The India-US Semiconductor Collaboration and its Possible Outcome

US wants to expand its partnerships on building semiconductors with like-minded countries like India and Taiwan. It has pledged to assist India in the building of this sector. India is expecting to bring in a total investment of around $25 billion as a result of its incentive scheme, which will aim at boosting the local manufacturing of semiconductors. The goal is to make India a major player in the global supply chain.

How does India’s political class, industry and the scientific community look at this collaboration? The Indian National Congress feels that the MoU signed between industry representatives of US and India looks like a step in the right direction, but falls short to deliver anything of substance. 

Critics of the collaboration in India state that in the last 7-8 years India seems to be lost in the global market. It is just attempting to mimic the West without understanding the difference in complexities between the West and India. India has not been able to commit the needed capital to such a complex and capital intensive industry. In 2019, India’s semiconductor imports were at $21 billion and this grows at 15% every year. “This Government might have big ambitions, however it does not have the competence to fulfill them,” says Pawan Khera, national spokesperson of the Indian National Congress.

Khera adds: “On the face of it this deal seems to be more of a geopolitical game rather than a trade deal.” The opposition feels that the US just wants to undercut the Chinese dominance on semiconductor manufacturing and is luring India to play the role of a regional proxy in this game. India has unwisely agreed to a deal that offers them nothing other than assurances. The right way for India to emerge as a global supplier of semi conductors is to strengthen its own industry. “We must assist, protect and preserve our semiconductor industry,” concludes  Khera.

While it is true that the US has always focused on developing its own industry, India must not lose focus while dealing with big players. India’s political opposition points out that the country must focus on building an independent industry of its own rather than being a junior partner in insubstantial MoUs and one sided deals. They believe that if India allows this deal to go forward, it will cause a major breakdown in its own semi conductor industry which will have a major repercussion for the country’s MSME sector.

However, the Indian industry looks optimistic about the US-India deal. Sunil G. Acharya, Vice President at India Electronics & Semiconductor Association (IESA) says that most American Semiconductor Majors including Intel, TI, Micron, and others already have a good presence in India. The Indian units of these majors are involved in semiconductor design & validation and other support services.  Additionally, there are several established fabless domestic players who offer design services to global companies across industry segments.

The academia of India has some interesting points to make in this regard. Dr. Abhinav Kumar Sharma, PhD (IIT, Bombay) who is a Professor (Operations and Data Science) at NMIMS University, Mumbai feels that there is a lot more to go before the scope and future of this collaboration can be predicted. Sharma says: “India is currently nascent in the semiconductor manufacturing industry. The Government of India is focused on providing impetus to the manufacturing sector through Production Linked Incentives (PLI) scheme. Additionally, the semiconductor-reliant industry has been shaken up recently as a result of strained supply chains in China. The Russia-Ukraine war resulted in an acute shortage of inert gas, which is critical to manufacturing a semiconductor chip. The Indo-US cooperation has a great scope in mitigating the exacerbating problems arising from such volatile global conditions.”

With the war not showing any signs of stopping, the collaboration and its expected output may get adversely affected. Though the American companies have shown India a lot of hope there still seems to be a disparity in what it has signed on paper and assured India of. So, what are the foreseeable results and future prospects? Will the US deliver on its promise? Will India’s semiconductor dreams really soar high as the media has been reporting?

Acharya is highly optimistic about the collaboration and says that when American semiconductor companies incentivized by the CHIPS act look to expand or establish semiconductor manufacturing in the US, there is a good possibility that they will consider expanding their design, R&D and support services footprint in India. This will help overall innovation in the industry.

It is true that many global giants are adopting to ‘China Plus One’ policy to reduce their dependency on China for manufacturing. Consequently, India is becoming one of the key beneficiaries of this policy, particularly in the semiconductor and allied industries. The Indian semiconductor industry has received pledges of multimillion-dollar investments from domestic conglomerates such as Tata Group and Adani. Further, in recent years, world-class academic institutes in India have increased their focus on research in the field of advanced semiconductor technologies. An outcome of this was SHAKTI, an open-source processor developed by IIT Madras.

Having been worth $27.2 billion in 2021, the Indian semiconductor industry is projected to grow to $64 billion by 2026, representing a CAGR of 19%. But none of these chips are manufactured end-to-end in India so far. It is worth pondering upon the humongous possibilities that come up with semiconductor chip manufacturing. So, is it just a matter of time that India sees itself amongst the pantheon of World’s leading Chipmakers? What is the Indian Government doing from its end to further boost this cooperation? Will it be able to make the most out of the opportunity or will the US be dictating all terms in this, as the political opposition is implying?

Chip manufacturing requires a lot of raw material. The supply of these materials is often disrupted and India must focus on making the supply more efficient and smooth. With the Covid-19 outbreak in China handicapping their semiconductor industry, this is India’s chance to be a global player for which it must provide its home grown industry with the needed help, both financially and material wise.

