Integrated circuit (IC), colloquially referred to as a “chip” or “semiconductor”, is the building block of the diverse, ubiquitous electronics, information & communication, and critical technologies such as smartphones, medical devices, Artificial Intelligence (AI), quantum computing, space and satellite technology, atomic energy and telecommunications. This sector is an innovation-intensive industry that has engendered the fourth-industrial revolution capable of fusing human imagination within the anatomy of a machine. The semiconductors are globally the fourth-most traded product after crude, refined oil and automobiles (Varas et al., 2021, p.4). In fact, over a trillion chips worth US $1.8 trillion were traded in 2018 (Semiconductor Industry Association, 2020, p.2). The innovation and production of scale in this industry are undergirded by diversified supply chains where different regions have acquired specialisation across multiple verticals. The most critical node of this supply chain is the island country of Chinese Taipei (Taiwan). Taiwan dominates the front-end manufacturing i.e., fabrication of wafers (the most capital-intensive) part of the supply chain, accounting for 65 percent of the global wafer production which includes 92 percent of the advanced version. According to a report by America’s Semiconductors Industry Association (SIA), Taiwan (<10nm) and Taiwan, Mainland China and South Korea (<=10nm) account for 65 percent and above of global share in the respective facet of front-end manufacturing 1. The troika of Taiwan, Mainland China and South Korea also account for 65 percent and above of the global share in Outsourced Assembly, Packaging and Testing (OSAT) (Varas et al., 2021, p.39).
According to World Semiconductor Trade Statistics (WSTS), India doesn’t impress in the semiconductor industry, accounting for only a percent of its global trade and 0.5 percent of its sales (SIA, APCO Worldwide, p.4). Indians dominate in the space of chip design as the country accounts for 20 percent of the human resource employed in this vertical (SIA, APCO Worldwide, p.5). India has the and has the necessary technical institutions such as engineering schools and research institutions to nurture this resource. The said country is also home to design and Research and Development (R&D) centres of almost all the top 25 global semiconductor design firms (PIB, 2022). However, the fabrication and OSAT facilities in the country are surprisingly low for a country which consumed, as per industry estimates, Rs. 1.1 lakh crore worth of chips in 2020 (TOI, 2022).
The Government of India’s mission to industrialise the country by transforming it into a major manufacturing centre has provided a much necessary impetus to large-scale electronics manufacturing. As per the data released by the ministry of electronics and IT (MEITy), there has been a jump in electronics exports from Rs. 39,978 crore in 2016-17 to Rs. 1,09,797 crore in 2021-22 and is projected at Rs. 1.79 lakh crore for FY 2022-2023 (IANS, 2023). A majority of the abovementioned Rs. 1.1 lakh crore worth of chips consumed by India in 2020 was imported. Annual chips imported by the country exponentially increased by 218 percent from US $1.5-2 billion in 2014-17 to US $8 billion in 2018, as per U.N. Comtrade Database (SIA, APCO Worldwide, p.4). India imported chips worth US $12 billion in 2021 (ibid). The government’s target to achieve US $300 billion in domestic electronics production hence will be realised only via chips imported from east Asia, especially China and Taiwan. However, the region is unravelling as a geopolitical hotspot, much to the prospective detriment of the supply chains.
Even though the global chips industry may have leveraged favourable regional (east Asia) attributes to amplify its innovation capabilities and production capacity, this has created a reciprocal relationship between regional political stability juxtaposed to the critical security of these supply chains. Tensions between Mainland China and the U.S. are deteriorating, but as Washington D.C. leverages its technological and economic heft to deny China access to technology in critical sectors such as the semiconductor industry, a bilateral trade and technological war has ensued which has the potential to reinforce the other pressure points of the relations, especially the sovereign status of Chinese Taipei (Taiwan) (Nellis, Freifeld and Alper, 2022).
The abovementioned trade and technological restrictions, hence, is an extension of (and a source of intensification of) rising military tensions in the South China Sea (SCS) as the U.S. and its regional allies (Japan and South Korea (to an extent) seek to “contain” Beijing’s power projection within the First Island Chain. The undeniable economic and military emancipation of China may pivot the international order towards multipolarity with the U.S. seeking to preclude the same via active as well as passive confrontations with Beijing on issues such as freedom of navigation in the SCS, One-China Policy, trade deficit, Beijing’s claims to maritime territories across the southeast & east Asian region, etc., via a blend of bilateral (fortifying strategic relations with Japan, South Korea and Philippines) and multilateral (APEC, Quad, ASEAN) diplomatic thrust, economic coercion (via technology war in telecommunication and semiconductor sectors) and military power projection (joint cross-service exercises) in the region.
