The demand for AI hardware continues to keep factories in Asia busy as the conflict in Iran intensifies.

      Asia's factories experienced growth once again in June, largely driven by the global demand for AI hardware, according to survey data released this week.

      Strong demand for chips, servers, and data-center equipment kept order books consistently full, even as the conflict in Iran raised energy costs and extended shipping times throughout the region. This trend was most pronounced in China.

      The RatingDog General Manufacturing PMI was reported at 51.7 in June, marking the seventh consecutive month of expansion, staying above the 50 threshold that distinguishes growth from contraction.

      High-tech manufacturing, in particular, performed even better, achieving a PMI of 53.5, well above the overall figure. This difference highlights the rapid growth of AI-related production compared to other sectors of the economy.

      Japan showed a similar trend, with its manufacturing PMI increasing to 54.8 from 54.5 the previous month, indicating six months of continued growth and a notable rise in new orders at their fastest rate in over two years.

      Other smaller economies also reported growth, with the Philippines rising to 50.9 from 50.8, Malaysia returning to expansion at 50.7 from 49.9, and both Taiwan and Vietnam also experiencing growth.

      The common factor across these markets is hardware. The demand generated by the AI expansion has transformed semiconductors, networking equipment, and server components into a driving force that Asia is well-suited to supply.

      A PMI is a diffusion index, representing a monthly survey of purchasing managers regarding output, orders, employment, and pricing. A reading above 50 indicates that more firms reported growth than contraction, so the June results reflect the overall trend rather than the magnitude of any recovery.

      From this perspective, the consistent trends across the region are as significant as any individual figure. The alignment among China, Japan, Taiwan, Vietnam, Malaysia, and the Philippines suggests a strong enough demand to endure fluctuations in any one market.

      This expansion has proven particularly profitable for China, which sees export earnings nearing $500 million an hour, primarily driven by AI-related products.

      Moreover, the robust orders for technology goods are serving as a buffer against the geopolitical and trade risks that might otherwise adversely affect the figures.

      However, this buffer is not without its challenges. Survey compilers pointed out increased price pressures, as supply shortages and shipping delays extended lead times, influenced by rising costs due to the Middle East conflict.

      Economists have cautioned that the energy crisis associated with this conflict might intensify in the upcoming months. A PMI reading indicates momentum, but not sustainability, and this momentum can quickly shift if input costs continue to escalate.

      Additionally, there is an inherent risk in relying so heavily on one demand cycle, leaving factories vulnerable if AI spending diminishes or if export controls become stricter.

      These controls are already altering supply chains, with restrictions from Washington pushing China's AI chip initiatives away from GPUs towards custom silicon, affecting what the region's manufacturers are expected to produce.

      Enforcement of these measures is becoming stricter, as customs officials in the region are intercepting shipments suspected of evading restrictions, including a recently seized $13 million AI chip shipment in Malaysia designated for re-export.

      Each new regulation introduces additional challenges, which may ultimately appear in the lead-time and price data already highlighted in the June surveys. The demand is indeed significant, but the costs associated with transporting goods to meet that demand are also substantial.

      For manufacturers, the situation is clear-cut: as long as data centers continue to place orders, production remains steady, and the conflict impacts costs rather than halting operations.

      Whether this will continue through the latter half of the year remains uncertain. While June's performance was strong, the same reports that praised the growth driven by AI also indicated impending costs.

      For now, Asia's manufacturing sectors are relying on chip production to navigate these challenges, and the June data suggests that this strategy is currently yielding positive results.