What is driving supply chain relocation to ASEAN?
From the perspective of major economies, the ASEAN region is generally viewed as geopolitically neutral. Its strategic location for international trade, tax incentives, relatively skilled/inexpensive labour forces and existence of tech clusters incentivise the inflow of global tech investment. As such, we think ASEAN is well positioned to benefit from investments that could lead to localisation opportunities and project allocations.
Malaysia
According to 蜜豆视频 economists, Malaysia retains a key advantage in semiconductor manufacturing and has managed to score a significant level of Foreign direct investment (FDI) over the past few years, reflecting its ability to retain its incumbent advantage over rivals. It has:
- Well- understood incentives for FDI,听
- An ecosystem of domestic companies supporting the large multinational corporations (MNCs) fronting the industry, and听
- A well-educated labour force. Unit labour costs, which measure wages after controlling for productivity (measured by value added per worker) are among the lowest in the region.
Thailand
Thailand ranks well in terms of infrastructure and ease-of-doing-business indices, despite slightly higher labour costs. More recently there has been an influx of FDI, partly from Chinese companies.
Singapore
Singapore is competitive when it comes to productivity (high education levels and R&D spending), openness to trade (highest number of free-trade arrangements in the region) and low tax rates. Costs and scale, however, are its Achilles heel.
Could ASEAN tech be in the early stages of a new upcycle?
Leading indicator 1: Global semis' revenue growth
Analysing ASEAN tech's total market capitalisation relative to global semiconductor (ex- memory) industry revenue growth over the past 10 years (and covering three semis cycles), we note within a semis cycle that total market cap peaks around one quarter ahead of a slowdown in the global semi industry's revenue growth. Conversely, a trough is reached about one quarter ahead of an acceleration in the global semi industry's revenue growth.
Leading indicator 2: ASEAN tech's revenue growth
We think the ASEAN tech sector's own quarterly YoY revenue growth lags global semis' quarterly YoY revenue growth by about one quarter as ASEAN tech firms are further downstream in the semiconductor supply chain relative to global semiconductor companies.
In our analysis of the past three cycles, we note the market tends to reach a trough about two quarters ahead of an acceleration in quarterly revenue YoY growth or growth turning positive. Conversely, we find that the market tends to reach a peak around two quarters ahead of quarterly revenue YoY growth slowing down.
Leading Indicator 3: Duration between past upcycles
The amount of time between the start of the past two upcycles (2013 and 2016) was 40-45 months (an average of around 43 months). It has been 41 months since the start of the last upcycle, in March 2020. Based on historical trends, this suggests we could have a new upcycle in the coming months (if one has not already begun). If this materialises, we likely still have a good runway in the upcycle considering previous upcycles lasted for an average of 19 months.
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