Chipped & vulnerable goi must make public investments to encourage private manufacturing in strategic semiconductor industry

Chipped & vulnerable goi must make public investments to encourage private manufacturing in strategic semiconductor industry

India’s automobile industry is reporting a significant drop in wholesale deliveries due to continuing global shortage in semiconductors. The supply situation isn’t expected to ease any time soon. That’s mainly because chip manufacturing is concentrated in a few countries. There are essentially two types of semiconductor manufacturing companies. Those who design and manufacture on their own like Intel and Samsung, and foundries that contract manufacture chips like the Taiwanese giant TSMC.

The shortage today is the result of a combination of factors that include the advent of 5G technology, growing need for greater computing power, as well as the Covid pandemic that exponentially increased the demand for information communication technology and digital entertainment products. The obvious solution is to increase the narrow base for semiconductor manufacturing. However, establishing foundries is hugely capital intensive and has a gestation period of up to three years. Which is precisely why a race is underway to expand semiconductor manufacturing capacity. In May, South Korea announced a whopping $451 billion investment to become a semiconductor giant while the US Senate in July voted through $52 billion in subsidies for chip plants.

Even China has upped its chip manufacturing game by announcing two schemes – the Made in China 2025 and the National Integrated Circuit Plan – to build a wholly indigenous semiconductor industry. In India, however, policies to promote domestic chip manufacturing have been scattershot. After failing to recognise strategic implications for years, the government in December 2020 invited proposals from companies to set up fabrication facilities. Earlier this year it offered more than $1 billion in cash incentives to each semiconductor company that sets up manufacturing units. But without a clear idea of where India should slot itself in the semiconductor manufacturing chain – where 90% of the value of a chip is split between design and manufacturing – production-linked incentive schemes will help little. GoI should see what the US, China and South Korea are doing – putting serious public money behind chip manufacturing – and frontload substantial investments if it doesn’t want to become a bottom-feeder in this sector.