Semiconductors or more simply chips are the components without which all modern electronic appliances cannot function. It is for this reason they are a strategically important good for those economies which rely on the manufacturing of electrical appliances as an important contributor to their economy. Chips are not just used in consumer goods but are also an essential component of modern warfare. The latest generation of semiconductors require a very high level of expertise which only a very few manufacturers or fabs as they are commonly called can produce. The monopoly of these to a geographical location is a risk to all the stakeholders involved.
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Taiwan Semiconductor Manufacturing Company (TSMC) followed by Samsung Electronics has the monopoly in manufacturing the most high-end chips. TSMC’s fabs are located in Taiwan which is a matter of concern for its clientele as the country is prone to natural disasters like earthquakes and droughts that can impact the manufacturing industry all over the world. Similarly, political tension between China and Taiwan or between China and the United States is seen as a strategic threat to all the major powers. The tension between the Trump administration and China a few years back led to Huawei losing the access to the semiconductors from TSMC for its operations. More recently, the onset of the pandemic has led to chip shortage for the automobile industry as the chip manufacturers were trying to meet the sudden increase in demand for consumer electronics.
The complexity of a semiconductor varies with its size. The 28 and 40 nm chips are used in cars and household devices while CPUs of a computer use a 10 and 14 nm chip. An even smaller 5 nm chip is used in the latest iPhones and by softwares processing big data. Under development are 2 and 3 nm chips which can undertake even more complex computation. To be able to manufacture these needs constant innovation and investment where the margin of profit is low. The construction of a fabrication foundry takes around two years and billions of dollars. It is for this reason a semiconductor is not designed and manufactured by an entity alone. The design and manufacturing of a semiconductor is usually undertaken by a company specialising on one particular aspect of chip manufacturing. A fabless manufacturer like Apple, Qualcomm and NVIDIA are known for designing a chip, the IP and architecture is developed by companies like ARMS and MIPS, the software to design the chips is developed by an Electronic design Automation (EDA) company like Cadence and Synopsys, and finally ASML sells the only machines used to edge the design on the most advanced chips.
The emerging rivalry between China and the United States has highlighted the technological disparity between the west and the rest of the world. The design and the intellectual property of the most advanced semiconductors is owned by the west while the manufacturing presently is based mainly in Taiwan and China.
Governments all over the world have often taken a keen interest in developing the semiconductor industry in their respective countries. Presently, all the major powers are in a race to develop an indigenous semiconductor ecosystem while also encouraging major fab foundries to set up shops in their country to meet the short term demand. TSMC was founded in 1987 by Morris Chang, who was then asked by the Taiwanese government to start a semiconductor company after his 25 years in Texas Instruments. A similar push is being made by China’s Semiconductor Manufacturing International Corporation (SMIC) which is publicly funded, and state owned. China wants to overcome their strategic impediment by investing $1.4 trillion by 2025. But overcoming the technological gap alone cannot be done by investing in R&D and infrastructure. Taiwan is known to have the best engineers when it comes to chip manufacturing. Reports show that China has lured thousands of engineers from Taiwan to build its semiconductor industry. A Taiwanese court has also found some engineers were guilty of selling trade secrets to a Chinese company.
The issue of Chinese intellectual theft is not new as it has progressively gotten worse every year which has impacted the American companies the most. From IP theft to chip shortage, this situation has demanded the Biden Administration to urgently overcome their reliance on chips originating from Taiwan and China. For this it plans to invest $50 billion in its domestic semiconductor industry. Bringing foreign companies like TSMC to set up fab foundries in the United States is the first step. The second step is to incentivise further investments by offering tax credits. Intel which was once the forerunner in both the designing and manufacturing of chips has lagged behind in recent years. It has itself started outsourcing the manufacturing of its chip design to TSMC. Intel is the only manufacturer in the West which can compete against TSMC and Samsung electronics since it takes time, human capital and capital to constantly innovate. It has all three but government support and incentive is necessary in this strategically important sector with high risks and low margins.
The Indian government has also laid down a $10 billion scheme to help create a semiconductor industry which is non-existent as of now. The government has even agreed to bear the 50% cost for two foundries each for semiconductors and displays. The policy aims to support the whole electronic manufacturing ecosystem. The primary beneficiary of the scheme are the domestic manufacturers which the government aims to help become profitable. The government’s policy intends to push for both the production and the indigenisation of design like their Chinese counterpart. The Design Linked Incentive (DLI) scheme seeks to provide financial incentives for the same.
India could use the U.S - China rivalry to its advantage by inviting investments in the country. It could act as an alternative to the foundries in both China and Taiwan and ease any concerns of its partners in the west. Almost 92% of the 5 nm chips are made in Taiwan alone. This will change in the coming years as more foundries come up in Europe and the United States. The global investment in the manufacturing of semiconductors is at an all-time high with 72 fabs coming up all over the world by 2024. The global supply network is most welcoming right now for new players to emerge as the demand for semiconductors is at an all-time high. India cannot miss this opportunity in meeting the global demand before it is fulfilled somewhere else.
(Divy Raghuvanshi is a PhD candidate in Centre for Studies in Strategic Technologies , School of National Security Studies, Central University of Gujarat.)
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