Semiconductors, commonly known as “chips,” are the tiny technological marvels that enable electronic devices to process and store data. Once considered highly specialized technological products, chips have gradually evolved into one of the most important industrial commodities of the 21st century. This shift is due to the fact that chips have become crucial components in key technologies such as artificial intelligence (AI), quantum computing, and the Internet of Things, all of which have significant security and economic implications. Much like oil, nations are now fiercely competing for control and production of chips, giving rise to a new geopolitical struggle. This battle for dominance threatens the global supply chain as countries vie for control over this critical technology.

Earlier this May, the Indonesian Coordinating Minister for Economic Affairs Airlangga Hartanto stated that Indonesia is taking steps to build its own semiconductor ecosystem. This initiative is one of the key aspects of Indonesia’s Golden Indonesia 2045 vision. However, several challenges stand in the way of the realization of this ambitious goal.

The global chip supply chain is dominated by several key nations, each specializing in different segments of semiconductor production. Taiwan and South Korea lead in semiconductor foundries, producing the majority of the world’s chips. In chip design, the United States excels, with companies like Intel, Qualcomm, and NVIDIA at the forefront. The Netherlands, through ASML, controls over 80 percent of the market for lithography machines, and 100 percent market share for EUV lithography machines, which are essential for manufacturing the most advanced microchips. Japan, once a world leader in semiconductor manufacturing, has since been relegated to producing advanced materials such as silicon wafers. China is investing heavily in building its own semiconductor ecosystem in response to U.S. trade restrictions.

If Indonesia aims to become a player in the global semiconductor supply chain, it will enter a highly competitive landscape dominated by a number of established players. The semiconductor industry, in particular, has a high barrier to entry due to its capital-intensive nature. To succeed, the Indonesian government will need to make substantial investments and attract significant foreign investment. This includes funding for the development of advanced production facilities such as Fabs and R&D centers, in order to foster an environment that encourages international companies to invest in and partner with Indonesia.

Even with substantial investment, Indonesia may only manage to develop a subscale semiconductor company that would be highly susceptible to the economies of scale enjoyed by established industry leaders. These firms can produce chips more cheaply due to their efficient overhead costs and high-volume production, making it challenging for smaller, subscale operations in Indonesia to compete effectively on price and efficiency.

To overcome this challenge, Indonesia must identify its niche and leverage its unique advantages in the market. Indonesia’s strategic advantage arguably lies in its abundant raw materials. The country is rich in silica sand, a critical component in the production of silicon wafers and, consequently, in semiconductors. It is estimated that the country has a total reserve of up to 25.33 billion tons and proven reserves of 331 million tons. Since 2022, the Joko Widodo administration has been implementing a downstreaming policy for silica sand, which involves limiting exports and enhancing domestic processing capabilities.

Furthermore, in 2023, Indonesia ranks third in global tin production and first in nickel production. While neither tin nor nickel are primary materials in semiconductor fabrication, both are crucial in the assembly and packaging processes of semiconductor devices. Tin is extensively used in soldering and packaging, while nickel serves as a barrier layer and in various alloys. This positions Indonesia as a potentially important chokepoint in the global supply chain for raw materials and semiconductor assembly, testing and packaging (ATP). Consequently, Indonesia finds itself in the same niche as Malaysia and Vietnam, both of which are currently more advanced in this sector.

Amidst the U.S.-China tech war and high tension in the Taiwan strait, Southeast Asian countries has emerged as a neutral ground for chip production, and have become an attractive investment destination for semiconductor companies. Recently, top European chipmaker Infineon announced a $7 billion investment in its biggest power chip plant in Kulim, Malaysia. Additionally, last year, U.S. President Joe Biden visited Hanoi to sign a comprehensive strategic partnership that had a major emphasis on semiconductor investments in Vietnam.

To compete with both Malaysia and Vietnam, Indonesia must address its engineering deficit. Currently, Indonesia’s ratio of engineers per million inhabitants is 2,671, compared to Malaysia’s 3,333 and Vietnam’s 9,037. To bridge this gap, strategic investments and targeted education policies are needed to boost the number of skilled workers, thereby enhancing Indonesia’s attractiveness as an investment destination for semiconductor companies.

In addition, Indonesia must actively seek collaboration with key stakeholders in the global semiconductor supply chain. In July, Jose W. Fernandez, the undersecretary of state for economic growth, energy, and the environment, announced that the U.S. had identified Indonesia as one of seven countries eligible for support to become a semiconductor hub. This includes potential funding under the CHIPS Act. The Indonesian government should also closely monitor Taiwan’s New Southbound Policy, as the new Lai Ching-te administration has hinted at the possibility of including a semiconductor component in this initiative.

Lastly, the government needs to enhance bureaucratic efficiency and ease regulatory hurdles for foreign investment. Although previous efforts to simplify permits and regulations were made through the Omnibus Law (Job Creation Act), these measures have not fully resolved the existing issues. When it takes office in October, the Prabowo Subianto administration will face the challenge of improving investment regulations to create a more investor-friendly and transparent climate. This will be crucial in attracting meaningful and substantial investment from major semiconductor companies.