SOUTHEAST ASIAN chipmakers need to raise capacity to meet rising global demand for advanced memory chips for artificial intelligence (AI) applications, the Asian Development Bank (ADB) said.

In the Asian Development Outlook, the bank noted that the Philippines, Malaysia, Vietnam and Thailand account for a tiny share of memory chips and microprocessors relative to the leading exporters, Taiwan and South Korea.

“These economies may still benefit from the AI-driven demand for specific microchips, given their specialization in downstream services such as assembly, testing, and packaging, critical to the global semiconductor value chain,” according to the report.

The Philippines is looking to benefit from US CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act of 2022, which seeks to allocate $52.7 billion in federal subsidies to support chip manufacturing in friendly countries.

The Philippines needs to leverage its partnership with the US to establish its own front-end semiconductor facilities to meet global demand, according to the Semiconductor and Electronics Industries in the Philippines Foundation, Inc. (SEIPI).

“Back when US Secretary (of Commerce Gina) Raimondo was here, she said that the US will triple the semiconductor volume in the Philippines. She was referring to the back-end as assembly, test, and packaging. But what we really want to have is the front-end semiconductor wafer fab for strategic reasons,” SEIPI President Danilo C. Lachica said via telephone. 

He said geopolitical tensions and the recent earthquake in Taiwan could pose supply disruptions on semiconductor wafers, which the Philippines imports.

The Philippines’ back-end semiconductor industry, which focuses on assembly, testing, and packaging, is also expected to benefit from subsidies to be provided by the CHIPS Act.

According to the ADB, China’s semiconductor export growth slowed in 2023 after global demand for photovoltaic cells dropped. An embargo on chip-making equipment exports to China could also hinder the latter’s production of microprocessors and memory chips.

“Southeast Asia’s economies provide younger, more abundant, and lower wage workers that can attract investments from large semiconductor manufacturers in East Asia as they diversify their production base,” the ADB said.

The Philippines must also come up with a “customized package” to encourage investment in Philippine semiconductors.

“We have high operating costs in power, logistics, water, cooling water, and even labor… so the package has to be customized according to the needs and interests of the potential investors in a wafer fab,” Mr. Lachica said.

The Philippines must also consider investing in renewables to lower power costs and restore the 5% gross income earned (GIE) tax incentive. “We had some capital flight, we had some investments that were changed because of that,” he said, referring to the tax incentive.

George N. Manzano, an associate professor of economics at the University of Asia and the Pacific, said improving logistics would help develop the Philippines as a semiconductor hub.

“Human resources… will be important, depending on the kind of semiconductor stage is going to be set up,” he said in a Viber message.

Mr. Lachica also called on the Commission on Higher Education to improve the engineering and applied science curriculum, Mr. Lachica said.

The Philippines only accounts for 3% of the region’s total semiconductor exports, according to the ASEAN+3 Macroeconomic Research Office (AMRO).

AMRO senior economist Andrew Tsang said the Philippine government, higher education institutions, and industry must collaborate to match semiconductor workers’ skills with industry demand.

“To enhance its competitiveness, besides attracting FDI (foreign direct investment) to bring in new technology and expertise, the Philippine workforce needs to be upskilled with appropriate training to enable technological adoption,” Mr. Tsang said in an e-mail.  

Meanwhile, AMRO expects global semiconductor sales to rebound this year, coming from a four-year low of a 9.4% contraction.

“The forthcoming recovery is partly driven by the ‘replacement cycle’ — the time it takes to replace old equipment, particularly items bought during the COVID-19 pandemic,” according to AMRO’s latest ASEAN+3 Regional Economic Outlook. 

More than 80% of the world’s semiconductor manufacturing come from high-income and developing economies in East and Southeast Asia, ADB said. — Beatriz Marie D. Cruz