The second Trump administration will be a double-edged sword for Southeast Asia, which has largely benefitted from being a China+1 hedge so far. However, while more foreign investments will be actualised, this might come with strings attached, says Chris Miller, economic historian and author of Chip War: The Fight for the World’s Most Critical Technology.
Miller, whose best-selling book recounts the decades-long battle to control semiconductors, explains that a new school of thought has emerged years after US President Donald Trump’s first-term tariffs. Chinese companies that opened factories in Asean, South America or elsewhere may soon face tightened rules to enforce trade diversion between those countries.
Miller says these are “rules of origin as a topic, about how much transformation in a good you need before it is considered a Vietnamese good rather than a Chinese good rerouted to Vietnam”.
While tariffs during Trump’s second term may attract more foreign investment into Asean, the downside is that this influx could also bring new restrictions, as Western and Chinese investments are increasingly viewed as politically intertwined.
“I think we’ve seen both the US and China try to use foreign investment leverage to shape certain political outcomes, especially in the tech sector,” says Miller. “Both countries believe, I think rightly so, that foreign investment flows are certainly about business, but also connected with political aims.”
Miller was speaking in an interview with The Edge Singapore and The Edge Malaysia at Forum Ekonomi Malaysia (FEM), the nation’s inaugural investment forum to chart its policies and priorities for the year, on Jan 9. He was a keynote speaker at FEM, where Malaysia’s ambition to become a key player in the global semiconductor supply chain was evident. The country is home to its own “Silicon Valley” in Penang, which has long attracted major semiconductor firms like Intel, Infineon, Lam Research and Texas Instruments.
See also: TSMC profit beats estimates after year of rapid AI-driven growth
The government earmarked US$5.6 billion ($8.88 billion) under the national semiconductor strategy unveiled in May 2023 to tap into the front-end chip manufacturing supply chain, which involves wafer fabrication, advanced testing and packaging and integrated circuit design.
Asean moving up
Typically, within the semiconductor industry, Asean countries operate in the low-end manufacturing space, such as packaging. While the evolution of the chip wars and the China+1 opportunity might grow Asean’s footprint in the sector, Miller says it is unlikely that the region will move up the value chain of chip manufacturing.
However, traditional packaging business is now transforming due to increased complexity in artificial intelligence (AI) and high-performance chips, earning the new descriptor “advanced packaging” — a market seen by Insights Partners to grow at a CAGR of 8% to reach US$55 billion by 2028 from around US$30 billion in 2020.
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Due to the complexity, heftier capital investments are required, which means countries with established ecosystems are better placed to make. “This presents an opportunity for Asean, in particular Malaysia and Singapore, to move up the value chain,” he adds.
This means that cost differentials between countries are primarily driven by capital costs rather than labour costs, says Miller. While packaging was once labour-intensive and labour cost differentials were significant, the shift towards more capital-intensive processes has diminished the importance of labour and rental cost variations.
He says advanced economies are also investing in packaging for the first time in a very long time, creating more competition in the advanced packaging space between traditional East Asian players and Southeast Asian players.
Miller also has a view on how other semiconductor players can capture their rightful share of the market. With Nvidia firmly established in the rapidly growing AI segment, he notes it is a “hard task” for other players to compete directly.
Nonetheless, significant growth is still seen in the market for chips used in automotive, robotics and industrial systems. These other market segments, which are more fragmented, are an open playing field for new firms and countries that don’t currently play a big role in chip design, he adds.
Traditional packaging has transformed into advanced packaging with increased complexity in AI, and Southeast Asian countries and firms have an opportunity to capture this share of the market, says Miller. Photo: Sam Fong/The Edge Malaysia
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Politicised supply chains
Chip War was published just in October 2022, but as with the broader tech universe, much has already changed. Several days after the book was released, the US unveiled its first export controls on graphic processing unit (GPU) chips to try to use semiconductor chips to slow China’s AI development, says Miller.
“Since then, we’ve seen a series of tit-for-tat measures from China, from the US, from Japan, the Netherlands … trying to increasingly politicise the semiconductor supply chain and we’ve also seen every major economy try to solidify or expand their role in the semiconductor supply chain,” he adds. “I think this is something that has been accelerating and will continue far into the future”.
