Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Markets Are Building Domestic Semiconductor Supply Chains
Transcript
- Lucas: China just posted its slowest quarterly growth since 2022 — investment slumped, and there are fresh calls for stimulus. That headline landed yesterday, July 14th, and it's a useful lens for something happening across the wider emerging market landscape. Luna: Which is that a lot of EM economies are betting big on domestic semiconductors. Not just assembly anymore — actual fabs, design houses, advanced packaging. Lucas: Exactly. The CHIPS Act in the US got all the attention, but quietly, India approved a $10 billion incentive scheme for chip manufacturing two years ago. And this quarter, the first commercial fab is breaking ground near Ahmedabad. It's a joint venture between the Tata Group and Taiwan's Powerchip — they're targeting 28-nanometer analog chips, not cutting-edge logic, but it's a start. Luna: Twenty-eight nanometer — that's not bleeding edge, but it's where a lot of automotive and industrial demand lives. And India's been trying to get a fab off the ground for decades. Lucas: Decades, yes. The difference now is geopolitical urgency. Companies want alternatives to Taiwan and China. And the Indian government is putting real money behind it — not just subsidies but guaranteed procurement from state-owned enterprises in defense and energy. Luna: Vietnam is another one to watch. Their VinFast-backed chip arm, Vingroup, has been quietly hiring design engineers from Intel and Samsung. They're targeting advanced packaging — the kind TSMC does in Taiwan but there's a huge capacity crunch. Lucas: Right. The global advanced packaging market was about $45 billion last year and it's growing at over 10 percent annually. Vietnam wants a piece of that. And they've got an edge — they already host Intel's largest assembly and test facility outside the US. The question is whether they can move up the value chain. Luna: Mexico is also in the mix. They've been a beneficiary of near-shoring for auto parts and electronics. Now there's talk of a government-backed consortium to build a small-scale fab for power management chips — think Texas Instruments-style products. Lucas: And Saudi Arabia. They've committed $10 billion to a semiconductor fund, and they're trying to lure talent from Taiwan with tax breaks that are essentially zero for the first ten years. The crown prince wants a domestic chip industry by 2030. Luna: But is this genuine industrial policy or just stimulus spending dressed up as tech sovereignty? I mean, building a fab is one thing. Running it at commercial yields is another. And these countries don't have the talent pipeline yet. Lucas: No, they don't. India's fab will need an estimated 5,000 engineers. Right now, India graduates about 2,000 chip-design engineers a year. So there's a massive gap. But the government is setting up 50 new semiconductor labs in universities. It takes time. Luna: And the market is pricing that skepticism in. Look at the EEM, the emerging markets ETF — it's down 0.8% in the last five days. South Korea's EWY is down over 3% in the same period. That's partly the global chip cycle softening, but it's also investors questioning whether these new players can actually compete. Lucas: Meanwhile, Brazil's EWZ is up nearly 5% in five days. That's more about commodity prices and the real rallying. But it shows how divergent EM is right now. Not all emerging markets benefit from the chip narrative. Luna: Let's talk about the dollar. It's still elevated — the trade-weighted dollar index is at 120.5, down a bit from last week but still high. That makes it expensive for EM governments to import chip-making equipment, which is priced in dollars. Lucas: That's a real headwind. Each fab costs between $5 billion and $20 billion. If the dollar stays strong, those costs go up. But some countries are hedging — India is negotiating equipment purchases in yuan or yen to bypass dollar constraints. Luna: Speaking of which, the yuan per dollar is at 6.78, down slightly. That makes Chinese equipment slightly cheaper for India. But it's a delicate dance geopolitically. Lucas: Look, if walking through the economy with us has made something click — if today's dive into why EM countries are chasing chips made sense — there's a small way to keep this going. It's buy me a coffee dot com slash fexingo. No pressure at all. Luna: Yeah, honestly, the smallest ask. If it was worth a coffee to you, that's the link. Keeps the show ad-free and independent. Lucas: So back to the talent question. One thing that gives me pause is the yield curve for these new fabs. TSMC's first fab in Arizona has faced delays and yield issues. If the world's best chipmaker struggles in a new location, what hope do India or Vietnam have? Luna: That's a fair point. But maybe they don't need to match TSMC's yields. If they can produce 28-nanometer chips at 60% yield for the domestic market, that's still better than importing everything. And governments are willing to subsidize for years. Lucas: True. And there's a national security angle. Every country wants to reduce dependence on a single node in Taiwan for defense and critical infrastructure chips. That geopolitical risk premium is being priced into the subsidies. Luna: So the long-term bet is that these fabs survive even if they're not world-beaters. And maybe some evolve. Could an Indian fab eventually grab a slice of the AI chip packaging market? Lucas: That's the hope. AI chips require advanced packaging — stacking memory and logic together. TSMC's CoWoS technology is basically full. The industry needs more capacity. If Vietnam or India can offer a viable second source, they could capture significant value. Luna: Let's look at South Korea for a second. Their memory chip exports slipped 3.1% in the last week, according to the EWY data. That's partly because demand is rotating from memory to AI accelerators, but also because China's slowdown is hurting end demand. Lucas: And that's exactly the kind of shift EM policymakers are terrified of. They don't want to be at the mercy of Korean memory or Taiwanese logic. So they over-invest. Some of these projects will fail. But a few might succeed and reshape the global supply chain. Luna: Which raises the question: who benefits most? If I had to pick one, I'd say India has the deepest talent pool, even if it's not specialized yet. And they're aggressive on incentives. Lucas: I'd add Vietnam. Their proximity to China, their trade agreements, and their existing electronics ecosystem give them a head start. Plus, they're politically stable in a way that's rare in Southeast Asia. Luna: Mexico is interesting too because of USMCA access. But they have water and energy constraints that could limit fab construction. Lucas: So the next five years will be telling. We'll see which of these bets actually produce profitable chips. For now, the money is flowing, and the strategic logic is undeniable. Luna: And the listener walks away with a new lens for watching EM ETF flows — if a country's fund is up, check whether it's because of commodity tailwinds or because they're building a fab. Lucas: Exactly. That's the kind of distinction that separates a headline from an insight. Thanks for spending the time with us.