The Philippines must attract fresh investments to upgrade and diversify its semiconductor industry in order to meet the growing demand driven by artificial intelligence (AI), as the sector is poised to bear the brunt of potential tariff impositions by the United States (US), according to think tank Oxford Economics.

In an Oct. 6 report, authored by lead economist Sunny Liu, Oxford Economics said the Philippines could face a “significant negative shock” if US President Donald Trump pushes through with his plan to slap tariffs on imported semiconductors.

Since August, Trump has been exploring the prospect of expanding his so-called reciprocal tariffs to foreign-made semiconductors, in a move to bolster US manufacturing.

Based on his initial pronouncements, Trump will impose 100-percent tariffs on semiconductor imports, but with exceptions for companies that manufacture in the US or have committed to do so.

The majority of semiconductor firms in the Philippines already have presence in the US, including top exporter Texas Instruments (TI), as well as Analog Devices, NXP, and Onsemi.

These companies are involved in assembly, test, and packaging (ATP), focusing on legacy chips that are used in automotive, consumer electronics, and industrial products.

Oxford Economics noted that since ATP is cost-sensitive and can be geographically flexible, a potential imposition of tariffs would make the country’s exports less competitive, with the risk of its usual buyers shifting to those that are exempt.

The think tank expects the likes of South Korea and Taiwan to benefit from tariff exemptions due to their existing manufacturing facilities in the US.

It also anticipates the probability of Malaysia qualifying for carve-outs as it moves into advanced packaging—an important component of the US supply chain.

Malaysia, once focused solely on traditional ATP like the Philippines, has been securing investments in AI and outsourced semiconductor assembly and test (OSAT) to revitalize its sector.

The Philippines, on the other hand, has been largely unable to secure foreign investments in “cutting-edge areas,” according to Oxford Economics.

Last year, the country saw net inflows of foreign direct investments (FDIs) reach $8.94 billion. However, this is well behind investments poured into neighboring Singapore, Indonesia, Vietnam, Malaysia, and Thailand.

According to Oxford Economics, the main obstacles for the country in attracting FDI boil down to infrastructure constraints, limited policy support and regulatory framework, and a skills gap in its workforce.

The lack of investments in the semiconductor sector made the country lag behind the shift toward AI-related areas such as graphics processing units (GPUs), advanced substrates, and advanced packaging.

“Although legacy chips will remain essential for the auto, industrial, and consumer markets, the shift to ‘heterogeneous integration’—combining mature-node dies with cutting-edge dies in one advanced package—will squeeze demand for standalone legacy chips,” the report read.

“To maintain relevance, the Philippines’ legacy-centric ATP base needs to be upgraded and diversified into higher-value segments,” it added.

Oxford Economics stressed that the country must upgrade its capacity for advanced packaging and front-end fabrication, or risk being “trapped in slow-growth sectors” such as legacy chips, which have a gradually eroding market size.

With uncertainties stemming from tariff threats, the think tank expects investments in the sector to remain muted, with multinational firms likely to hold back on expansion plans.

“Nevertheless, we believe Southeast Asia, including the Philippines, is poised to emerge as a global OSAT hub in the medium term, underpinned by a trend of building more resilient and diversified semiconductor supply chains,” it said.

Alongside a more robust investment promotion effort, the report noted that the government must work on improving investor confidence.

Oxford Economics stated that the government could amend the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act to provide specific incentives to the semiconductor sector.

 CREATE MORE, which introduced incentives promoting high-impact investments, currently lacks perks that address the industry’s needs, such as high energy consumption and advanced engineering capabilities, the think tank said.

Semiconductor and Electronics Industries in the Philippines Foundation Inc. (SEIPI) expects electronics exports this year to post flat growth from last year’s value of $42.6 billion, though it remains optimistic for at least a two-percent uptick.

Oxford Economics echoed the flat to modest growth projection but warned that it could be “skewed to the downside” given current external headwinds and the tariff threat.