As global events continue to show, we live in an unpredictable world. The way COVID-19 disrupted global supply chains, especially the semiconductor industry, revealed that there is actually something unhealthy going on in the global ecosystem.
Semiconductors are an essential part of electronic devices. Information communication technology (ICT) is the engine that drives modern digital economies. Core ICT – including semiconductors, 5G infrastructure, data centers – is the service layer where the applications are delivered, be it social media or online shopping platforms. Core ICT enables innovation in smartphones, computers, healthcare, military systems, transportation, clean energy, search engines, gene sequencing and countless other applications.
The number of companies making advanced chips has dwindled in recent years and advanced manufacturing has moved east. A report from the Semiconductor Industry Association shows 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 made in the US. Only 12% of chips sold worldwide were made in the US in 2019, up from 37% in 1990.
The shortage of semiconductors was mainly caused by the rising COVID-19 cases in supplying countries, especially those in Asia. Furthermore, relatively low margins in the manufacture of substrates, which send user instructions to a computer’s chips and relay the answers, have led to underinvestment, adding to the pain of a global chip shortage. Deliveries were further impacted 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 tech companies, the US-China trade war and the rollout of 5G infrastructure.
The shortage of semiconductors is starting to affect every sector in India. As Original Equipment Manufacturers (OEMs) have slowed down production, smaller players are feeling the bottleneck as their business orders and revenues have been negatively impacted. As new technologies become more accessible, the demand for chips increases. For example, the Indian government is stressing the need for the adoption of electric vehicles, which has also led to increased demand for chips. For example, a normal car typically uses about 300 chips, while a new electric vehicle can have up to 3,000 chips.
The disruption in semiconductor chip supply chains has sparked huge speculation about increasingly intense strategic competition between China and the US. While the US wants to selectively decouple from and reduce its dependence on China, India realizes that mastery of key information and communication technologies is now an important dimension of self-reliance. How does India stand in technology competition? What are the national policy institutions with regard to ICT research and infrastructure.
India’s semiconductor push
India leads the way in the services tier. Delivery costs are the lowest in the world and it is also starting to do well in the application layer with some fintech companies. But India does not participate in the core technology layer, where the US, China, Taiwan and South Korea lead the way. To remain strong, India will have to develop the ICT core layer, which has so far been sidelined. But that’s changing and there is more interest from non-traditional investors who want to explore space to generate potentially nonlinear benefits.
Within policy circles there is a clear realization that if India is to be a leader in the near future, advanced and niche technologies will play a central role in the process. In a recent speech at the India Mobile Congress event, which was held on December 8, 2021, Prime Minister Narendra Modi said the world is looking to India with optimism to provide technological solutions, stating that: “From 5G technology to artificial intelligence , virtual reality, cloud, internet of things and robotics, the The world looks to India with optimism to provide technology-based 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 is really based on this technology. China is lagging behind Taiwan in the semiconductor industry, but they are trying to catch up in investment and manufacturing alone. 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 main reason for developing its own semiconductor manufacturing capacity is to absorb future supply shocks. With the post-pandemic world showing a propensity to work from home, experts estimate that around 50 crore people will use the internet in the next decade, justifying increased 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, 37% of which came from China. Indigenous semiconductor manufacturing would lower the country’s import bill and create numerous employment opportunities for Indian youth. With an improved national cybersecurity profile, chip self-sufficiency would give India a much better global positioning in geopolitics.
For now, India has two semiconductor manufacturing plants or factories: SITAR, a unit of the DRDO in Bengaluru and a semiconductor lab in Chandigarh. These build silicon chips for strategic purposes such as defense and aerospace and not for commercial use. To boost India as a global hub of electronic systems design and manufacture, the government has: approved a scheme of Rs 76,000 crore ($10 billion) to boost semiconductor manufacturing including financial support of up to 50% of project costs to set up semiconductor and display manufacturing units.
Semiconductor manufacturing and supply is a highly interactive and global industry. There are aspects of the supply change that can only be found in one place; for example, 92% of the global production at technology nodes for logic chips below 10 nanometers (nm) is located in Taiwan. When it comes to China, it doesn’t have that kind of dominance in logic chips specifically, but it plays a huge role in integrated circuit assembly and testing.
China represents 54% of the world’s global semiconductor market, so it may not be possible to decouple economic activity from China. Strategic competition between the US and China will put pressure on Indian companies, as it could lead to missing out on the huge economies of scale that the industry benefits. Assuming 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 nevertheless important to develop native design capabilities.
While it is not unlikely that Indian policymakers will face strategic competition, the national strategy for ICT focuses more on the socio-economic impacts of core technologies, such as inclusive and sustainable growth. Thus, the focus is on developing domestic capabilities and strengths rather than the scuffles associated with competition between the US and China. The leadership landscape will be characterized by countries that can empower themselves as a hub within such a global technology network, and not focus on a domestic onshore supply chain.
Vaishali Basu Sharma is an analyst strategic and economic affairs. She has worked as a consultant with the Secretariat of the National Security Council for almost ten years.