US to reboot India’s chip ambitions, will help plug-in to global alliances

From a domestic perspective, this could also prompt a potential realignment of India’s current policy approach on chip manufacturing: which is currently focused, almost entirely, on the manufacture of mature nodes – generally defined as chips that are 40 nanometres (nm) or above and find application in sectors such as the automotive industry – before trying to attempt an entry into the more advanced nodes (smaller than 40nm), which are far more strategic, but require exceptional manufacturing capabilities and project execution skills. This comes at a time when there is already a debate in policy circles in New Delhi on whether to focus India efforts purely on design capabilities part of chip manufacturing, or to mark a full fledged entry into the foundry business (factories that process inputs and actually manufacture chips).

Red lines

But there are also some likely red lines. The US has initiated discussions with India on aligning export controls and a new trade dialogue focused on these issues has been launched with the US Department of Commerce’s Bureau of Industry and Security from Washington’s side. Compliance with labour and other standards are also likely to be part of the commercial and strategic deals, especially in light of India’s continued import of Russian oil. The G-7 countries led by the US, Australia and the European Union had slapped price caps on Russian oil products to restrict Moscow’s access to a potential funding source for its war on Ukraine, while still maintaining an incentive for the country to supply oil to the global market.

As against greater engagement on the Indo-Pacific economic framework and strategic objectives such as manufacturing of chips etc, the trade-off for countries such as India could involve signing up on government-to-government level agreements on labour standards, environmental benchmarks and anti-corruption yardsticks etc. Apart from the Russian oil issue, there could also be a nudge for New Delhi to join the trade pillar of the IPEF, given that, from Washington’s perspective, the political appetite for a full-scale free trade agreement with India is simply not there in the US Congress level at this point in time and that the IPEF is being pushed by Washington as a more practical substitute for any bilateral deals. Incidentally, New Delhi had opted out of the trade pillar of the IPEF citing reservations about commitments required on environment, labour, digital trade, public procurement etc.

Closed loop

But the reason why India is keen on greater collaboration shepherded by the US is the way the global semiconductor chip industry works, dominated almost entirely by some countries and, in turn, a handful of companies. For instance, two nations – Taiwan and South Korea – make up about 80 per cent of the global foundry base for chips. TSMC, the world’s most advanced chipmaker, is headquartered in Taiwan, while only a handful of companies – Samsung, SK Hynix, Intel and Micron – can put together advanced logic chips, and US’ Nvidia dominates the chips used in the high-end graphics-based applications. One firm in the world – the Netherlands based ASML – has the capability to produce a type of machine called an EUV (extreme ultraviolet lithography) device, without which making an advanced chip is simply not possible. So much so that when US President Joe Biden was in the Netherlands in January, he asked the Dutch government to block exports from ASML to China as part of the efforts by the US to cut off Beijing’s ability to make advanced semiconductors, according to a Reuters report. Cambridge-based chip designer Arm is the world’s biggest supplier of chip design elements used in products from smartphones to games consoles, and considered so strategic that regulators blocked a $40billion takeover of the Softbank-backed British company by the Nvidia over competition concerns last year. It’s a nearly closed manufacturing ecosystem with very high entry barriers, as China’s SMIC, a national semiconductor champion that is now reportedly struggling to procure advanced chip making equipment after a US-led blockade, is finding out.

Currently, foundries in Taiwan account for over 70 per cent of the chips that mobile devices made in India utilise, according to industry estimates by the Indian Cellular and Electronics Association. India expects its semiconductor market will reach $63 billion by 2026, compared with $15 billion in 2020. A small beginning, with the country’s first semiconductor chip manufacturer Polymatech starting production of its Opto-semiconductors and memory modules at Kancheepuram, Tamil Nadu.

In response to the government’s incentive scheme, a joint venture comprising Vedanta and Taiwanese electronics contract manufacturer Foxconn signed a Memorandum of Understanding with the Gujarat government in September to set up a semiconductor and display manufacturing unit, but the venture is reported to be struggling to raise funds for the project. ISMC, a joint venture between Abu Dhabi-based Next Orbit Ventures and Israel’s Tower Semiconductor, has proposed a 65-nanometer analog semiconductor fabrication unit.