As a result, Miller believes that a few areas of change will arise. First, there will be more focus on domestic data centre construction, including the provision of power and infrastructure permits and the building involved.
The second is on tariffs, in which, in the second Trump term, there might be more threats than tariffs that are imposed. “It’ll be interesting to watch what happens relative to the rhetoric, but I think that will impact electronic supply chains, and it will encourage companies to rejig their supply chains to minimise the tariff rates they might be subject to,” he says.
Miller’s prediction on domestic data centre construction is already happening in Malaysia. According to DC Byte, more than 1 gigawatt (GW) of data centre supply is expected to come on stream over the next two years, a boom compared to the current installed capacity of under 400 megawatts (MW). This figure has been constantly increasing since The Edge Singapore last reported on the risk of oversupply in July 2024.
In addition, about 3GW of capacity is in the developmental stages and will be added progressively over the next three to five years. By 2028, the potential data centre inventory would be 10 times more than what was built over the last two decades.
“This would put Malaysia ahead of Singapore, Asia’s [ex-China] largest DC metro where capacity is projected to stabilise at 1.4GW due to land scarcity and stricter conditions imposed on new builds,” says RHB Bank in its regional sector update research on Oct 2, 2024.
SEZ data centre boom
Analysts Jeffrey Tan and Wan Muhammad Ammar Affan note that as AI workloads double every six months, the demand for GPUs will scale new highs, with the cost of training models tripling yearly.
“GPU-as-a-Service (GPUaaS) would emerge as a new revenue stream for telcos and data centre operators,” they say. Meanwhile, the analysts think that concerns over a potential oversupply of inventories in the medium to longer term are exaggerated, as the acceleration in AI adoption is catalysing demand for highly scalable infrastructure.
“This should fuel a prolific investment cycle with data residency and compliance regulations supplementing demand growth,” they note.
Citing Google’s data centre investments, which generated US$1.1 billion in income for workers and added US$2.2 billion to GDP in the region, the RHB analysts believe that hyperscaler investments would create 26,500 jobs and contribute more than US$3 billion to the Malaysian economy by 2030.
They believe that the timely development of the Johor-Singapore Special Economic Zone (JS-SEZ) provides a “fecund ground” for deta centres to co-exist and thrive, and name a few top data centre stock picks.
Telekom Malaysia is RHB’s preferred telco play for the Malaysian data centre theme. With its access to over 30 subsea cable system consortiums and higher demand for its internal co-location facilities, it has a “buy” call with a target price of RM8.40 ($2.56) on the telco.
The analyst recounts Telekom’s 51:49 joint venture with Singtel to construct a Tier-3 AI-ready data centre campus with an initial IT load of 64MW and the potential for the capacity to be bumped up to 200MW. They see the data centre industry in Malaysia addressing some elements of capacity constraints in Singapore, with Singapore Telecommunications (Singtel) committed to ensuring good spillover demand from customers across the Causeway.
Likewise, they have a “buy” call on Singtel, with a target price of $3.50, noting that the telco offers one of the most compelling data centre plays in the region with many data centre assets in captive markets.
“The group’s regional data centre business (Nxera) is a major growth engine and is a focal point within the Singtel 28 mid-term growth strategy. Global private equity investor KKR took up a 20% stake in Nxera in September 2023, which valued Nxera at US$4 billion or 32 times EV/Ebitda. KKR’s investment will help defray data centre capex across the region,” they say.
Tan and Wan have “buy” calls on Tenaga due to accelerating energy demand from the data centre industry. It also has a “buy” call on YTL Power, which has long-term earnings potential from its AI-data centre development.
The analysts believe Google could make further investments in Malaysia, given its US$2 billion investment commitment. Therefore, they have “buy” calls on Sime Darby Property, which they say could accommodate more data centre demand with its robust balance sheet and landbank.
They note that Sime Darby’s property sales are also among the strongest. In addition, they have “buy” calls on Mah Sing, Gamuda and Sunway Construction, Malaysian names related to the data centre space.
“We see the strong commercial proposition of data centres spawning more M&As and/or strategic partnerships across multiple stakeholders, fuelling an expansion in transaction multiples. Agricultural land owners are warming to diversification opportunities in light of declining yields from traditional crops,” they add.
