AI Boom Lifts Asian Economies, But Southeast Asia May See Only Short-Term Gains
While AI investments boost Asian economies, Southeast Asia's position in the value chain raises concerns.
1AI-Driven Economic Surge in Asia
Taiwan is on track for its first double-digit GDP growth since 2010. Japan, Malaysia, Singapore, and China all reported over 20% export growth in July. South Korea's exports surged by more than 60%. Second-quarter GDP growth exceeded expectations in Singapore, Hong Kong, and Taiwan. Stock markets are also riding the AI wave; shares of ChangXin Memory Technologies and Unitree soared over 450% on their debut trading days.
2Southeast Asia's Short-Term Windfall
Singapore raised its annual growth forecast from 2-4% to 4.5-5.5%, citing AI sector growth. Malaysia is leveraging its chip assembly and testing expertise. Thailand and Vietnam are attracting data center and cloud computing investments. Kuala Lumpur launched a National AI plan to move local firms up the value chain. However, experts warn the region's cheap labor advantage may not be sustainable.
3Structural Challenges and Middle-Income Trap
Malaysia faces brain drain to Singapore and the West. By 2048, 14% of its population will be over 65. Experts note the region remains stuck in low-cost labor industries, unable to escape the middle-income trap. Power outages and water shortages also limit data center expansion. The region struggles to scale data center capacity due to inadequate electricity grids.
4Geopolitical Tensions in AI Race
The U.S. is urging countries to pick sides in its AI rivalry with China. Both superpowers launched competing multilateral frameworks: Pax Silica (U.S.-led) and WAICO (China-led). Kazakhstan's joining both initiatives raised alarms in Washington. China is building a full-stack AI ecosystem while reducing U.S. tech reliance. Chinese policymakers aim to use AI as a general-purpose technology to boost multiple sectors.
5Southeast Asia's AI Strategy
Singapore has become a regional hub for global developers thanks to its semiconductor talent pool. Malaysia aims to build AI capabilities, not just use them, as stated by Communications Minister Fahmi Fadzil. However, experts highlight that the region's open, cross-border investment-dependent economic model is at risk due to rising geopolitical tensions.
6Energy and Infrastructure Constraints
Southeast Asia imports most of its oil and gas from the Middle East. Supply disruptions from the U.S.-Iran conflict have hit hard. Energy is a major constraint, especially with congested grids. The region may expand data center capacity faster than its power networks can support. Data center investments only deliver lasting benefits when they develop local suppliers and skills.
7Expert Insights and Warnings
Economist Danny Quah notes Southeast Asia is experiencing a 'sugar rush' from providing supporting semiconductors and data center resources. But these are easily replicable, offering no lasting advantage. LKYSPP's Ramkishen Rajan points out that Southeast Asia's electricity grids limit data center growth. Governments must recognize they're consumers, not competitors, in the AI race.
8Future Outlook and Takeaways
Concerns persist that Southeast Asia's AI gains may be short-lived. The region risks being stuck at the lower rungs of the value chain. Experts argue governments can't be too ambitious, as only the U.S. and China can produce frontier models. Southeast Asia must position itself as a consumer and user, not a producer, in this game.