the sector faces. For instance, with the rise of the U.S.-China tension, customers are concerned about the resilience of the supply chain. Other major challenges include infrastructure, customer and supply chain ecosystem, geopolitical stability, government regulations and skilled labour force among others. Southeast Asian country, Malaysia, is playing a major role in boosting the semiconductor industry by contributing 23 percent of the U.S. semiconductor trade and by holding a presence in the chip assembly, packaging and testing with further plans to integrate circuit design under the plan of the New Industrial Master Plan 2030. Overall, the success of the semiconductor industry of ASEAN is a testament to its strategic economic diplomacy.
Southeast Asia’s Semiconductor Ecosystem
The semiconductor industry is one of the key enabling factors for technological progress as well as economic growth globally, with Southeast Asia receiving increased importance in the international supply chain landscape. Given their manufacturing hubs in countries like Singapore, Malaysia, and the Philippines, Southeast Asian countries are increasingly playing a vital role in the semiconductor supply chain. Some of the leading manufacturers in the region include Intel, Samsung Electronics, Taiwan Semiconductor Manufacturing Company and Global foundries among others. Leveraging the strategic location as well as the political stability in the countries in Southeast Asia, along with governmental efforts like putting more emphasis on research and development to provide incentives, will further enhance the growth of the industry.
Singapore, the first Southeast Asian country to enter the industry, aims to grow as an AI hub by 2030 in which semiconductors will play a key role accounting for almost half of Singapore’s manufacturing output and seven percent GDP. The country remains globally relevant because of its preferred regional location for complex activities. Singapore also produces advanced manufacturing with front-end fabrication vendors conducting major expansion at the sites of the country. Although Singapore has produced competitive companies in this sector it is dependent on servicing foreign countries. The Government is aware that Singapore is not able to compete in terms of subsidies in the arms race amongst the world's largest economies to attract chip sector activity. Instead, Singapore must aspire to “create core intellectual property to entrench relevance or else it will just be one amongst many”, as stated by the Trade and Industry minister of Singapore in 2021. Similarly, Southeast Asian countries like South Korea, Japan and Vietnam have shown efforts to rework and amend their semiconductor strategies. This is done to stay relevant and competitive in a shifting geopolitical landscape, with the recent win of the US Presidential election by Donald Trump along with a threat from Beijing targeted tariffs and rising uncertainty about business with China.
Geopolitical shifts are fundamentally reshaping Southeast Asia’s role in the semiconductor industry. Here, major industry players are making strategic moves while immediate impacts might be subtle, long-term strategies are focusing more on supply chain self-reliance, security and control. The United States and Europe have begun to invest more in the Southeast Asian markets given the influence of geopolitics, technological development and talents, leading to integrated device manufacturers. In terms of companies like Foundry, TSMC, Samsung and Intel are spearheading advanced processes in the United States which will gradually exert influence in the foundry field. Meanwhile, China grapples with the development of advanced processes, its mature processes have developed rapidly under the impetus of its domestic demands and national policies.
Case Study of Malaysia’s Semiconductor Sector
From the lens of a realist, the semiconductor industry of Malaysia emphasises on a strategy that strengthens its national power and economic security. Malaysia holds seven percent of the global market share and contributed 23 percent of the U.S. semiconductor trade in 2022. Malaysia currently holds a presence in chip assembly, packaging and testing with more plans to further integrate circuit design and wafer fabrication under the New Industrial Master Plan 2030. Recent announcements of investment by Intel (US 7 billion), Infineon (US 5.5 Billion) and Texas instruments (US 3.1 billion) are a testament to the fact that Malaysia is at a well-positioned scale to engage in more complex activities. Malaysia aims to attract RM 500 billion in investment through the National Semiconductor Strategy. The Malaysian government also made efforts to use constructivist principles in forming international relations. The recent announcements in regards to creation of the National Semiconductor Key Task Force, which will serve as a platform to advance the semiconductor industry and attract key investments. The large multinational companies like Intel, Infineon and Micron have invested and established assembly and testing facilities in the state of Penang, the manufacturing hub that facilitates the end-to-end production process. This helps in strengthening the position of Malaysia as a key player in the semiconductor industry globally. Recently, in 2024 the AT&S Austria Technologies and Systemtechnik (Malaysia) Sdn Bhd opened their campus in Kulim Hi-Tech Park as part of their RM 8.5 billion investment. The consulate General of Malaysia in India mentioned opportunities if both the countries collaborate further. Malaysia can leverage its raw materials while Indian professionals could conduct vocational training in electronics and digital technology. The governments of both countries have introduced multiple policies and schemes that could benefit regional expansion. For instance, the Malaysian SMEs in India could apply the schemes provided by India’s ISM to enhance the activities of the Semiconductor industries of both the countries. Moreover, SMEs of both the countries could collaborate with the other nations through the annual SEMICON Southeast Asia which takes place in both Malaysia and India annually.
