Chipping into the Global Chip War

There are more than 50 “choke points” in chip manufacturing

By Ankur Bisen

US President Joe Biden on 9 August signed the Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) Act and rolled out $52 billion worth of government subsidies and incentives for the semiconductor industry to boost manufacturing within the country.

In December 2021, India announced its own plan: an ambitious $10 billion package of incentives and subsidies for the domestic manufacture of chips. But what explains this sudden rush for “chip nationalism” and how does India’s chip nationalism fare vis-à-vis that of the rest, particularly China?

Fuel Cells of Economy

Semiconductors or microchips are miniature circuits that make all things electronic work. They are manufactured in factories that are called foundries and shipped to customers across the globe to use in everything from mobile phones to computers.

The rise of chips is intertwined with the recent triumph of electronics engineering. For instance, fuel gauges have changed from mechanical devices to chip-based displays in the car. Manual devices that measure blood pressure have given way to battery-powered, chip-enabled systems that not only measure a person’s blood pressure but also store it as a data set.

The chip foundries are finishing kitchens for components and materials sourced from all over. In many cases, several supply bases are monopoly sources. So much so there are more than 50 “choke points” in chip manufacturing. Choke points are defined as activities for which more than 60 percent of the inputs come from a single source.

For instance, while 40 percent of all chips manufactured in the world are made either by Taiwan Semiconductor Manufacturing Company (TSMC) or United Microelectronics Corporation (UMC) – both Taiwanese companies and 80 percent of the valves that go inside the gas cylinders that are used to make these chips come from a single source based in Luxembourg. The U.S. still is the undisputed leader in research and development.

Covid-19 disruptions and the war in Ukraine have brought out the criticality of chips in everything from space exploration to driving cars. For the first time, the global nature of chip manufacturing has been open to a world order that is no more global.

The centrality of the Indo-Pacific

The US-China confrontation has brought the crucial role of Taiwan in the chip scenario to the surface. It is difficult to believe that the present hawkish stance of China over Taiwan has nothing to do with chips.

The environmental impact notwithstanding, suppliers and sources that are spread all over the world converge at foundries that are optimized for costs and efficiency. Differently put, a globalized world and the set-up of the chip industry feed into one another.

Chip nationalism is a bold but uncharted attempt to turn the industry into a geopolitical tool in the hope of nudging participants to choose between a US-led and China-led coalition and everyone in between.

Even China and the US may not have the answer to what will it cost to pull this off and whether they will succeed. China, for instance, has allocated $220 billion in public and private capital to the effort but with underwhelming results.

Opportunity for India

Chip nationalism is a silent war that everyone is pursuing but no one will win because a stable globalized world of trade is an essential pre-condition for the chip industry, argues a recent Nikkei Asia article.

The second question pertains to the demand trajectory for chips going forward. Analysts who track the industry have begun to assign single-digit growth for the industry as the new normal in the foreseeable future. In this context, the plans of the significant chip powers may well turn out to be instances of chasing a shrinking pie.

Both these questions pose a crucial question for India: should it pursue chip manufacturing by rolling out incentives or is there a smarter alternative to this global game that everyone else seems to be rushing into blindfolded? If with $220 billion China is still figuring out the answer and another $100 billion of war chest is waiting to be deployed between the EU and the US, what makes India’s $10 billion stand out in a maturing industry?

India’s interest will be better served if it re-evaluates its role in the semiconductor value chain and picks areas that emphasize its strengths such as chip design and testing or as a supplier of critical components and raw materials such as fluoropolymers. It could also reorient public sector companies such as National Aluminium Company Ltd (NALCO) for rare earth coalitions and explorations.

Going strong on positions of strength will not only give India the necessary leverage but also ease the pressure on the government to offer incentives that carry a high opportunity cost.

The Way Forward

The assumption that Indian foundries will entice component and raw material sources to set up shop here, as happened in the case of auto components, may be misplaced. Any country or source that is a critical player in the chip value chain intends to hold on to its advantage or further consolidate it for leverage. Moreover, major powers like the US will use all their tools to entice such monopolistic sources in the hope of creating consortiums and supplier blocs.

India’s interest will be better served if she picks areas that emphasize its strengths such as chip design and testing or as a supplier of critical components.

India’s current plan to in-source foundries relies on a simplistic calculation of the balance of trade, which it intends to pursue in isolation, or at least that is what can be inferred from the limited information on the subject available in the public domain.

Chip manufacturing in the new world order is unlike garment manufacturing, which can be encouraged through incentives alone. Moreover, the opportunity cost for India to invest $10 billion through subsidies in foundries over investments in healthcare, jobs, education, and climate resilience is immense.

Is India ready to plug and play?

The US-led Minerals and Security Partnership (MSP) includes Australia, Canada, Finland, France, Germany, Japan, South Korea, Sweden, the UK, and the EU but not India. The government of India has expressed its concern about being left out, but this post-facto reaction to such an important announcement shows that the country is still figuring out the rules of this game.

Should India sit at this high stake table in which the other parties are far ahead on human development indicators and are ready to play it blind for the foreseeable future?

It will take at least a decade before we can conclusively establish the success or failure of India’s push into chip manufacturing. At this time, we also do not know even how to define success. India’s plan looks underwhelming any which way we look at it.

(Courtesy: The India Forum)

Ankur Bisen is a senior partner with Technopak Advisors, and the author of ‘Wasted: The Messy Story of Sanitation in India, A Manifesto for Change’. Twitter: @AnkurBisen1

Disclaimer: The views expressed are not necessarily those of The South Asian Times 

Images courtesy of (Image Courtesy: BBC) and Provided

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