By Oorja Tapan and Pooja Arora
Semiconductor executives have gathered in Gandhinagar, Gujarat at SemiconIndia 2023 where India is making considerable efforts to pitch its comparative advantages to the industry as a reliable partner in the semiconductor supply chain. China has threatened to impose export curbs on key chip manufacturing material. Meanwhile, American, and Chinese chipmakers are urging their respective securocrats to enhance communication between the two sides to ensure that the global supply chains for semiconductors are not threatened. The confrontation between the US and China is shaping the supply chains of chip manufacturing across the world. In recent years, the two geostrategic rivals have announced trade embargoes and policies that threaten the global supply of this critical component that is the foundation of modern-day electronic devices.
The COVID pandemic elucidated the need for recalibration of the fragmented supply chains with world leaders calling for decoupling from China through the ‘China plus One’ strategy. Semiconductors have emerged as strategic commodities. At the base of the buzzwords of the twenty-first century, including artificial intelligence and the fourth industrial revolution, lie critical hardware components that employ semiconductors in their manufacturing processes. Integrated circuits, transistors, diodes, microprocessors, memory chips, sensors, solar cells, and display technology utilize semiconductors as base material. Since most technologies associated with Industry 4.0 are dual use technologies, i.e., have civilian and military uses, countries are eager to de-risk from China, protect intellectual property, research, and establish reliable supply chains using strategies of reshoring and friend shoring.
A semiconductor supply chain encompasses all the stages and processes involved in the design, manufacturing, and distribution of semiconductor products which are then employed by the end users to further manufacture electronic components such as smartphones, computers, automotive systems, industrial equipment, and more. It is a highly globalized industry spanning across the world where countries have attained specialization in various stages of semiconductor manufacturing.These are currently concentrated in countries such as Taiwan, China, US, South Korea, Germany, and Japan where rising geopolitical tensions and weaponization of trade has weakened global supply chains for electronics.
The Chinese security establishment is worried about China’s technological security due its dependence on American companies like Intel and Nvidia. The technology employed by Chinese tech giants (including its surveillance technology) depends enormously on foreign hardware for core technologies of computing, an industry led by the firms from the US or its allies in chip production and design. Taiwan has become even more strategically essential for China due to its dominance of integrated circuit chips’ exports. China has been investing in the mining of rare earth ores consisting of elements like neodymium, cerium, terbium etc. since the 1970s and has today monopolized around 70% of the mine production of rare earths. With recent Chinese export restrictions on critical minerals like gallium and germanium (both crucial for computer chips, iPhones, electric vehicles, turbines etc.) for national security interests, inflationary threats loom over the chip making supply chains.
The chip-geoeconomics not only adds to geopolitical strains between key producers/exporters but also highlights rising tensions over cybersecurity and ecological issues associated with mining of rare earth metals wherein such metals are the cornerstone of semiconductor industry. Fair, resilient and sustainable chip supply chains are needed at the global level with multilateral institutions and minilateral arrangements pining for the same. A specialized multilateral body for international monitoring of fair chip trade might not really sound as farfetched in future as it sounds today!
Meanwhile, India is pitching itself as a reliable destination for semiconductor and electronics manufacturing and may emerge as a net winner as the world de-risks supply chains from China. In 2021, the government announced plans to allocate 760 billion Indian Rupees (approximately $9.24 billion) to bolster domestic production in the semiconductor and liquid-crystal display sectors, aiming to drive further economic development. During his address to a joint session of the U.S. Congress last month, Indian Prime Minister Narendra Modi emphasized that collaboration between India and the U.S. in the fields of semiconductors and critical minerals contributes to enhancing the diversity, resilience, and reliability of global supply chains. India’s attractiveness as an investment destination for semiconductor supply chains stems not only from geopolitical factors, but also, economic factors.
India has partnered with like-minded nations in trilaterals like India-Japan-Australia, now known as the Supply Chain Resilient Initiative(SCRI). India has also become a member of the US-led Indo-Pacific Economic Framework (IPEF) formed last year and is eager to follow the “China plus one” diversification model. India has made ‘chipmaking’ a national priority under Atmanirbhar Bharat policies and partnering with American and Japanese companies in recent deals. Despite the Taiwanese firm Foxconn’s split with Vedanta, it is committed to chipmaking in India. India has many potential partners in Asia like South Korea, Vietnam etc. to ensure reliable supply chains in semiconductor manufacturing.
India is one of the world’s fastest-growing economies possessing a large demographic dividend, trained human capital, a burgeoning middle class, and an increasing inclination towards trade and investment. India’s manufacturing sectors, including automotives, pharmaceuticals, and electronics assembly, have already attained a high level of sophistication, positioning them as strong contenders in this competitive race for global investments. India must aim at participating in the semiconductor supply chain in a strategic manner.
India must orient its industrial policy for the electronics supply chain to encourage mergers and acquisitions with MNCs that can offer specialization and technology transfer. Foreign investment into the country should be strategically oriented towards export to embed India into the global supply chain for electronics manufacturing in general and semiconductors, in particular. It would be prudent to participate in regional trade agreements and increase investments in South Asia and ASEAN nations in a strategic manner to capture existing and emerging policy benefits in these countries for electronics manufacturing.
Strategic commodities like semiconductors are the building blocks of the ensuing Industrial Revolution 4.0. A scramble for chips should not mirror the wars fought over oil in the past decades. Dual use technologies have historically been subject to international control, regulation, and/or monitoring. Regardless of the economic salience of the ‘China Plus One’ strategy, India must seize this opportunity to embed itself in the global supply chains for strategic technologies of the fourth industrial revolution.
Authors are Ph.D. Scholars, Jawaharlal Nehru University.
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