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Under the Banyan Tree - The surging demand for Asia's AI Hardware
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Fred is joined by Ines Lam and Ricky Seo to discuss how the AI boom is remapping Asia's supply chains, why Korea is the undisputed leader in High Bandwidth Memory, and if we are ever likely to satisfy global demand for AI hardware.
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Transcript
Introduction and Context Setting
00:00:09
Speaker
Hello from Hong Kong. I'm your host, Fred Newman, chief Asia economist at HSBC. You're listening to Under the Banyan Tree, where we put Asian markets and economics
AI's Influence on Trade and Korea's Dominance
00:00:17
Speaker
in context. On today's show, we're taking stock of all things AI in Asia, from a remapping of trade routes to the absolute dominance of Korean players in the worldwide semiconductor sector.
00:00:29
Speaker
We're also asking the key question, are we anywhere close to satisfying the global demand for AI
Guests Introduction and AI Supply Chain Discussion
00:00:35
Speaker
hardware? My guests today are Asian economist Ines Lam, who's recently published an in-depth report on Asia's complex AI supply chains, and Ricky, CEO, our head of semiconductor research. Ricky also heads up our research department in Korea, which is, of course, home to some of the top chip-making giants, including Samsung and SK Hynix. Ricky and Ines, welcome to Under the Banyan Tree.
00:00:59
Speaker
Thank you, Fred. Hey, Fred. Let me start with
Asia's AI Export Growth
00:01:02
Speaker
you, Ines. You obviously had a very in-depth report on Asian supply chains recently out when it comes to AI hardware. But before kind of delving into the supply chains, give us a sense of how how relentless the growth numbers look when it comes to exports in Asia. How much really does this mean for Asia's growth cycle that you have such booming AI hard demand out of the U.S.?
00:01:29
Speaker
So the first thing that comes to mind is that in the first quarter of this year, Asia's exports of AI goods jumped 56% from a year ago. And that I think that's that number just shows how big big this whole AI trade has expanded in the past 12 months. And the second thing is that within Asia, the trade of AI goods has also surged in the past couple of years. Actually, it has doubled its value within just five years time. So I think that shows the extent of this boom. Yeah. That is massive. You're saying actually there's been in doubling a doubling in the types of goods being traded across Asia in last couple of years. Just the AI hardware components. This is obviously chips, it's cooling systems, this is cables, this is everything that kind of revolves around AI doubling in terms of size and still running, still running at 50 plus percent growth fee every year. So absolute red hot
Expanding AI Trade in ASEAN Economies
00:02:30
Speaker
sector. But Ines, when we think about AI hardware, we tend to think about Korea, Taiwan. They're kind of obviously the central nodes of the semiconductor supply chain because they produce these very advanced chips. But in your research, you highlight how really it's spread out. It's not just about Korea and Taiwan. It's benefiting other economies as well in Asia.
00:02:53
Speaker
Yeah, that's right. ah So apart from Taiwan and Korea that you just mentioned, we see that the trade of ai goods with ASEAN economies has also expanded rapidly the past few years. With Singapore, with Malaysia, also a bit of the Philippines and Thailand, they are trading a lot more with Korea and Taiwan.
00:03:16
Speaker
And so they're trading a lot more with Korea and Taiwan. and And that is, I suppose, because of supply chains within Asia being fused together. So I guess I would have thought Korea produced a chip and sends it to the United States. But you're saying it's actually more complicated than that. The Korean chip goes to Malaysia first and then to the Philippines and then to Vietnam and then goes to the United States?
Nuances of AI Supply Chains in Asia
00:03:40
Speaker
It's certainly more complicated than that. It's because each economy plays a unique role in this AI supply chain. For example, Malaysia has very advanced packaging testing services. So what we see is that Korea will export its memory chips to Malaysia for these back end services.
00:04:02
Speaker
That's just one example. And so the goods get be sent back and forth, and so that means it's it's a much broader supply chain story. Now, we talked a lot about the production of these AI hardware components, like semiconductors that get sent around, but what about some of these economies now becoming essentially investment destinations in their own right, meaning that the
Data Center Construction Boom in Asia
00:04:25
Speaker
U.S. has built up these massive data centers. Most of these goods ultimately ended up in the United States, but is there... Not an increasing sign that we see investment within Asia as well, where where actually data centers are being built within the region.
00:04:40
Speaker
Oh, for sure. i mean, within Asia, Singapore is the prime example of how much data centre construction has grown in the past few years. But Singapore has its ah land and and energy constraints. So a lot of it is spilling over to Malaysia and Indonesia. And we are seeing the data. It is just remarkable for how quick data centre construction is going on in Asia.
