Outside China, where are the chip opportunities in Asia?

While China has the biggest share of the global semiconductor market, Japan and South Korea have been making moves to chip away at its dominance. Malaysia and Vietnam are also countries investors should keep an eye on if the chip war between Beijing and Washington continues intensifying.

• Japan’s government-backed investment fund is buying the country’s semiconductor materials giant JSR for $6.4bn.
• Malaysia’s semiconductor industry could benefit from the rise in friendshoring technology supply chains.
• How to invest in Asia chips: the Global X Japan Semiconductor ETF is up 49% in the past six months.

Last week, China announced curbs on exports of gallium and germanium — key metals in semiconductor manufacturing.

In a quick response, the EU and Japan signed a memorandum to boost the pair’s chip supply chain resilience, which will include an “early warning” system to prevent future supply chain disruptions, according to a tweet by EU commissioner Thierry Breton.

“We made it very clear we just want to de-risk,” Breton told Reuters last week.

South Korea, meanwhile, is expecting limited impact from China’s curbs. “We are monitoring the situation in key countries such as the US and Japan and will make utmost efforts to prepare measures to deal with even unlikely situations,” said Young J. Joo, deputy minister for industrial policy, in a statement seen by Reuters.

Elsewhere in the region, according to a statement, the Taiwan Semiconductor Manufacturing Company (TSMC) [TSM] won’t be overly affected by the curbs. As for other Taiwanese firms, WIN Semiconductors [3105.TWO] sources most of its gallium from Japan and Germany, but Visual Photonics Epitaxy [2455.TW] has said it will need to seek permits to keep exporting gallium and germanium from China.

The restrictions Beijing has placed on key chipmaking metals has underlined the need to reduce reliance on China’s rare earths, and is an opportunity to shine a spotlight on the chip industries in other Asian nations — principally Japan, South Korea and Taiwan, but without overlooking Malaysia.

South Korea and Japan’s governments ramp up support

South Korea announced back in May that it’s to build the world’s largest chip centre by 2042, with Samsung Electronics [005930.KS] to provide $230bn in funding. The government is also planning to accelerate research and development efforts, and strengthen legal protection for chip technology being developed by South Korean companies.

The Japanese government has ramped up financial aid for its state-backed semiconductor foundry venture, Rapidus, which is supported by several major companies, including Denso [6902.T], Softbank [9984.T], Sony [6758.T] and Toyota [7203.T]. The aim is for the foundry to help secure long-term supplies of cutting-edge 2 nanometre chips.

In a further sign that Tokyo wants to assert its dominance on the global semiconductor stage, government-backed fund Japan Investment Corp (JIC) is to take control of JSR [4185.T], a leading semiconductor materials supplier for approximately $6.4bn.

JSR CEO Eric Johnson stressed to CNBC last week that it “absolutely is not” a government takeover. “[JIC’s] mission is economic. What they’re looking to do is enhance the competitiveness of the Japanese economy,” he added.

Kazuto Suzuki, a professor at the University of Tokyo Graduate School of Public Policy, told Bloomberg that the acquisition makes strategic sense. JSR “won’t be exposed to the risk of a buyout from overseas. So it becomes a national policy company”.

Malaysia positioned for chip growth

While Japan, South Korea and Taiwan are part of a pact with the US — the so-called ‘Chip 4 Alliance’ — the semiconductor industry in other countries, among them Malaysia, shouldn’t be overlooked.

Malaysia is “in a bit of a sweet spot” amid ongoing geopolitical tensions, Frederic Neumann, chief Asia economist and co-head of HSBC Global Research Asia, told The Edge Malaysia back in April. The country is in a position of strength to benefit from companies looking to friendshore their semiconductor and technology supply chains.

Ajit Manocha, president and CEO of US-based Semiconductor Equipment and Materials International, also spoke to the publication in May.

“The state’s solid reputation is built on decades of manufacturing excellence and industrial experience, which has translated into far-reaching effects, in terms of moving up the value chain and uplifting the skillset of the local workforce,” said Manocha.

No country stands alone

As geopolitical tensions between the US and China continue to intensify, the Association of Southeast Asian Nations (ASEAN), and particularly Vietnam, could end up replacing China as a major semiconductor production hub, according to research by Seok Joon Kwon, assistant professor at the School of Chemical Engineering, Sungkyunkwan University in South Korea, published last year.

According to Kwon, China could suffer losses of $170bn–$250bn if its chip supply chain ends up being severed, which is twice the amount it’s invested over the past 10 years.

On a related note, if Japanese companies get dragged further onto the US side of the chip war, then they could miss out on long-term opportunities in China, warned Thomas Patchett, Japanese equity specialist at Baillie Gifford earlier this year.

The need to reduce exposure to risks from China could lead to more Asian governments looking to buy, or at least invest in, their flagship chipmakers, to consolidate their industry and strengthen economic and political ties with other countries in the region.

“The reality is no one country is going to be able to be self-sufficient. You’re going to have to be able to support your strengths where you can, but you’re also going to have to rely on the global connectiveness in the long run,” as Eric Johnson concluded in his CNBC interview.

How to invest in Asia chip stocks

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in focus: the Global X Asia Semiconductor ETF

The Global X Asia Semiconductor ETF [3119.HK] is the most obvious way to gain broad exposure to Asia’s chip industry. As of 31 May, information technology accounted for 81.21% of the portfolio, followed by consumer discretionary (11.24%), industrials (4.12%) and healthcare (3.14%). The fund is up 9.2% in the past six months.

As of 30 June, the Betashares Asia Technology Tigers ETF [ASIA.AX] has allocated broadline retail 21.1% of its portfolio, followed by semiconductors (20.6%), interactive media and services (16.8%) and tech hardware, storage and peripherals (13.4%), among others. The fund is flat over the past six months.

For a specific play on Japan’s chip industry, there’s the Global X Japan Semiconductor ETF [2644.T]. As of 31 May, electrical appliances was the sector with the biggest allocation (57.89%), followed by chemicals (15.81%), machinery (11.82%), precision instruments (10.93%), wholesale trade (2.57%) and metal products (0.51%). The fund is up 49.1% in the past six months.