South and Southeast Asian economies are emerging as back-end hubs but technical gaps constrain their ability to capture greater economic value, Moody’s said Tuesday.

The rating agency said in a note that Southeast Asia is emerging as a key destination for assembly, testing and packaging of semiconductors, driven in part by the
widespread adoption of “China + 1” strategies to enhance supply chain resilience.

According to Moody’s semiconductors now represent a significant engine of export and manufacturing growth within the region, accounting for around 26 percent of Malaysia’s and 32 percent of the Philippines’ total goods exports in 2024.

In Vietnam, the figure has risen steadily from a low base to around 6 percent in 2023.

With accelerating demand fueled by artificial intelligence (AI), high-performance computing and 5G, Moody’s highlighted that Southeast Asia is well positioned to capture increasing semiconductor export volumes.

However, near-term risks remain, notably, potential US tariffs that could reduce Southeast Asia’s attractiveness as an export base to the country.

This may disrupt export momentum and weigh on growth, particularly for export-oriented economies such as Vietnam, Malaysia and Singapore.

Although the $95 billion assembly, testing and packaging market is currently focused in North Asia, Moody’s said Southeast Asia is on track to significantly expand its capacity.

According to the rating agency, the region now hosts the third-largest number of facilities globally, behind mainland China and Taiwan, and is projected to capture around 24 percent of global capacity by 2032.

Malaysia leads within the region, while Vietnam’s capacity is expected to reach 8 percent by 2032 amid sustained increases in foreign investment.

Nevertheless, Moody’s said technical gaps constrain Southeast Asian economies from moving up the value chain and gaining greater economic value.

Research and development (R&D) and industry-government partnerships will likely help the economies in entering high-value semiconductor segments.

Without these improvements, it opined that the region risks missing out on segments such as design and fabrication, which contribute 50 percent and 25 percent of semiconductor value-added, respectively, according to Organization for Economic Co-operation and Development (OECD) estimates.

Currently, assembly, testing and packaging offer only 5 percent of value-added because of their labor-intensive and low-margin nature.

In the short to medium term, Moody’s said structural constraints will continue to weigh on the region’s competitiveness.

Outside of Singapore, innovation ecosystems within South and Southeast Asia remain underdeveloped with limited research infrastructure, capital and global connectivity.

Regulatory fragmentation and weak intellectual property enforcement limit investor confidence and restrict the diffusion of technology.

While Malaysia and Vietnam host major facilities of multinational companies like Intel Corporation and Samsung Electronics, they remain focused on basic assembly, with limited progress in scaling high-value operations.

The trend is similar for Chinese investments in Malaysia, according to Moody’s.

Moody’s also pointed out that talent shortages pose an additional challenge for the region.

India accounts for roughly 19 percent of global chip designers but hosts only 7 percent of design facilities.

This gap is exacerbated by tertiary education systems that lag behind more developed Asia counterparts, resulting in a shortfall of graduates equipped with requisite technical skills.

The gross enrollment ratio for tertiary education among developed Asia averaged around 80 percent of total population in 2022, contrasting with around 40 percent for South and Southeast Asia, excluding Singapore.

Brain drain further aggravates this issue as professionals seek better opportunities abroad.

For instance, Malaysia loses a substantial portion of annual engineering graduates to Singapore.

Moody’s opined that retaining talent will require improved compensation, career pathways and investment in local R&D.

Infrastructure gaps also constrain growth and add to the costs of setting up facilities, said Moody’s.

It noted that reliable electricity, ultra-pure water and efficient logistics are essential for semiconductor manufacturing.

However, it said many of the region’s economies, including India and the Philippines, still contend with power quality issues and competing uses for water, necessitating captive power or back-up systems and water production facilities.

Fragmented and congested transport networks also add to logistics costs, it added.

However, it noted that Singapore stands out with higher Logistics Performance Index (LPI) scores, indicating better connectivity, but most of the region lags behind East Asian peers.

While South and Southeast Asia trail in advanced capabilities, Moody’s said they offer scalable strengths in cost-competitive labor and business friendly policies.

Preferential land access, visa facilitation and the development of special economic zones, such as Malaysia’s Johor Singapore corridor and Indonesia’s Kendal zone, are helping build regional semiconductor hubs.

It highlighted that proximity to East Asia’s electronics clusters further enhances integration into larger manufacturing ecosystems.

According to Moody’s, securing a competitive edge increasingly hinges on workforce development, R&D investment and fostering public-private partnerships for innovation.

It noted strategic collaborations with global companies will facilitate technology transfer, expand supplier capacity and elevate technical expertise.

Singapore exemplifies this with an S$18 billion ($13.6 billion) R&D commitment (2021–25), generous tax incentives and talent initiatives with institutions such as Nanyang Technological University.

Coupled with infrastructure support that enables multinationals to set up cutting-edge facilities, these efforts accelerate technology transfer, expand supplier capacity and build technical expertise, strengthening the region’s semiconductor ecosystem.

By adopting this integrated approach, South and Southeast Asia can enhance its semiconductor ecosystem and secure a stronger position in the global technology landscape, said Moody’s.

Overall, Moody’s sees Asia to keep global chipmaking lead despite US-China tensions, supply chain risks.

According to the rating agency, geopolitical tensions and economic uncertainty are prompting Asian semiconductor companies to diversify geographically.

However, it noted Asia will retain its leadership in chip manufacturing over the next five years, supported by cost advantages, established ecosystems and deep technical expertise.

While China’s self-sufficiency push presents opportunities for domestic players, it said the pursuit will only modestly curb revenues for other regional leaders — Taiwan, China, Korea and Japan.

It also said Southeast Asian economies are emerging as back-end technical hubs.

#SemiconductorSupplyChain #ASEATech #AdvancedManufacturing #RAndDInvestment #SkillsAndTalent