00:05:06
Speaker
So we mentioned Malaysia and Singapore, of course. i think even Australia is joining this. India is joining the construction of data centers. We now saw just Korea announce again new investments in data centers, Japan. So certainly there is not just that Asia is producing these goods, but it's also becoming its own customer And so so that suggests that the AI economy, AI hardware economy in Asia continues to barrel ahead and drive economic growth. Thanks, Enos. I might come back
Unexpected Semiconductor Demand in Korea
00:05:36
Speaker
to you in a moment. I wanted to bring in Ricky here because, Ricky, you sit in Korea. You're a veteran when it comes to the semiconductor industry. Just just take a step back here for me.
00:05:46
Speaker
Have you ever anticipated, have you ever thought such a boom could be possible that we see in Korea right now? Have you ever seen that in in your career, this demand for Korean semiconductors, this relentless boom that we're seeing?
00:06:01
Speaker
I mean, to be honest, this is something that I never expected. Before my career, it it was similar thing happened in 1990 to 1995 when we first adopted PC in the office.
00:06:16
Speaker
But i I didn't experience it as an analyst, but that was what saw from my statistic that DRAM industry grew six times in 1995.
00:06:29
Speaker
compared to 1990 when we see first PC in the office. Wow, that's interesting. You're saying there was a period in nineteen ninety s where the 1990s where the DRAM industry, which is obviously the memory chip industry, grew six times. Is that the the growth rate we've seen in this cycle? Has the high-band memory segment, that's kind of the core of the boom in Korea, has it also grown six times already, are we still lagging that particular growth rate?
00:06:54
Speaker
Actually, the speed of growth is even much faster now. We see are seeing 11 times growth already in the last three years. 11 times. So this is even bigger than we saw in the 1990s. So you just mentioned, Ricky, you've never seen something in your career that dramatic. Now, i want to ask you, though, i mean, one is, of course, we know that there is a lot of demand coming through from ai But to what extent is that also the the lack of capacity which is driving prices? In other words, how much do we see underlying demand increase and how much is it just an explosion of prices because we just don't have the capacity to produce these chips? Is this more just the values are going up or the underlying volume also going up?
00:07:44
Speaker
I mean, value is more driving the growth, actually, in terms of the ah kind of normal growth of 20 to 25% annually. But the capacity increase initially, prepare only 5 to 10%.
00:08:00
Speaker
That mismatch actually boosted ASP. That ASP increase actually driving the overall growth of the EM market. so So ASP, of course, is the average selling price. And you're saying really that the volume increases were 10% to 15%, but the actual price increase, of course, much, much more because we don't have the capacity. So in some ways, Korean producers are sitting on huge price gains for the products because the market doesn't have capacity.
Challenges in Expanding Semiconductor Capacity
00:08:29
Speaker
Korea is dominant in this. Are there other factories worldwide where we see also the capacity for this type of memory being produced or the Koreans really the only producers in the market that can produce the very high end of these memory chips that are needed for AI?
00:08:46
Speaker
Basically, there's so only three DRAM players globally, and two Korean giants, Samsung and Hy-Nix, dominating about 75% market share. So they are taking most of benefit from this price increase.
00:09:00
Speaker
So 75% comes out of Korea. and And how easy is it now when you see these huge price gains? you know If you look at his economic history, you would you think, well, there's going to be other players going to join this because there's a lot of money to be made in this. There's enormous demand coming through. How easy is it for the Korean players then to maintain their dominance in it, their market share? Or is there a risk that ultimately you're going to see capacity come in from Chinese competitors, for example, from other types of competitors from Japanese competitors who are going to then join the market and expand capacity and bring down prices?
00:09:40
Speaker
I mean, because of the economic export restriction to China, Chinese players will have kind of limitation to expand capacity. So these are the U.S. us s export restrictions that kind of make it difficult for Chinese producers to get their hands on the advanced equipment they need for producing the very advanced chip. So Chinese producers maybe can't really compete in this area. But what what about the you know Japanese producers, for example, or some other American companies?
00:10:11
Speaker
For Chinese, that's right. yeah There's Chinese trying to catch up, but the the speed of capacity expansion will be slower, especially on the leading edge side. For Japanese, there's no Japanese player anymore.
00:10:23
Speaker
You know, that old Micron acquired those Japanese and Taiwanese G-REM makers already. So they are only one player other than Samsung and Hy-Nix from Korea.
00:10:36
Speaker
So it it looks like the the Korean players are highly, highly specialized and highly sophisticated in terms of what they're doing. Give us a sense of how hard is it to produce these advanced chips? What's involved here? Why is it only two, two and a half, three companies in the world are able to produce these very advanced chips?
00:10:57
Speaker
I mean, they the survivor of this volatile DRM industry. There's a cycle and there's a new technology they have to develop and there's a huge capex, capital investment needed for the capacity expansion. You know, lead time, a different lead time made a cycle volatile.