The bilateral tensions are shaping into a contour of neo-Cold War and one of its critical facets is the above mentioned sovereign status of Chinese Taipei (Taiwan). As Beijing asserts sovereignty over Taiwan in tandem with its One-China Policy, it has sought to counter any challenge to the said policy via aggressive diplomatic and military posturing. After a meeting in early April 2023 between Taiwanese President Tsai Ing-wen and U.S. House Speaker Kevin MacCarthy, China retaliated by sending warships and fighter jets as well as announcing a three-day “combat readiness patrols” signalling a stern warning to any attempts at secession by the self-ruled island (Elbeshbishi, 2023). Such a military posture is similar to the one assumed in August 2022 when the then House Speaker Nancy Pelosi visited Taiwan and China fired missiles near the island country as part of retaliatory military exercises that had disrupted airlines and shipping routes. On the question of the Chinese invasion of Taiwan as a means to unification, different actors have offered different analyses. While Taiwanese Foreign Minister Joseph Wu has argued that Beijing is “more likely” to invade the
autonomously-ruled island and that the attack may materialise by 2027, CIA chief Willian Burns has said that Chinese President Xi Jinping “and his military leadership have doubts today about whether they could accomplish that invasion” (Smith, 2023) (VOA, 2023).
The tail spinning of military stability in east Asia owing to security uncertainties abound in the region has raised the risk of semiconductor supply chain disruption. The toughening military positions of all the regional actors including the increasing Japanese stakes in maintaining the political status quo of Taiwan and burgeoning Taiwan-U.S. military ties have rendered the region into a geopolitical hotspot with all the stakeholders steadily climbing up the escalation ladder (Blanchard, 2023). Given that “almost 75% of the global installed capacity is concentrated in East Asia (Japan, South Korea and Taiwan)”, unforeseen hostile military actions such as (temporary) naval blockades or an outright regional war in/near the Taiwan Strait will render devastating (and possibly irreparable) damage to global semiconductor supply chains (Varas et al., 2021, p.40). In 2021, the losses to the global automobile industry alone due to chip shortage rendered by the COVID pandemic were projected around US $110 billion in revenue (Wayland, 2021). Even though the probability of such actions and aggressions is low given China’s dependence on Taiwanese companies for fabrication and OSAT facilities, stress-testing the chains by concerned Indian policymakers and institutions makes the vulnerabilities, especially for an ambitiously industrialising country like ours, apparent. A thorough evaluation of resilience of the supply chain is critical from a national security perspective as even natural disasters have historically had a significant impact on global supply chains. The significance of the impact of natural disasters was apparent from the 2011 dual calamities of an earthquake followed by a tsunami in Japan which had affected 25 percent of global wafer fabrication capacity and 75 percent of supply of hydrogen peroxide (H2O2, used for cleaning and etching of wafers) and had halted operations is several fabs for months (Varas et al., 2021, p.40). India too had felt the impact of this disruption in the automobile and electronics sector, revealing an old yet unlearnt lesson of importance of resilient domestic supply chains across various segments of value addition (Chauhan et al., 2011).
India’s semiconductor dependency flow towards the east Asian region and the only way to de-risk or dilute such overwhelming reliance is through domestic policies to attract the supply chains into the country. It was in this context that the Indian government in 2021 launched the PLI scheme worth Rs. 76000 crore to spur the establishment of a domestic chip manufacturing ecosystem. It is important to note that such central policies must be complemented with active government support at the state and municipal level as well. The Government of Gujarat’s state semiconductor policy, which augments the incentives provided by the central government, is a step in the right direction to achieve a necessary growth spur. Given that India already dominates the design segment of the supply chain, government and private players must actively engage with foreign companies specialising in quickly achievable targets of creating OSAT facilities in the country. The Assembly, Testing and Packaging unit, also known as the back-end manufacturing, is less capital-intensive (specialised firms invest >15 percent of annual revenues in facilities and equipment; consumes 13 percent of capital expenditure) and more labour-intensive (Varas et al., 2021, p.19). This segment of the supply chain seeks pastures offering low labour costs and India offers a competitive workforce (at $0.8/hour) along with favourable demographic dividend for employment as well as rapidly growing consumption economy (Business Standard, 2022) (Das Gupta, 2022).
India also must leverage bilateral initiatives, such as the India-U.S. iCET (initiative on Critical and Emerging Technology) to boost a resilient domestic chip ecosystem through the development of a skilled workforce, transfer of knowledge and transfer of technology by capitalising on the “China+1” global motivation. India is also on the cusp of leveraging the Australia-India Economic Cooperation and Trade Agreement (ECTA) and deepening the bilateral Critical Minerals Investment Partnership to secure the supply of raw materials necessary for the front-end and back-end manufacturing, hence further diluting dependency on east Asia. We must also encourage Taiwanese companies to diversify their supply chains, specialising in the OSAT segment, via policies akin to those which have aided the expansion of manufacturing/assembly of iPhones across the country.
Of the four strategic sectors recognised by the Indian government, two of them i.e., atomic energy, Space and Defence; and Transport and Telecommunications stands directly to benefit the country’s push for indigenisation of supply chains. The resultant amplification of hard and soft power will render the country an independent pole of power in the evolving multipolar world order. This will not only provide a crucial technological impetus to her ambitions for industrialisation in the manufacturing and services sector but also propel the country as a viable pole of power to which other countries can anchor their economic ambitions. In the earnest quest for Atmanirbharta, the effective economic and policy incentives, in partnership with the private sector, in R&D across various segments will render a virtuous cycle of disruptive innovation and investment, fortifying India as a major power in critical technologies.