A series of government policies and incentives have been undertaken to attract foreign investment and develop the domestic industry in Malaysia. This strategy centres on vast fiscal support to enhance the nation’s manufacturing and technological capabilities. In May 2024, the Malaysian government promised at least RM25 billion (roughly USD 5.3 billion) in incentive to lure foreign investors and provide training to up to 60,000 Malaysian engineers to fill the skilled labor demand of the industry.
Malaysia’s approach to attracting investment in its semiconductor sector has been one that is steeped in tax incentives. Introduced by the Promotion of Investments Act 1986, Pioneer Status provides tax relief to a part of or the entire statutory business income of companies involved in promoted activities or producing promoted products in Malaysia. The qualifying firms are granted a prime financial advantage over other manufacturing companies in which they receive five years of tax relief from the commencement of production.
Aside from pursuing tax incentives, Malaysia has set up Free Industrial Zones (FIZs) to provide a better environment for the high-tech industries. For example, the Bayan Lepas Free Industrial Zone in Penang has played an important role in attracting multinational companies by catering to the needs of semiconductor manufacturers, and by providing infrastructure and regulatory benefits. It has now become a major semiconductor chips production centre of Malaysia, earning it the label of 'Silicon Valley of the East'.
Ambitious investment targets show that the government is further committed to the semiconductor industry. In May 2024, Prime Minister Anwar Ibrahim announced that Malaysia’s aim is to bring in at least RM500 billion (about USD 107 billion) in investments for its semiconductor sector. This objective reflects the nation's desire to consolidate into a global manufacturing hub by leveraging its geographical location and favourable investment climate, among others, to draw large amounts of foreign direct investment.
U.S - China Tensions
Realism underscores Malaysia’s strategy to maximise its national interest with the global semiconductor industry now being defined by the intensified rivalry between the United States and China, with the region of Southeast Asia, and in particular Malaysia, playing a strategic role. To shore up the domestic semiconductor production of the U.S. and decrease its reliance on Chinese supply chains, the country has taken steps, such as the CHIPS Act. Not only does this legislation seem aimed at strengthening U.S. technological autonomy, but also encourages American companies to move manufacturing to allied nations. The Southeast Asian countries are the prime candidates for these investments, whose developing technological infrastructure and relative strategic location make them so. For example, U.S. firms have been interested in establishing or expanding semiconductor operations in Malaysia.
To counter the United State’s initiatives, China has deployed its countermeasures to preserve its dominance in the global semiconductor industry. China has been investing more and strengthening its economic ties in the region. This will help China secure its position in the semiconductor supply chain and counter the friendshoring efforts of the USA. Chinese companies are also keen on building partnerships and setting up their operations in Southeast Asian nations such as Malaysia, among others, to ensure the continuity of access to crucial markets and key resources. Moreover, this strategic engagement serves as a counterbalance to U.S influence in the region, while supporting China’s semiconductor industry.
Malaysia finds itself in a very difficult place in trying to ensure both America’s and China’s interests. Being a major player of the semiconductor industry, Malaysia has garnered the investment of both superpower investors, as each superpower is looking to take advantage of Malaysia’s strategic position and manufacturing capabilities. Malaysia’s government has taken a neutral position to take advantage of the economic opportunities that both nations can offer without becoming involved in the geopolitical rivalry between the two. Balancing this act requires careful maneuvering by Malaysia, without becoming over-dependent on any of the sides and hence, compromising its sovereignty and economic stability.
This ongoing geopolitical tension between US-China has multi-faceted implications for Malaysia. Foreign investment, on the one hand, can result in economic development, creation of jobs, and technological changes. However, the danger of allying too closely with one superpower could mean losing out to the other, putting one at the risk of economic sanctions or reduction in trade opportunities. The global semiconductor supply chain's complexity further allows disruptions or policy changes in one part of the world to have cascading effects on Malaysia's economy. Given that, Malaysia needs to continue to engage in diplomatic efforts and diversify its economic partners and invest in its own domestic capabilities to overcome these challenges effectively.
The global semiconductor industry has been significantly reshaped by the U.S.-China rivalry, with Southeast Asia and above all, Malaysia positioned as key players in this emerging milieu. However, navigating the complex geopolitical dynamics of the U.S.-China relations tensions continue to act as a barrier to achieving international growth.
