Can India overcome chip crisis?

The semiconductor industry fears the raging Russian-Ukrainian conflict will trigger yet another global chip supply crisis. Semi-conductors are also known as chips or processors, are vital for industries ranging from automobiles, electronics and mobile phones, medical devices to heavy industries including steel. The industry found itself in a quandary when microchip shortages first shut down automotive production lines in 2021. The global semiconductor shortage has affected many industries since the Covid pandemic hit in 2020 and because of that, they are either forced to pay more for products or being asked to wait a little more -waiting period of cars delivery were 3 to 9 months. Companies reported huge losses that run into billions of dollars. Apple lost $6 billion in the fourth quarter owing to chip shortages last year. Since orders for advanced chips are placed well in advance, manufacturers have not yet been able to come back to pre-pandemic production schedules to cater to all sectors.

The consumption of microchips in products is ever-increasing and the impact of disruption in the supply chains have a cascading effect on the economy. A confluence of problems led to the semiconductor shortage. Chip hoarding by Chinese firms, logjams at ports and poor inventory planning by companies have also worsened the semiconductor shortage. When some high-tech and consumer-electronics companies began to experience chip shortages and voiced concerns about supply chains, the attention intensified. It's now clear to all - we are living in a semiconductor world.

What led to the current dilemma? And what lies ahead for the semiconductor sector and the significant economic value that it generates particularly for India?

Russia-Ukraine war

At present, Russia and Ukraine supply a large amount of neon gas and palladium, which are used in the production of semiconductors such as memory chips. Japanese media reports the situation in Ukraine may affect semiconductor production, which is regarded as "the rice of the industry". The two countries account for a small proportion of global chip semiconductor production, but a large proportion of raw materials.

The Philadelphia Semiconductor Index (SOX) fell 1.3 per cent on February 28, reflecting the market's rising concerns about the future supply stability of the global chip industry. Ukraine's global supply share of neon (Ne) reached 70 per cent while Russia accounts for about 40 per cent of global palladium supply, according to a report released by market research firm Techcet in February. The US gets 90 per cent of it neon gas supply from Ukraine. Therefore, the situation in Russia and Ukraine may have an impact on the industrial chain, which will increase manufacturing costs.

Chip crisis playing out in geopolitics

The global chip crisis amidst the ongoing Russia-Ukraine war and geopolitical tensions with China have shifted focus back on semiconductors. The global supply chain, which is currently heavily dependent on China, will see a major churn in the post-pandemic world, with businesses shifting their dependencies to other countries. The US, which was once a leader in chip manufacturing, wants its position back. The US is looking to bring manufacturing back to America and reduce its dependency on a handful of chipmakers mostly concentrated in Taiwan and South Korea. China's renewed aggression on Taiwan is also being seen in the light of the chip crisis.

Semiconductor manufacturing is now dominated by TSMC (Taiwan Semiconductor Manufacturing Company) in Taiwan and Samsung Electronics in South Korea. Big brands like Apple and Qualcomm design their own chips but outsource them to companies like TSMC, the world's largest contract manufacturer for chips. Companies like Intel design and manufacture their own chips too outsourcing some manufacturing to TSMC. Intel now plans to spend $20 billion to build two new chip factories in Chandler, Arizona. These new fabrication plants (Fabs) will also manufacture chips designed by Amazon, Qualcomm, and other customers. The United States and Japan have recently announced sanctions against Russia, restricting the export of chip technology products to Russia. Under this circumstance, the industry is worried that Russia is likely to cut off the supply of raw materials when it takes countermeasures, exacerbating global and regional chip tensions.

Indian scenario

The US, China, Taiwan, South Korea and Japan account for nearly all of the semiconductor fabrication in the world while India draws nil in terms of manufacturing and fabrication. Although, India has capability in chip designing but not in manufacturing. According to government data, India imports 100 per cent of its chip demands. China is one of the key exporters of semiconductors to India. The shortage of semiconductors led to the closure or lowering of production by several firms from diverse industries said the Economic Survey for 2021-22. Due to the global chip shortage, Mukesh Ambani's Reliance Industries Ltd had to delay its much-anticipated launch of a smartphone in partnership with Google.

India's microchip demand stands at around $24 billion (Rs 1.8 lakh crore) and is expected to reach $100 billion (Rs 7.5 lakh crore) by 2025, according to a Bloomberg report. The global shortage of semiconductors will continue to hit its sagging economy in the current financial year.

What India is doing for chip shortage?

Amid the shortage, there is talk of how India should brace up to the crisis and look at ways to manufacture and fabricate microchips on a large scale here. India is one of the largest semiconductor chip design centres working on cutting-edge technologies. Chip manufacturing, however, is an extremely difficult task - of the 200-odd countries, only a handful have the manufacturing capabilities at a high level. It is a highly capital-intensive needs a multi-billion-dollar investment into the fabrication units.

Past initiatives to set up chip manufacturing units in the country never took off due to lack of long-term vision, lack of government incentives, and poor planning. Now the government appears keen to promote the manufacturing and fabrication of chips in the country and has even proposed tax incentives for those who set up state-of-the-art fabs in India.

In December 2021, India has rolled out a production-linked incentive (PLI) scheme worth over $10 billion (around Rs. 76,000 crores) to attract global chipmakers to set up fabrication plants in the country. The government expects investments of around Rs 1.7 lakh crore and 1.35 lakh jobs to be created in the next four years under the incentive scheme for semiconductors.

India's forays into chip manufacturing

As of now, the ISRO has a fab foundry in Chandigarh and the DRDO has one too in Bengaluru. The Tata Group is looking to enter semiconductor manufacturing and has set up a business to seize the opportunity. The US-based memory chipmaker Micron Technologies has announced that it will set up a Centre of Excellence in memory and storage systems in India. Micron is a major supplier to Apple.The announcement of Vedanta- Foxconn JV last month to manufacture semiconductors in India will significantly boost the manufacturing of electronic goods in the country. The Taiwan-based Hon Hai Technology Group, also known as Foxconn would invest $118.7 million (Rs 899 crore) and hold 40 per cent of the venture's shares. Foxconn is the world's largest contract electronics manufacturer and a major supplier to iPhone maker Apple. The move to set up a joint venture between India and Taipei could spark fresh tensions with China, which claims the island country as its own. Ministry of Electronics and Information Technology (MEITY) is eyeing investments of Rs 90,000 crore in semiconductors fabrication in India, however, it says production will be possible only after 2 years. Meanwhile, government is in talks with chip suppliers to address the shortage issue, some companies have been eyeing overseas acquisitions as well.

(Author is a journalist who writes on defence, strategic affairs and technology)