Caught Between Superpowers: Southeast Asia's Strategic Supply Chain Dilemma and Paths to Breakthrough

Engines in the Cracks: Southeast Asia’s Role Shift in Strategic Supply Chains

In recent years, Southeast Asia’s position in the global economy has gradually evolved from a traditional manufacturing and assembly base into a “connector” economy linking the two major economic blocs of China and the United States. This role has brought unprecedented investment and export dividends, but it has also deeply exposed the region to geopolitical economic fault lines. A newly released report by the Lowy Institute points out that strategic supply chains—covering renewable energy, critical minerals, and emerging technologies—now account for more than 20% of ASEAN’s total exports and attract more than half of the region’s new foreign investment projects.

These are striking figures. They show that strategic supply chains are no longer just a narrative about future industries, but a substantive pillar of Southeast Asia’s current economic growth. Semiconductor manufacturing, electric vehicle battery assembly, solar photovoltaic production, and critical mineral processing—these sectors are expanding faster than traditional manufacturing and have become new entry points for Southeast Asia to integrate into global value chains.

Yet it is precisely these high-growth sectors that now face the most severe external pressure. As technology controls, tariff barriers, and export restrictions between Washington and Beijing continue to escalate, Southeast Asia, serving as an indirect corridor and manufacturing node, can hardly remain unscathed. The Lowy Institute report uses the term “strategic dilemma” to capture this situation: regional economic growth is highly dependent on strategic supply chains, and those very supply chains are the main battleground of geopolitical economic competition.

The Diverging Value of Four Supply Chains: Not All Growth Is Worth Chasing

The report assesses Southeast Asia’s four most prominent strategic supply chains—semiconductors, electric vehicles and lithium batteries, critical minerals, and solar photovoltaic manufacturing—and reaches an important conclusion: their long-term economic value is not equal, and policy resources should not be allocated evenly.

Semiconductors: The Undisputed Top Priority.

Semiconductors are a foundational input for the digital economy and the age of artificial intelligence. Southeast Asia already occupies an important position in global packaging and testing, with Malaysia and Singapore possessing mature capacity, while Thailand and Vietnam are actively taking on a new round of industrial chain relocation. Semiconductor manufacturing not only delivers high added value, but also drives growth in precision engineering, materials science, and a high-end talent ecosystem. Against the backdrop of a fragmenting global chip supply chain, Southeast Asia has the opportunity to become a “third pole” manufacturing node alongside China and the United States. The report argues that semiconductors should be the core focus of Southeast Asia’s strategic supply chain policy.

Electric Vehicles and Lithium Batteries: A Secondary Choice with Ecosystem-Building Potential.

The value of the electric vehicle industry chain lies not only in final vehicle assembly, but also in upstream segments such as batteries, electric motors, and electronic controls. Indonesia, leveraging its nickel ore resources, is building vertically integrated capabilities from minerals to batteries to complete vehicles; Thailand, drawing on its traditional automotive industry base, is actively attracting investment in EVs and components. This sector is closely tied to global decarbonization trends and can generate long-term consumer demand. The report recommends that electric vehicles and batteries follow semiconductors as the second priority in regional industrial policy.

Critical Minerals: Resource Endowments Do Not Equal Automatic Development.Southeast Asia has abundant nickel, tin, bauxite, and rare earth resources, but most of these minerals are exported as raw materials or in initially processed forms, resulting in limited value capture. Although Indonesia's nickel ore export ban and downstream smelting investments have achieved some results, overall, the profit and job-creation capacity of critical mineral processing is far inferior to that of semiconductor or battery manufacturing. The report warns that governments should not be driven by "resource nationalist" sentiments to over-subsidize mineral processing projects, but should carefully assess their long-term competitiveness.

Solar photovoltaic manufacturing: market oversupply and fierce competition.

Southeast Asia was once the main destination for overseas capacity of Chinese photovoltaic companies, especially Vietnam and Thailand. But the global photovoltaic industry has experienced severe overcapacity, and price wars continue to compress profit margins. At the same time, U.S. tariff investigations and trade restrictions on Southeast Asian photovoltaic products have cast a shadow over the industry's prospects. The report argues that solar photovoltaic manufacturing makes a limited economic contribution to Southeast Asia, and the rationale for continuing large-scale subsidies is insufficient. Policy should shift toward supporting demand-side decarbonization applications rather than blindly expanding supply capacity.