Challenges and Risks
With geopolitical tensions rising, the semiconductor industry faces many challenges. The trend of de-risking and globalisation has made Southeast Asian countries and India an important base for semiconductor development. However, these countries lack the necessary conditions to fully capitalise on semiconductor opportunities. The major challenges include Infrastructure, customer and supply chain ecosystems, geopolitical stability, government regulations and skilled labour force, among others. For the development of the semiconductor industry, primary requirements such as power supply, water resources, transportation networks and availability of adequate infrastructure is needed. Singapore is the only country in Southeast Asia attracting fans with its well-developed hydroelectric power infrastructure and coordination in power supply. The issue of power shortage in Vietnam has led to discussions between Samsung and power companies to cushion the impact, leading the governments to strengthen efforts to invest wisely in the newly launched National semiconductor energy and increase the spending on research. Semiconductor supply chains require an ecosystem of raw materials to support local investment. For instance, in foundry, a fab with a capacity of 30,000-40,000 wafers/month will need at least 10 nearby material suppliers. To support this particular supply chain, it must have an efficient cargo system. With the rise of U.S.-China tension, customers are concerned about the resilience of the supply chain. Countries are also developing their own semiconductors to reduce dependence on others. Factors like local government tax credits as incentives for the semiconductor industries will play a major role in considering investing in a country, which is a tactic used by India and Southeast Asian countries. The need for skilled labourers is very critical to the semiconductor industry. Fabs require an all-rounder talent pool in engineering, material science and electronics. Engineers should be able to manage an entire process of wafer/ cheap manufacturing, improve processes, perform tests and introduce new processes. The knowledge and experience of engineers will affect the whole manufacturing unit of the semiconductor industry as that will help integrate requirements, build analytics along with providing data analytics.
Policy Recommendations for Future Outlooks
Looking at the potential for regional and global growth, Malaysia's semiconductor industry is anticipated to expand in the future into emerging markets such as artificial intelligence (AI), 5G and the Internet of Things (IoT). It is predicted that the demand for AI chips is going to surge by about 40%, reaching annual revenues of USD 1.11 trillion by 2032. With this surge comes a huge opportunity for Malaysia to advance its semiconductor sector by moving up the value chain and focusing on high-value components.
To take advantage of these opportunities, Malaysia needs to put more emphasis on adopting to liberal institutionalist ideas which suggest the benefits of collaboration for mutual grain in the region. By working together, the region can conduct collaborative research activities, develop harmonised standards and develop an integrated supply chain, which would contribute to the region’s competitiveness in the global semiconductor market. One way to develop a skilled workforce which will help drive semiconductor innovation is to create specialized research and training centers in collaboration with neighboring countries.
More effort should be directed to enhancing technical education and workforce development. To continue to have a steady pipeline of skilled professionals in areas of semiconductor technology, and the adjacent AI fields, these programs will need to be invested in. This approach is more than capable of meeting industry needs for the moment, and it projects ahead into the development of future technology, putting Malaysia at the forefront of semiconductor innovations.
It is important to diversify the sources of investment as well. By drawing investment from many different countries and companies, Malaysia can minimize geopolitical risks of heavy reliance on a single nation. Diversification boosts economic resilience while enabling the semiconductor industry to remain stable in the face of global market drop, political instability and artificially high equipment maintenance costs.
Malaysia is at a critical place in the global semiconductor industry. Enhanced regional cooperation, leveraging growth opportunities in AI, 5G, IoT and semiconductor-enabled industries; strengthening of its semiconductor education pipeline, and diversification of investment sources can ensure Malaysia’s place in the global semiconductor supply chain. Such strategic initiatives will not only contribute towards economic growth but also to a long term resilience in the face of changing geopolitical dynamics.
Conclusion
In the shifting geopolitical landscape, Southeast Asia and Malaysia, in particular, are set to play a major role in the semiconductor industry’s evolution of the region. However, in the face of the rising U.S.-China rivalry, Malaysia has demonstrated remarkable flexibility to leverage its strategic position, robust policies and increasingly capable technology to commit to a major share of the global supply chain as an independent player and one that attracts foreign investments. This trajectory reveals the ways in which diplomacy, economic policy and technological forethought meet in a space of power play and market forces.
Malaysia has managed to exemplify its strategic acumen by balancing relations between both the U.S and China. By dint of neutrality, the nation has offset the risk arising from previous over-dependence on either superpower. This showcases that Malaysia is on the right track to become a global hub of semiconductor innovation while preserving sovereignty from external pressures by way of initiatives like the National Semiconductor Key Task Force and ambitious investment goals.
Despite that, the path to that future is not an easy one. With the complex nature of global semiconductor supply chains in tandem with geopolitical tensions, there is still a need to reinforce resilience. To continue to be competitive, Malaysia will need to invest in infrastructure, workforce development, regional cooperation and so forth. Amongst that, navigating the tricky line between encouraging foreign investment, whilst protecting local interests will continue to be a priority in Malaysia’s strategy.
Malaysia’s experience in strategic adaptability under global uncertainty is a case study for Southeast Asia. Malaysia sets a template for its neighbours by aligning domestic policies with global possibilities and creating a vision that includes both innovation and inclusivity. And the story of Malaysia’s semiconductor industry is not just one of economic ambition, but also of policymaking’s ability to navigate the complexities of a fragmented global order.
By Oditi Patgiri and Soumyaditya Deb
Oditi Patgiri is a second-year Global Affairs student at O.P. Jindal Global University, with a keen interest in International Relations, particularly in Southeast Asia, South Asia, and Northeast India.
Soumyaditya Deb is a third year student pursuing law from Symbiosis law School, Pune.
His interests lies in White Collar Crimes, International law, Philosophy, International Affairs and Sociology.
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