The recent PLI/DLI and Semiconductor Manufacturing incentives rolled out by the Govt. of India offer an opportunity for American companies to expand their capacities in India and also de-risk their supply chains. It also allows American companies to leverage the skilled workforce in India to build capacity and invest in catalyzing Research and Development in the semiconductor and related industries.  “Both the Government of India and the Governments in states have instituted policies to help assist in ease of doing business for American companies,” says Acharya.

Sharma too almost has the same opinion as Acharya. He says: “Historically, the electronic manufacturing sector in India suffered because of a lack of adequate infrastructure, domestic supply chain and logistics, high cost of finance, and limited focus on R&D by corporate. With the Production Linked Incentive scheme (PLI) and national policy on the electronics manufacturing industry, the government is encouraging the industries to develop core components and compete globally. The PLI scheme aims to encourage local manufacturing and make India self-reliant. The Indian government is trying to position India as one of the most appealing destinations in Asia for electronics and semiconductors.”

India seems to be on the right path with its Production Linked Incentive Scheme (PLI), that extends an incentive of 4% to 6% on incremental sales (over base year) of goods produced in India for a period of five years following to the base year. The Design Linked Incentive (DLI) Scheme offers monetary incentives and design infrastructure support across various stages of development & deployment of semiconductor and chip designs for a period of 5 years.

Khera feels that the future is bright if India plays its cards right. “We must not fold under pressure and agree to deals that do more harm than good. The collaboration between US and India makes sense if both are equal players, which is not the case in this deal. India must chose the independent path build its industry make it strong and bullet proof and then we can sit on the table for a deal where the interests of India are furthered along with the United States rather than India being merely fodder for a geopolitical supply chain war.”

Semiconductors are the basic raw material for any kind of growth planning of any industry. If an industry wants to grow today, they need the chips as their fundamental necessity. Without it, nothing is going to run. No major Government programs across the globe are going to run without semiconductors. From that standpoint, even though stocks of majors like Intel and Micron may have dripped in the last quarter, the industry believes that in the longer term there will be a healthy demand for consumer electronics. Acharya foresees a very strong growth point for the semiconductor industry.

Now, with the rapidly changing geopolitical situation we are reminded of the fact that China is a huge consumer of electronics, even though China is seen as a producer. One has to wait and watch as to till when the embargo on higher-end chips continues, and have to see how the demand will turn out.

The Indo-US cooperation cannot be perceived as restrictive to any particular field as such. India is expected to be a hotbed of semiconductor chip industry innovation, which will help advance technologies in many different fields, including construction, logistics, etc. Sharma says that the current logistics cost vis-à-vis the GDP is around 16 per cent in India, which will significantly go down with the improvements expected due to the expansion of this field. The US can be a significant partner for India in ensuring smoother supply chains. This is evident from their current logistics cost as compared to the GDP, which is close to 7.5 per cent. Any economy prospers with efficient supply chains and the industrial development that comes along with it. The bottom line here is that our government has proactively taken steps in the direction that will evidently bring prosperity to our people through development.

The atmosphere looks positive and India is hopeful of building the right supply chains worldwide in the future. Semiconductors are more of a necessity than a mere ambition and the Government looks set to deal with all kinds of challenges that will come in the way. India has made it clear – it wants homegrown semiconductors and discontinue its reliance on other nations for chips.

There have been reports that there may be an acute shortage of raw materials, like Neon and Palladium if the Ukraine-Russia war carries on. How does India plan to deal with it?

Acharya sheds some insightful thought on the issue. “Neon Gas and Palladium Gas comes from Ukraine, it’s a byproduct of steel production. Palladium also comes from Russia predominantly. These materials are used primarily in semiconductor manufacturing and here we don’t manufacture semiconductors, except for what happens at SCL. So, from an Indian perspective, we are not directly impacted by this shortage as we do not consume these chemicals for semiconductor production.”

So, how does this affect the global supply chain with the war going on? Most of the neon gas is generally used for high-end advanced nodes. India claims that they had evaluated this right when the war had begun and this is greatly going to affect countries like the US and Korea who manufacture semiconductors. If the war continues there could be an impact on manufacturing in the long term, and this isn’t just Neon and Palladium. One must note that more than 60% of the raw materials of the world go through China. These materials are chemicals, minerals and gases and the next thing needed is semiconductor manufacturing equipment. In the global scenario, there are only two major producers of equipment – the US and Japan.

India claims to have a core interest group comprising of various leaders who are already focusing on this space, first to see if they can develop a policy to end dependency on China for sourcing. “I think India can play a vital role in the supply of raw materials. It is a long process but we need to start working on it,” adds Acharya.

According to sources, the Indian Government has had meetings with the country’s major steel plants, and is trying to come up with a solution of the shortage of raw materials, though right now, there is no immediate dearth but plans to deal with it are going to be rolled out soon.

The industry looks to be highly satisfied with the way the collaboration is being acted out. The opposition makes some pertinent observations but India is devising ways to deal with any kind of material shortage – if it arises! Also, India wants to build its own raw materials and remain firm on its China-Plus-One strategy. The action has begun and huge investments are being made to become chip reliant. If the US stays true to its promise, India may become a big player in the semiconductor avenue.

[Photo by U.S. Department of Energy, via Rawpexels]

The views and opinions expressed in this article are those of the author.

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