Western companies pour money into Malaysia in a bid to diversify chipmaking supply

Access to renewable energy and talent remain obstacles

A slew of Western companies have made recent investments in Malaysia’s chip industry, aiming to diversify supply chains out of China. Germany’s Infineon is investing US$7 billion in Malaysia’s north for what will be the world’s largest silicon carbide chip plant. Silicon carbide chips are used in the power systems of critical technologies such as EVs and wind turbines. The US’ Intel similarly intends to invest US$7 billion into a 3D chip packaging plant in Malaysia’s southeast. The ‘packaging’ process of connecting chips to each other vertically reduces distances, allows more interconnections, and results in faster, more efficient systems.

Malaysia already has an established semiconductor ecosystem, housing 13 percent of the world’s packaging, assembly, and testing capabilities. This has made it the sixth-largest exporter of semiconductors in the world. Malaysia is also geographically well-placed to integrate with global semiconductor supply chains and is less susceptible to typhoons, earthquakes, and volcanic eruptions that affect many of its Southeast Asian neighbours.

Access to renewable energy remains a challenge for Malaysia. Chip manufacturers are increasingly factoring in access to cheap and clean electricity in their decisions to relocate due to the energy-intense nature of chipmaking, but Malaysia sources just 7 percent of its energy from renewables. The country is also experiencing a serious shortage of engineers which has grown to around 14,000 in the past few years.

Vietnam seeks to strengthen its rare earths industry

Hanoi walks a delicate line between supply chain diversification and maintaining relations with Beijing

Vietnam is attempting to kickstart its rare earth export industry in a bid to tackle China’s dominance of the sector. Vietnam’s rare earth deposits – the second largest in the world – are rich in minerals such as cerium, praseodymium and neodymium that are used in critical technologies. Neodymium, for instance, is used to make magnets for EV motors and wind turbines. Vietnam aims to produce as much as 60,000 tons of rare earth oxide equivalent per year by 2030 – around 29 percent of China’s annual quota. China currently controls around 90 percent of rare earth processing.

Hanoi intends to build up both its mining and processing capabilities. It will open tenders for the Dong Pao mine – one of the largest rare earth mines in the world - before the end of the year, attracting the likes of Australia’s BlackStone Minerals, which will submit a US$100 million bid for at least one of the mine’s concessions, and Vietnam’s VTRE, which aims to process the mine’s rare earths from as early as the end of the year.

In addition to an increasing interest from western companies in investing in the country, diplomatic engagement has also grown: Vietnam last month upgraded diplomatic ties with the US to the highest level. Vietnam maintains a careful balancing act between the two.

US and Mexico trade disputes stall ahead of elections

Both administrations are attempting to calm bilateral tensions and prevent disruptions to their respective upcoming campaigns

The US and Mexico have effectively halted trade disputes with each other amid looming elections in both countries. For two years, Mexico has argued that the US’ interpretation of a provision from the US-Mexico-Canada free trade agreement (USMCA) was protectionist - Mexico contends that 75 percent of core components of a vehicle need to be sourced from a USMCA country to be exempt from tariffs, while the US argues that it should include 75 percent of all components of a vehicle. However, Mexico recently ceased raising the issue despite a USMCA panel ruling against the US in January. At the same time, the US has stopped accusing Mexico’s new nationalist energy policies of unfairly favouring state-owned companies.

Both the US and Mexico are trying to prevent a situation in which the other country revives a dispute against them in response to their own dispute. For the Biden administration, a change to its interpretation of the USMCA’s auto tariffs may upset its union voter base with implications for next year’s presidential election. Likewise, Mexico’s ruling MORENA party is touting energy nationalisation as one of its key priorities leading up to next year’s election. However, the dispute deadlock may come at the expense of the USMCA’s efficacy. Mexico and the US will need to ensure that they do not set a precedent for further disregard of the USMCA’s provisions as US corporates seek to “nearshore” in the face of escalating geopolitical tensions.

The EU begins inquiry into Chinese-made EVs

Brussels faces the challenge of balancing economic security with a least cost energy transition

The EU last month launched an “anti-subsidy investigation” into EVs imported from China in a bid to address threats to its domestic auto industry. For an at-most 13-month period, the European Commission will explore whether it should impose tariffs on vehicles sourced from China to a greater degree than its standard 10 percent rate for vehicles. The probe comes in response to concerns that the EU’s automakers are being unfairly disadvantaged in the European market by a flood of cheap Chinese EVs that have been produced under Beijing’s massive EV subsidies. Despite their relatively new presence, Chinese brands now make up 8 percent of EVs sold in the EU, and the number continues to grow.

Although China’s EV subsidies have caused some of the EU’s automakers to lose market share and even shift production to China, they have also helped to facilitate mass adoption of EVs in Europe. The EU faced a similar conundrum in 2012 when it introduced a tariff regime on Chinese solar PVs to deal with a deluge of cheap imports, only to later abandon the tariffs in order to prioritise renewable installations. Further complexity comes from defining what constitutes a Chinese electric vehicle given that several western brands, including Tesla and BMW, produce or source significant parts of their EVs in China. There is also the consequence of backlash from Beijing, since China is the largest market for many EU exports.

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Huawei’s new smartphone suggests a significant advance in China’s chip capabilities

China’s progress has triggered calls in Congress to widen export controls, but some doubt the efficacy of such measures

Last month, Huawei released a very advanced 7-nanometre (nm) semiconductor in its new Mate 60 Pro smartphone, produced by China’s Semiconductor Manufacturing International Corp (SMIC). The chip contains technology seemingly only 4 years behind that of its US-aligned counterparts, casting further doubt over the effectiveness of the US’ chip export controls, which aimed to hold back China’s chip capabilities by 8 to 10 years. The Biden administration’s CHIPS and Science Act, instituted in October last year, prohibits the export of semiconductor equipment to China that can be used to make DRAM memory chips smaller than 18 nm, logic chips smaller than 14/16 nm and NAND memory chips with more than 128 layers.

China’s seemingly rapidly advancing chip capabilities have sparked concerns that it could soon catch up to the US and its chipmaking allies Japan, Taiwan and South Korea in areas such as AI and military. Some lawmakers in Washington have called for the export controls to be tightened to include less advanced chips. The US Commerce Department has for years considered blocking sales of all US products to Huawei. Despite the concerns, it is uncertain how quickly China will be able to catch up to the capabilities of the US and its allies. It would need to continue pouring large sums of money into its domestic chip industry, which it will have to balance with investment in other critical industries, all the while navigating its current economic headwinds. Additionally, China needs to match its competition across numerous sections of the supply chain, which have been cornered by just a few companies with strong US ties.