By Harsha Vardhan
Technology is changing our lifestyle across the world from the Silicon Valley in the US to rural villages in India. From Boston to Begusarai, Cupertino to Calicut, Dallas to Delhi, technology has its footprint everywhere. From the smartphones to the space shuttle, from electric scooters to bullet trains – inside each of these, there are tiny pieces of technology that brings it all together and that is the semiconductors.
Semiconductor chips are a vital components in practically every industry. However, the world is facing a chip shortage because of its limited supply. In addition to long-standing issues within the industry, such as insufficient capacity at semiconductor fabs, the Covid-19 pandemic introduced unprecedented challenges. For instance, automakers slowed down their chip orders in early 2020 as vehicle sales dropped. When demand recovered faster than anticipated in the second half of 2020, the semiconductor industry had already shifted production lines to meet the demand for consumer appliances. Some other reasons were the suspension of plant operations in the US for weeks due to the power failures in Texas caused by snowstorms, drought/water crisis in Taiwan, and stockpiling by Chinese companies because of concerns with US foreign policy and relations.
But the current chip shortage is unlikely to be resolved soon, partly because of the complexities of the semiconductor production process. Typical lead times can exceed four months for products that are already well established in a manufacturing line. The end-to-end life cycle spans one to three years. Setting up a manufacturing unit with all infrastructure takes around 12-18 months, followed by a research-intensive product development cycle of another 12-36 months and a repeatable production process of more than four months. A semiconductor chip, in other words, is a function of an efficient manufacturing process, engineering talent and a conducive government policy.
India is ready in just one of the three parameters of chip self-reliance. According to government data, India imports 94 percent of its electronics and 100 percent of its semiconductors. Digital India initiatives seek to fulfil all three parameters with a sense of urgency. The good news is that India is trying to lay a strong foundation of chip design that can be expanded to research and development focus for product development and IP (intellectual property ) creation. There is an opportunity to create a solid manufacturing base, but it can happen only with strong government support for this sector. Taiwan provides a 90 percent subsidy to chip manufacturing, and we will have to travel a long way to achieve a comparable scale.
Crisis in Taiwan Straits and its Implications
The recent visit of US House of Representatives Speaker Nancy Pelosi to Taiwan has created an unprecedented crisis in the region. The Chinese state media called it an “open salvo of war” and the country has reportedly sent over two dozen fighter jets into Taiwan’s air defence zone. The situation is more than just a regular geopolitical escalation; it doesn’t take much to foresee the outcome if the country producing 63 percent of total semiconductors stops producing them. The situation will be grave, and it will take us not years but several decades to recover from it.
According to a Goldman Sachs report, the world chip shortage has already affected 169 industries and we’re not talking about electronics anymore. Industries like steel and concrete production and even soap manufacturing are already affected. Reports suggest that mobile phones are going to get costlier. They already warned that Apple might increase the price of the upcoming iPhone 14 by $100. Prices have been rising across the supply chain, and Apple needs to pass these costs to the consumer on this release.In 2021, only 70 percent of the requested components were made available to mobile phone manufacturers. Counterpoint suggested that companies like Samsung, Oppo and Xiaomi were more affected than Apple.
If this threat comes true, we will see computers, laptops, mobiles, and automobiles getting costlier and harder to get by. People still can’t seem to get their hands on the PS5, a product launched in November 2020! A shortage in chips due to Covid-19 resulted in the Jaguar–Land rover producing around 1.70 lakh fewer cars than expected. While US-based car automobile company General Motors reported 16% of vehicles being unsold due to a global chip shortage.
Time for India to chip in
In every adversity, there’s an opportunity. As the world grapples with an acute semiconductor shortage, there is an opportunity for India to move the needle in the right direction. India has a strong base for semiconductor chip design, a software-intensive area. The Indian government, in December 2021, rolled out an incentive scheme worth Rs 76,000 crore (roughly $10 billion) to attract international semiconductor and display manufacturers in a bid to establish the country as a global chip manufacturing hub. This will go a long way in establishing the country as a global hub for electronics goods, besides creating jobs and attracting investments from top companies around the world.
However, apart from high costs, certain infrastructure requirements are vital. It requires an uninterrupted power supply and access to millions of litres of pure water. India is lacking in these departments. We still experience frequent power cuts and our water supply treatment isn’t up to the mark. Before the global chip shortage, these factors were enough to discourage foreign players from setting up shop in India. Things have started shifting positively and big corporates such as Tata group and Vedanta Have shown interest in moving forward with joint ventures.
Establishing a few successful units is a long-haul game of at least 3 to 5 years. It will work as an accelerator for other sectors and contribute immensely to India’s desired $5 trillion economy target by 2025. It can work on the PPP (public-private-partnership) model. Both state and central governments should come forward to provide infrastructure and long-term incentives, and companies can go for joint ventures with industry experts. Indian industries’ consortium should come forward and incubate a new ecosystem of chip manufacturing. Their commitment to manufacturing and supply chain can help India minimize import dependency and reduce her vulnerability emanating from the potential crisis in the Taiwan straits.
In recent years, the semiconductor industry’s profitability has improved exponentially relative to other companies, and this trend is expected to continue further. From 15th place in 2000-2004, it shot up to 4th place between 2016-2020 in terms of economic profit,as reported by Mckinsey and Company. Here is an opportunity for India to go beyond the software and establish herself as a chip-manufacturing powerhouse.
The author is Vice President of Optum India, a part of UnitedHealth Group, a Fortune Five company headquartered in Minnesota, US. He is a software engineer by profession.
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