IIndia’s bid to join the global chip-manufacturing crowd is likely to be its biggest “industrial policy” gamble in a long time. Such policy interventions directed by the government went out of fashion decades ago as the free trade mantra took hold.
It has now made a comeback as the Covid-Ukraine supply disruption has alerted every major economy to strategic vulnerabilities. The nightmare scenario would be that Taiwan, which accounts for more than half of global chip supply, is attacked by China, which accounts for half of global demand.
Chips, or integrated circuits, imprinted on silicon wafers are at the heart of every type of manufacturing industry from automobiles to telecom gear and from defense equipment to solar panels. They will become even more so in the world of artificial intelligence and electric cars, which require many more chips than gasoline-powered cars.
Still, the massive cash needed for state-of-the-art research and super-expensive production facilities has concentrated the chip-making business into a half-dozen companies that wield global dominance.
Now, government after government is throwing billions of dollars at chip manufacturing, hoping to improve market share. The US has offered a total of USD 52 billion in stimulus. The European Union is on top of an earlier proposal of USD 30 billion. China reportedly subsidizes its chip manufacturing worth USD 15 billion annually. Samsung plans to invest $200 billion in new chip factories.
CShould India, which is poised to become the third largest economy in a decade and one of the world’s largest markets for a range of chip-based products, be sitting on its hands? It has already offered an unprecedented 10 billion USD as capital subsidy. Is this enough? And is self-sufficiency the right approach in a mega-buck game, or is it better to be part of a network?
Chip manufacturing requires a complex ecosystem. You need equipment that will populate factories (an area of Japanese lead), photolithography equipment that photo-print circuits on silicon wafers (a Dutch specialty), and materials that go into the finished product – for example, neon gas and palladium . , for which Russia and Ukraine have been major suppliers.
China moved quickly to procure some rare clays and minerals, to counter the US which has switched 10 other countries to the Mineral Security Partnership. India has been thrown out.
Result: Interdependence is inevitable. The US is at the fore in logic chip design, South Korea in memory chips. Intel and others outsource wafer fabrication to Taiwan. Japan’s chip industry is still focused on older technology (there is a market for it). Intel in the US has not yet broken through the 10nm (one hundred thousandth of a millimeter) barrier, while Taiwan Semiconductor Manufacturing Company and Samsung produce 3nm chips. China has just reached 7nm, while Japan and the US are jointly working on 2nm technology. More such alliances can be formed.
What is India trying to do? Its chip-making gamble is part of a broader, incentive-based thrust in electronics manufacturing. It is buoyed by early success in mobile handset manufacturing. Whether it will succeed in making display units (for laptops, handsets, etc.), another focus area, remains to be seen.
Chip makers proposing to install in India may consider mid-range chips (28nm) used by the automobile industry and some smart phones.
Essentially, there is an ongoing debate on specialization versus the full-spectrum approach. The country has a strength in chip design, and a natural advantage in the labor-intensive part of chip making (assembly, testing and packaging). It can also perform well in downstream product combinations like mobile handsets. Some component or sub-assembly manufacturers may invest here to feed assembly lines. Over time, an ecosystem with global ties can develop.
The full-spectrum approach, which the government prefers, seeks to replace imports of both chips and downstream products, although upstream import dependence for materials and production equipment will remain. And since the wafer-manufacturing process is capital-intensive, with a demanding production process amid constant technology change, you may need to commit to billions.
Nevertheless, the government clearly feels that India cannot afford to be left out of the game. We’ll know in a few years whether it’s a “vaulting ambition that drives itself forward” or a strategy for success.
By special arrangement with Business Standard
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