Japan, South Korea, and Taiwan facing the risk of 'industrial hollowing out': When the AI boom obscures pressure from China

DLPL News In recent years, Japan, South Korea, and Taiwan have continued to be recognized as three key industrial pillars of Asia. These are economies closely tied to technology conglomerates, the semiconductor industry, electronics, automobiles, chemicals, precision machinery, and global supply chains. Notably, the wave of artificial intelligence has brought the Northeast Asian region back into the global spotlight. However, behind the positive export figures and the boom in the semiconductor industry, a concerning issue is gradually emerging: the traditional industrial bases of Japan, South Korea, and Taiwan are being eroded by the ever-increasing competitive pressure from China.

In other words, AI is making the economic picture brighter. But that very light may also be obscuring deep cracks in the region's industrial structure.

AI-driven prosperity: beautiful but not secure enough

Amid the global AI wave, Northeast Asian economies are reaping massive benefits.

Taiwan plays a central role in the semiconductor industry, especially in the production of advanced chips. South Korea has a major advantage in memory chips, electronic devices, and global-scale technology conglomerates. Japan still holds many critical stages in semiconductor materials, precision machinery, and chip manufacturing equipment.

Therefore, as the world accelerates investments in data centers, AI servers, processing chips, memory, and computing infrastructure, these three economies immediately benefit. Exports increase, corporate profits improve, the stock market gains momentum, and governments have more reasons to be optimistic.

However, the problem is: this growth is too concentrated in a narrow group of industries.

An economy can be very strong if it leads in semiconductor technology. But if other industries simultaneously weaken, that growth is no longer a sign of comprehensive health. It is like a body with one very strong arm, while the rest is gradually losing its resistance.

China is no longer just a "factory"

For decades, China was seen as an assembly link in the Asian supply chain. Japan, South Korea, and Taiwan provided machinery, components, technology, materials, and capital; China received, assembled, processed, and exported to the world.

But that model has changed.

Today's China does not just assemble. China has become a direct industrial competitor.

In electric vehicles, batteries, renewable energy, chemicals, machinery, industrial equipment, consumer electronics, and many mid-tier manufacturing segments, Chinese enterprises are advancing very rapidly. They possess a massive domestic market scale, massive production capacity, competitive costs, a dense supply ecosystem, and strong support from industrial policies.

This creates immense pressure on Japanese, South Korean, and Taiwanese conglomerates because previously, Chinese enterprises were customers or partners. Now they are both customers and competitors, and in some industries, they have even become the leaders.

Traditional industries are being eroded

Competition from China does not occur in a single industry. It spreads across multiple sectors, such as:

In the automotive industry, Japanese carmakers once dominated many Asian markets. But the rise of Chinese electric vehicles is changing the game. Chinese brands compete not only on price but also on the speed of innovation, autonomous driving software, battery endurance, and the ability to bring products to market very quickly.

In the battery industry, South Korea once held a very strong position with large conglomerates. But Chinese enterprises, especially in the EV battery sector, have risen with massive production scales and the ability to control raw material supply chains.

In chemicals and industrial materials, excess production capacity from China has dragged down prices, shrinking the profit margins of Japanese and South Korean businesses.

In machinery and industrial equipment, China is also gradually replacing imports with domestic products, while simultaneously exporting to markets where Japanese and South Korean enterprises previously held an advantage.

As a result, many industries that were once the foundation of Northeast Asia are no longer growing as before. If we exclude the contributions of semiconductors, AI servers, and high-tech related products, the manufacturing picture could be much less bright.

The risk of over-reliance on semiconductors

Semiconductors are a strategic industry. But relying too heavily on them is also a risk.

The semiconductor cycle is inherently highly volatile. When chip demand rises, revenue and profits can boom. But when the cycle reverses, inventory increases, chip prices drop, and orders slow down, an economy overly dependent on semiconductors will suffer heavily.

For Taiwan, the semiconductor industry is vital. For South Korea, memory chips and electronic technology are export pillars. For Japan, although no longer dominating the production of finished chips as before, the country still holds many key positions in equipment, materials, and components for the semiconductor industry.

The worrying point is that the AI wave might create a feeling that everything is fine. But if the rest of the industrial base is weakening, a reversal in AI demand could expose risks very quickly.

In other words, AI today is both an opportunity and a smokescreen.

A difficult policy puzzle for Northeast Asia

Japan, South Korea, and Taiwan do not lack technological capacity. The problem is they must rebalance their industrial bases.

If they only focus on spearhead industries like AI and semiconductors, they can continue to maintain their position in the short term. But in the long term, the economy needs a broader manufacturing foundation, including automobiles, chemicals, energy, industrial equipment, engineering services, software, and supporting industries.

Governments in the region will have to face some big questions:

This is not just an economic problem. It is also a geopolitical, supply chain, and industrial security problem.

What does Vietnam see in this story?

The story of Japan, South Korea, and Taiwan is also an important warning for Vietnam.

Vietnam wants to become the new manufacturing hub of the region. We strongly attract FDI, deeply participate in the electronics, textile, footwear, furniture, and logistics supply chains, and are increasingly interested in semiconductors, AI, data, and high tech. However, if it stops at the role of processing or assembly, Vietnam may face the same problem that many industrial economies once faced: rapid growth but low added value; large exports but weak domestic enterprises; reliance on a few industries or a few major partners.

The lesson here is that Vietnam needs to build substantial industrial capacity. It is not just about attracting factories, but developing supporting enterprises, technical human resources, governance standards, design capacity, industrial legal frameworks, intellectual property protection, and the ability to participate deeper in the value chain.

A strong industry does not just lie in the number of factories. A strong industry lies in the ability to self-upgrade.

Conclusion

The AI boom is bringing huge opportunities for Japan, South Korea, and Taiwan. But that opportunity also comes with a paradox: the more successful they are in semiconductors and AI, the easier it is for these economies to ignore the weakening of the remaining industries.

China is no longer the low-cost manufacturing partner it used to be. China is becoming an industrial powerhouse competing head-on across multiple tiers. This forces Japan, South Korea, and Taiwan to rethink their growth models.

An economy cannot survive merely on a technology wave, no matter how big that wave is. AI can generate profits, but for an industry to be sustainable, it must have depth, diversity, and the capacity for self-innovation.

For Vietnam, this is a lesson worth reflecting on: in the new industrial race, the important thing is not just to participate in the global supply chain, but to gradually elevate one's position within that very supply chain.

DL PINNACLE LAW FIRM LLC