In recent years, the semiconductor industry has become a focal point for policymakers across major economies worldwideInstead of prioritizing efficiency in the production processes, countries are now emphasizing supply chain independence, diversification, and security as they shape their semiconductor strategiesThis shift is transforming not only the distribution of the global semiconductor supply chain but also the overall trajectory of the industry itself.

The central idea emerging among these economies is the concept of "local production for local consumption." Since 2022, nations such as the United States, members of the European Union, Japan, and South Korea have each introduced their own chip legislation, aiming to address the imbalances in semiconductor design, manufacturing, and consumption within their bordersTheir plans often include substantial incentives and financial backing to foster domestic chip research and production, all while striving to gain an industrial and technological edge over their competitors.

For instance, the United States has laid out ambitious goals under the Chips and Science Act, aiming to boost its advanced process capabilities in logic, memory, and analog chips

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The U.Senvisions enhancing packaging capabilities and capturing a larger market shareMoreover, the nation aims to solidify its leadership in high-value sectors such as chip design, electronic design automation (EDA), and semiconductor equipmentSimilarly, the European Union is allocating about €43 billion in public and private funds to become a leader in the global semiconductor ecosystemTheir strategy includes attracting talent and building advanced fabrication plants, with a target to double the EU's current market share of 10% to 20% in semiconductor manufacturing.

Japan is intensifying its investments in semiconductor materials and equipment, with plans to invest around ¥10 trillion ($90 billion) from 2022 to 2032 to boost domestic manufacturing capabilities and diversify supply sourcesMeanwhile, South Korea is planning to construct 16 new fabs over the next few decades to reinforce its dominance in cutting-edge memory chips while significantly increasing self-sufficiency in key materials and components.

Beyond these established players, countries that previously lacked robust semiconductor ecosystems are also striving to develop their industries

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Nations like India, Spain, Brazil, Vietnam, and Malaysia are diligently implementing policies to attract semiconductor investments and nurture related talentThis broad initiative reflects a global trend toward strengthening domestic semiconductor industries and tapping into new markets.

The impact of these developments is already reshaping the global semiconductor capacity landscapeIn the semiconductor foundry sector, aggressive investments in wafer fabs are likely to dilute the traditional dominance of East Asian countries in this sphereAs per a joint report from the Boston Consulting Group and the Semiconductor Industry Association, incentives in the U.Sare expected to accelerate the construction of domestic foundries, furthering the growth of American semiconductor productionBy 2032, it is projected that U.Swafer fabrication capacity will increase by 203%, capturing approximately 14% of the global wafer capacity market.

At the same time, shifts in semiconductor backend operations show a rapid rise in the Southeast Asian packaging and testing sector due to nearshoring and friend-shoring strategies

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Forecasts indicate that Malaysia and Vietnam are likely to occupy increasingly significant roles in the future packaging and testing market, potentially reaching a market share of about 10% by 2027.

Despite these optimistic projections, there remains a prevalent concern regarding the possibility of overcapacity in the semiconductor sector, especially in light of the surge in policy initiativesIndustry insiders recount that there is a palpable anxiety around excessive capacity stemming from the recent intensification of semiconductor policiesHowever, extensive data and analyses indicate that there is still considerable uncertainty around whether these fears will materialize into realityIf overcapacity were to arise, it would likely not be evenly distributed across the industry.

A crucial factor influencing this uncertainty is the actual implementation and effectiveness of the semiconductor policies being executed by these nations

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Taking the U.Sas an example, the massive undertaking of constructing advanced process fabs will confront a formidable set of challengesThe country hasn't seen large-scale wafer fab development in over two decades, and now faces a talent shortageOn one hand, there are limited local companies with the requisite experience and capabilities; on the other, semiconductor firms must vie with other industries for a dwindling pool of construction workersAfter the completion of fabs, there’s a risk of acute shortages in technical staffThis talent dilemma has consistently topped the agendas of semiconductor executives for the past three years, as highlighted by reports from industry observers like KPMG and the Global Semiconductor Alliance.

Compounding these challenges is the capital expenditure on supporting industries surrounding wafer fabs, which far exceeds the costs directly associated with establishing the fabs themselves

There is palpable concern among executives over whether government incentives will adequately support this financial demandAdditionally, establishing new fabs in regions like the U.Sand Europe comes with stringent emissions regulations, elevated labor costs, more complex regulatory frameworks, and the formidable task of managing corporate performanceAll of these elements factor heavily into considerations on whether to seek or accept government subsidies.

Interestingly, the attitudes of global semiconductor corporations toward support programs from the U.S., EU, and Japan are shifting from initial enthusiasm to a more pragmatic outlookData from the Global Semiconductor Alliance indicates that in 2023, around 62% of semiconductor executives anticipated an increase in capital expenditure, yet this figure declined to 55% for 2024, reflecting a tempered expectation as the landscape evolves.

Changes in anticipated capital expenditures can largely be attributed to shifts in U.S

interest rate policiesExtended periods of high interest rates have imposed significant constraints on capital expenditure plans among semiconductor companiesMore critically, enthusiasm for semiconductor policy initiatives appears to be waning; even amidst industry cycle fluctuations, firms have expressed eagerness for expansion, yet they now carry out thorough assessments of governmental policies and compliance demands, leading to a more nuanced understanding of the limitations inherent in such governmental support.

In addition to supply-side factors, rapid growth in demand for semiconductors presents a further dimension to how the potential for overcapacity is evaluatedMany executives are optimistic that emerging trends, such as generative artificial intelligence, cloud computing, and the increase in automotive chips, will propel the semiconductor industry towards significant growth

According to McKinsey & Company, the global semiconductor market is projected to escalate from $600 billion in 2021 to a staggering $1 trillion by 2030. This growth spurs a notable rise in confidence regarding operational profitability, with expectations of substantial improvement in 2024 as compared to 2023.

Assessing whether the effective implementation of semiconductor policies among the U.S., EU, and Japan could trigger overcapacity risks reveals that while such risks may exist, they are likely to be regionally concentrated rather than globalAs countries ramp up their semiconductor policies, they’re fostering the rapid formation of regional supply chainsTherefore, the looming risk of overcapacity will likely manifest in confined areas, not as a global menaceIn this scenario, countries and regions with extensive market potential and manufacturing needs will not only face a lower risk of overcapacity but will also exhibit a greater capacity to adjust and absorb production surges.