The AI Boom’s Bittersweet Taste: A Cautionary Tale for Southeast Asia

The recent surge in AI-related exports and growth across Asia has been meteoric, with Taiwan, Japan, Malaysia, Singapore, and mainland China reporting significant increases in electronics exports. Economists warn that this boom may be more of a “short-term blip” for Southeast Asian economies.

Taiwan is poised to achieve its first year of double-digit GDP growth since 2010, thanks to surging demand for AI hardware exports. South Korea’s export boom has been driven by chipmaking giants SK Hynix and Samsung, with electronics exports increasing by over 60%. Shares in companies like ChangXin Memory Technologies and Unitree have skyrocketed on their first days of trading.

However, this growth comes with a caveat: Southeast Asia’s economies are largely dependent on providing supporting components for the AI industry, rather than leading-edge innovation. Danny Quah, an economist from Singapore’s Lee Kuan Yew School of Public Policy (LKYSPP), notes that Southeast Asia is experiencing a “sugar rush economic boom” due to its provision of semiconductors and power resources for data centers.

Southeast Asia’s competitive edge is built on cheap, low-skilled labor. While this may have been an advantage in the past, it limits the region’s ability to move up the value chain and compete in higher-end AI segments. Guanie Lim, an associate professor at Japan’s National Graduate Institute for Policy Studies (GRIPS), points out that Malaysia has consolidated its pre-existing niches in semiconductor manufacturing.

Moreover, Southeast Asia faces significant structural shortcomings that limit its ability to develop a robust AI ecosystem. Grid reliability and water shortages constrain data center buildout, while energy constraints hinder investment in computing capacity. Ramikshen Rajan, a professor at the LKYSPP, notes that energy is a key constraint, particularly where grids are congested.

Southeast Asia’s governments must be realistic about their AI strategies. Quah argues that only China and the U.S. can generate frontier models in AI, and Southeast Asia should recognize its role as consumers rather than competitors. This is a sobering message for Southeast Asia, which has been eager to join the AI bandwagon.

The escalating rivalry between the U.S. and China in the AI arena also poses a challenge to Southeast Asia. The recent Reuters report on the U.S.-led Pax Silica initiative highlights the risk of being caught in the crossfire. As one source notes, “To be part of everything is to be part of nothing,” underscoring the delicate balance that Southeast Asia’s economic model has long been built on.

As Southeast Asia navigates this complex landscape, it must prioritize building its own capabilities in AI. Kuala Lumpur’s National AI plan aims to push local firms into higher-value segments of the AI supply chain, but more needs to be done. The region’s governments must recognize that their competitive edge is both a blessing and a curse – a reminder that Southeast Asia must work harder to develop a robust AI ecosystem.

Ultimately, the AI boom’s bittersweet taste for Southeast Asia serves as a cautionary tale about the importance of building genuine capabilities in this sector. By recognizing its limitations and constraints, the region can avoid being trapped at the bottom rungs of the AI tech ladder – and take steps towards becoming a true player in the global AI landscape.