Regional coordination: from going it alone to a community strategy

The core policy recommendation of the Lowy Institute report is not simply "government intervention," but rather an emphasis on "disciplined and coordinated industrial policy." In the context of strategic supply chains facing geoeconomic pressures, governments are prone to falling into subsidy races or protectionist traps. But Southeast Asian countries each have limited market sizes and vastly different industrial foundations; only through collaboration within the ASEAN framework can the region's overall advantages be brought into play.

First, semiconductor investment requires regional planning.

Singapore excels in high-value-added design and manufacturing, Malaysia has strong strength in packaging and testing, and Thailand and Vietnam have potential for labor-intensive packaging capacity. If countries can define a clear division of labor and establish cross-border supply chain linkage mechanisms, it will be more efficient than each competing for similar projects. The report suggests that ASEAN could establish a semiconductor industry coordination platform to promote investment information sharing and coordinated capacity planning.

Second, the electric vehicle ecosystem needs cross-border connectivity.

The EV industry is not just a simple stacking of components; it requires charging infrastructure, battery recycling networks, technical standards, and talent cultivation systems. Indonesia's nickel mines, Thailand's vehicle manufacturing, Malaysia's electronic components—if these elements can be integrated through regional agreements, Southeast Asia can form a cohesive EV supply chain cluster. The report specifically mentions that building a skills pipeline is key to long-term competitiveness, and ASEAN should unify vocational training standards and certification systems.

Third, critical mineral governance requires a regional consortium.

Southeast Asia's mineral resources are unevenly distributed. If countries act independently, it is difficult to secure a favorable position in global negotiations. By establishing a regional critical minerals governance framework, countries can coordinate extraction standards, environmental regulations, and export policies, enhancing their bargaining power in negotiations with major consumer markets. At the same time, this also helps avoid the "resource curse" and ensure that resource revenues are truly transformed into local industrial capacity.## Decarbonization: An Underestimated Competitiveness Lever

The Lowy Institute report also makes a frequently overlooked point: accelerating decarbonization at the regional level will bring additional demand-side dividends to strategic supply chains. The global trend toward carbon neutrality is driving demand expansion for clean energy, electric vehicles, and low-carbon technologies. If Southeast Asia can take the lead in decarbonizing its power systems, it will attract more ESG-conscious international investors and reduce the carbon tariff risks faced by its exported products.

This "collective decarbonization" strategy can give Southeast Asia an edge in strategic supply chain competition. For example, aluminum, chips, or battery components produced with renewable energy will find it easier to enter markets with strict carbon footprint requirements, such as the European Union. Policy-coordinated decarbonization planning is not just a climate action; it is an economic competitiveness strategy.

The Future of the Connector: Seeking Balance Amid Decoupling

Southeast Asia's prosperity over the past few decades has been built on the broader environment of global trade liberalization and Sino-U.S. cooperation. Now, that foundation is shaking. As a connector economy, Southeast Asia cannot avoid the impact of great-power competition, but it should not passively endure it either. The Lowy Institute report reminds us that strategic supply chains are neither automatic teller machines nor panaceas. They are a set of economic assets that require careful management.

Targeted industrial policies, regional cooperation mechanisms, and pragmatic decarbonization pathways can help Southeast Asia find a balance between the two great powers. The semiconductor and electric vehicle industries are certain growth directions for the next decade and deserve concentrated resources for focused development; critical minerals and solar photovoltaics, however, require more sober expectation management. Ultimately, whether Southeast Asia can transform strategic supply chains from geopolitical "risk exposure" into a "strategic springboard" for economic upgrading depends on whether its governments have sufficient strategic resolve and governance wisdom.

In this era of uncertainty, Southeast Asia's answer lies not in picking sides, but in building a resilient, well-differentiated regional economic community with shared goals. And the governance of strategic supply chains is the litmus test of this challenge.