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18 Aug 2022

Econ Digest

The U.S. CHIPS Act affects chip supply chains and undermines the competitiveness of Thailand’s electronics industry

คะแนนเฉลี่ย

        The United States (U.S.) passed the CHIPS and Science Act on August 9, 2022, to provide approximately USD52 billion in government subsidies to the U.S. chip manufacturing and research industry, aiming to bolster U.S. competitiveness. Under this Act, coupled with geopolitical issues between the U.S. and its allies especially Taiwan, South Korea and Japan, which are leaders in the semiconductor industry, and China has been going on for a certain period of time, this is likely to lead to a greater dispersion of the chip supply chain structures that are originally concentrated in the Asia-Pacific region to North America, particularly advanced chips smaller than 28 nanometers (nm) in size.

        Since Thailand is a part of the chip supply chain for outsourced semiconductor assembly and test (OSAT) and printed circuit board (PCB) manufacturing processes in the region, as well as a manufacturing base for downstream products, particularly the continued increase in chip usage in modern automobiles, this change could affect Thai industries. KResearch has conducted the following analysis:

  • In the short to medium-term (less than 5 years), the chip supply chain will begin to disperse from the Asia-Pacific region to North America. However, the investments driven by the CHIPS Act will take time, so the overall supply chain may not change much during such period. China will likely remain the leader in basic chip manufacturing (over 28 nm) for the mass market, while Taiwan will remain a leader in advanced chip manufacturing and the U.S. alliance will still hold technologies associated with advanced chips manufacturing, leaving the entire chip industry still dependent on each other’s supply chains. Under this changing landscape, Thai industries will be affected as follows:
-  Basic chip market: Thai OSAT businesses are likely to be affected, but Thai PCB manufacturers may benefit from the opportunities to export PCBs to the U.S.

        The CHIPS Act will allocate USD2 billion in funding to invest in basic chips that are vital to U.S. industry and security, such as power management chips and advanced sensors in automobiles and communication devices. When coupled with the geopolitical issue of the Taiwan Strait, which is the center of about 65% of the world’s OSAT production (38% in China and 27% in Taiwan) and about 74% of the world’s wafer production (8% in China and 66% in Taiwan), this could be the starting point for minimizing the business risk by gradually diversifying the supply chain of basic chips that are essential and indispensable in modern electronic devices to North America, from that originally concentrated only in the Asia-Pacific region. The trend of changes in the structure of basic chip supply chain may affect Thai OSAT businesses based in the Asia-Pacific region in the future.

        However, the support for investment in advanced chips in the U.S. will boost demand for highly complex PCBs, especially multilayer PCBs and high-density interconnect (HDI) PCBs. At present, the U.S. imports PCBs mainly from China and Taiwan (accounting for 37% and 21% of the imports respectively). Taking geopolitical issues into account, the U.S. will tend to reduce its dependence on such imports in the future, and may increase its imports from Japan, South Korea and Thailand, which are ranked the third to the fifth largest PCB manufacturers in the world, respectively. As a result, Thailand may benefit from complex PCBs for automobiles and telecommunication devices, as major Thai manufacturers possess certain expertise in these areas. On the other hand, the investment in manufacturing advanced PCBs in the U.S. may not increase much, as the CHIPS Act does not cover the support of such PCBs.

- Advanced chip market: The impact on Thai OSAT businesses is limited, but Thailand may be affected by the tight supply of advanced chips in the production of high-tech products by Chinese companies investing in Thailand in the future.

        Currently, Thailand plays a minor role in the assembly and test processes of advanced chips; therefore, Thai OSAT businesses are unlikely to be affected by the CHIPS Act, as such processes are usually carried out in countries where advanced chips are manufactured to maintain the continuity of complex production processes. The CHIPS Act also covers funding for the assembly and testing processes to promote the dispersion of advanced chip manufacturing to the U.S.; this will encourage OSAT companies of advanced chips to gradually invest in the U.S. at the same time.

        However, Thailand may be affected by the tight supply of advanced chips in the production of high-tech products by Chinese companies investing in Thailand. Technology competition between the U.S. alliance and China has led to recent U.S. restrictions on some Chinese companies in certain industries, especially in the telecommunication industry. The situation could be exacerbated by the CHIPS Act, as it prohibits the funded companies from investing and upgrading advanced chip manufacturing in China for 10 years. As a result, China may face more access restrictions and have to develop its own advanced chip technology, which will take time. However, restrictions on China’s access to advanced chip supply may cause a tight supply of chips for manufacturing industries in which China is gradually investing in Thailand, especially the modern automobile industry like EVs. On the other hand, companies in the high-tech production chain of the U.S. alliance, especially Japanese companies investing in Thailand, may not face restrictions on technology access, because advanced chip supplies ranging from production equipment, chemicals and manufacturing technologies are accessible among the U.S. allies.

  • In the long-term (over 5 years), the dispersion of the chip supply chain to North America and the development of China’s advanced chip manufacturing technology will achieve substantial results, while tensions between the U.S. and China in the tech race will intensify. Chip technologies and supply chains will be clearly divided into two camps, namely the U.S. alliance with main supply chain in Asia-Pacific and North America and China’s alliance with main supply chain in Asia-Pacific.

        As for Thai OSAT and PCB businesses, the long-term strategy will be an attempt to become part of the supply chain of both camps. Thai operators nowadays often implement business strategies by positioning themselves as neutrals in the supply chain and some companies have invested in factories in both the U.S. and China, giving them the flexibility to adapt to the market. However, in the long run, the division of technology standards may cause Thai business operators to adapt more, especially to meet different needs in technology and production processes, making it necessary to invest in different production lines to meet customer needs. In addition, Thai business operators may also face intense competition with local business operators in the U.S. and China, who collaborate with the industry’s technology leaders in terms of technology research and development as they gain advantages in terms of relationship and technology used in the supply chain, resulting in Thai business operators having to encounter more competitive challenges in the long run.

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