As global events continue to demonstrate, we live in an unpredictable world. The manner in which COVID-19 disrupted global supply chains, particularly the semiconductor industry revealed that there is actually something unhealthy going on in the global ecosystem.
Semiconductors are an essential component of electronic devices. Information communications technology (ICT) is the engine that drives modern digital economies. Core ICT – which includes semiconductors, 5G infrastructure, data centres – is the service layer where the applications are provided be it social media or online shopping platforms. Core ICT enables innovation in smartphones, computing, healthcare, military systems, transportation, clean energy, search engines, gene sequencing and countless other applications.
The number of companies making advanced chips has shrunk in recent years, and cutting-edge manufacturing has moved east. A report by the Semiconductor Industry Association reveals that all chips made with the most advanced methods (known as sub-10 nanometer processes) are made in Asia – 92% in Taiwan, and the remaining 8% in South Korea. Few semiconductors are actually made in the US. Only 12% of chips sold worldwide were made in the US in 2019, down from 37% in 1990.
The semiconductor shortage was caused mainly as a result of rising COVID-19 cases in supplying countries, especially those in Asia. Further, relatively low margins in manufacturing of substrates, which transmit user instructions to a computer’s chips and relay the answers, have led to its underinvestment, adding to the pain of a global chip shortage. Supplies were further affected by a sudden spike in demand for gadgets during the coronavirus-induced lockdowns. Added to this are the effects of chip hoarding by manufacturers, sanctions against Chinese technology companies, the US-China trade war and roll out of 5G infrastructure.
The shortage of semiconductors has started affecting each and every sector in India. As original equipment manufacturers (OEMs) have slowed down production, smaller players are feeling the pinch as their business orders and revenues have been negatively impacted. As new technologies become more accessible, the demand for chips is increasing. For instance, the Indian government is stressing the need for adoption of electric vehicles, which has also led to an increased demand for chips. For example, a normal car typically uses roughly 300 chips, whereas one new electric vehicle can have up to 3,000 chips.
The disruption in the semiconductor chip supply chains has generated tremendous speculation over an increasingly intense strategic competition between China and the US. As the US seeks to selectively decouple from and reduce its reliance on China, there is a realisation in India that mastery of key information and communications technologies is now a major dimension of self reliance. How is India poised in terms of technology competition? What are its national policy settings vis-à-vis ICT research and infrastructure.
India’s semiconductor push
India is leading in the services layer. The cost of delivery is the lowest in the world and it has also begun to do well in the applications layer with a bunch of fintech companies. But India doesn’t participate in the core technology layer, where the US, China, Taiwan and South Korea are on a frontline level. In order to remain strong India will have to develop the core ICT layer, which has been on the sidelines so far. But that is changing and there is increased interest from non-traditional investors who want to explore the space for generating potentially non-linear benefits.
Within policy circles there is a clear understanding that if India is to be a leader in the near future, then advanced and niche technologies will play a pivotal role in the process. In a recent address to the India Mobile Congress event, held on December 8, 2021, Prime Minister Narendra Modi said that the world looks towards India with optimism to provide technology-enabled solutions, stating that, “From 5G technology to artificial intelligence, virtual reality, cloud, internet of things and robotics, the world looks towards India with optimism to provide technology-enabled solutions that are affordable and sustainable.”
Semiconductors would continue to enable the world’s greatest breakthroughs. The real battleground of leadership between China and the US really is predicated on this technology. China is behind Taiwan in the semiconductor industry but they are trying to catch up just in terms of investments and fabrication. In the US, the CHIPS for America Act, which would fund the semiconductor industry to the tune of $52 billion over five years.
For India the foremost reason to develop indigenous capacity for manufacturing semiconductors is to tackle future supply shocks. With the post-pandemic world demonstrating an inclination towards work from home culture, experts estimate that around 50 crore people will join the internet in the next decade, warranting an enhanced demand for phones, laptops, servers, internet connectivity and cloud usage. Our digital ecosystem will have to evolve accordingly.
In 2020, India spent $15 billion on electronic imports, with 37% coming from China. Indigenous manufacture of semiconductors would decrease the nation’s import bill and create numerous employment opportunities for the Indian youth. With improved national cyber security profile, chip self-sufficiency would give India a far better global positioning in terms of geopolitics.
For now India has two semiconductor fabrication plants or fabs – SITAR, a unit of the DRDO in Bengaluru and a semiconductor laboratory in Chandigarh. These build silicon chips for strategic purposes like defense and space and not for commercial use. In order to boost India as a global hub of electronics system design and manufacturing, the government has approved a Rs 76,000 crore ($10 billion) scheme to boost semiconductor manufacturing under which financial support of up to 50% of the project cost for setting up semiconductor and display fabrication units will be provided.
Semiconductor manufacture and supply is a highly interactive and global industry. There are aspects of the supply change that can be found in only one place; for instance 92% of global manufacturing at technology nodes for logic chips below 10 nanometer (nm) is in Taiwan. When it comes to China it doesn’t have that type of dominance in logic chips specifically but it plays an enormous role in assembly and testing of integrated circuits.
China constitutes 54% of the world’s global semiconductor market, so it may not be possible to decouple economic activity from China. The US-China strategic competition will place pressure on Indian companies because it might lead to losing out on the massive economies of scale that the industry benefits from. Assuming that microelectronics are manufactured in a global supply chain that does not include China, will consumers be willing to pay higher prices? So while decoupling is not possible from a practical point of view, it is nonetheless important to develop indigenous design capability.
While strategic competition is not unlikely to be on the minds of Indian policymakers, its national strategy on ICT is more focused on the social economic impacts of core technology such as inclusive and sustainable growth. So the focus is on developing domestic capabilities and strengths rather than on the scuffle which the US-China competition is pegged on. The leadership landscape will be marked by nations which are able to strengthen themselves as a hub within such a global technology network, and not concentrate on an onshore domestic supply chain.
Vaishali Basu Sharma is an analyst on strategic and economic affairs. She has worked as a consultant with the National Security Council Secretariat for nearly a decade.