00:11:16
Speaker
And then, you know, Korean makers and the Micron is three big survivors from this long history of DRM industry. So in part, there are survivors from a very, very competitive industry, and it takes now huge amounts of capital, as you described, to expand capacity. And that in itself kind of means that these companies have a leg up in terms of their competition.
00:11:38
Speaker
But given that we still have capacity constraints on memory, how quickly is extra capacity coming on? If you look over the next year or so, can we build new factories to fill the demand, or do you expect this to last two, three years? um but before really meaningful capacity comes on stream?
Impact of AI Hardware Boom on Prices
00:11:59
Speaker
You know, the fulfillment ratio of DRAM industry is 50 60%, which means you can only get 50 to 60% of what you order.
00:12:11
Speaker
And there will be new factory coming online from second quarter of next year, about three of them from each player. But that still doesn't fill the ah shortage the situation.
00:12:25
Speaker
And building new factories on top of that will take on another three to five years. These are staggering comment on nine these are are staggering numbers, Ricky. So he's saying that the capacity right now is only enough to satisfy 50% to 60% of actual demand and that it would take up to five years to build enough factory capacity to meet all the demand. So I'm looking at, as a consumer, therefore, at high memory prices for semiconductors. And that's ah here to stay, isn't it?
00:13:02
Speaker
Yeah, I mean, this price hike will not change in near term. You know, this upward price trend and supply demand situation will be difficult to resolve the e in next two or three years.
00:13:16
Speaker
So, so but but when we talk about demand, I mean, one is one is, of course, we're talking about very high-end memory demand for advanced applications. AI applications, but we've now seen that that is even putting a squeeze on consumer electronics. Recently, Apple said it would raise prices because the cost of memory has gone up for consumer electronics items. And so and how is it that essentially the AI hardware boom, which is very specific memory chips that that go into these applications, is actually putting up with prices across all types of memory chips, including for consumer electronics.
00:13:54
Speaker
Yes, it is true that the demand from consumer electronics side has been shrinking. Also, that side, the consumer product side, has been covered by chinese players more and more.
00:14:07
Speaker
But the mainstream demand of DRAM now is more from industrial side, including AI. We used to have about 40% industry demand in the DRAM, but now it moved up to 60 70% of demand and consumer demand has been shrinking. so It's not going to change the ah direction of this price increase of DRAM in the two or three years. Well, Ricky, there you have it. I hope you were telling me that the prices for my new phone would come down again. But listening to you, it sounds like actually the shortage of memory is going to stay with us for quite some time and therefore high prices. And...
00:14:51
Speaker
Ricky, thank you so much for for these insights. It's a fascinating industry, I think, that you cover out of Korea. And as you said, you've you've never really seen a cycle like this. And it sounds like this is here to stay. um Now, final thoughts here from Ines, if I could you bring you back in You talked also a lot about the broader implications of this AI hardware boom. What about India? We haven't really talked about India because you mentioned Singapore and Malaysia. we mentioned, of course, the Taiwanese economy, Japan, even Vietnam, Thailand. But what about India?
India's Potential as a Major AI Consumer
00:15:26
Speaker
Well, good that you mentioned and India, Fred. So India does not produce AI hardware like other Asian economies, but I think it has massive potential in becoming one of the biggest AI consumer in the world. And it's because for now, India uses AI mostly in its IT sector. It hasn't really rolled out to the consumer yet.
00:15:51
Speaker
But India having such a huge population, I think there is a massive demand ah potential for India to have more data centers built and for AI to be deployed in its various IT service sectors. and That's interesting. So that really highlights, again, that Asia and India, certainly by other Asian economies as well, have not yet fully engaged engageded in this data center build-out frenzy, as we see in the U.S. But if they did, then, of course, AI hardware demand would take another
Conclusion and Promotion
00:16:23
Speaker
leg up. And so, as Ricky says, there is just not enough technology.
00:16:28
Speaker
memory chips to go around to feed all of that. I want to thank you both for illuminating this very, very fascinating story, giving nuances to the story around supply chains, around the memory sector. So, Ricky and Ines, thank you very much for joining us under the banyan tree.
00:16:45
Speaker
Thank you, Fred. Thanks, Fred.
00:16:49
Speaker
Well, folks, this certainly won't be the last Asia AI podcast we'll produce here under the Banyan Tree. Thank you for joining us. And if you want more on the global matters moving markets, do listen to our sister podcast, The Macro Brief.
00:17:01
Speaker
Under the Banyan Tree is an HSBC Global Investment Research production produced by Graham Mackay. Thanks for listening, and we'll talk to you again very soon.