The global semiconductor industry
has become the arena for the most bitter technology battle between the US and China. Taiwanese semiconductor players are caught squarely in the middle. Indeed, many observers feel that China’s recent aggression to assert sovereignty over Taiwan is guided partially by its need to secure cutting edge chip fabrication facilities. The ripples of this war are being felt in Europe, Japan and South Korea. The Indian government, unfortunately, has largely ignored what is going on, though it affects every country that hopes to be a strong manufacturing and digital innovation hub.
Chips are at the heart of every product and device — from automobiles to aircraft, and from motor cars to mobile phones — and this is only going to increase in the coming years. Media attention in India has largely focused on chip shortage that has disrupted manufacturing in the automobile and other sectors. But the shortage in manufacturing industries is really not the primary cause of concern — the real motive is to secure access in advance to the latest and most powerful chips while denying it to the other party. This, in turn, will determine the winner in technologies as different as artificial intelligence, cryptocurrency, NFT mining, 5G and others.
The chip industry is divided largely into players who design and fabricate their own chips; those who only design chips; and those who only fabricate chips. Companies like Intel fall in the first category while Qualcomm and Nvidia are good examples of fab-less design firms. Taiwanese TSMC is a great example of a chip fabricator which does not design its own chips but manufactures them for everyone from Apple to Huawei.
The US used to dominate both design and fabrication but over the years its dependence on fabrication firms outside the country has increased sharply. Now it is offering billions in incentives to ensure that latest generation chip fabrication facilities are set up within its borders. Europe and Japan have also fallen behind in chip fabrication but are scrambling to attract “fab” firms to protect themselves from being collateral damage. South Korean companies like Samsung and SK Hynix have excellent chip fab facilities but are caught in the middle as they have big clients in both the US and China.
China’s problem is that it lags behind the US in design and behind Taiwan, South Korea and the US when it comes to the latest generation of fabs. With the US determined to deny China access to the latest in both chip design and fabrication, it is now spending billions to become self-reliant. But building domestic capacity could take years and that is the context in which its sabre-rattling against Taiwan should be seen.
Since 2018, the US has moved systematically to prevent China from accessing the latest chips and chip technologies. It first barred any company from sharing US chips with Huawei or any company using US tech in chip manufacturing from doing business with the Chinese company. Since then, the restrictions have increased — with the US denying tech to SMIC and also preventing China from buying the cutting edge chip production machinery made by ASML of the Netherlands that are crucial for anyone setting up a new generation fab facility. ASML is the only company that manufactures these machines.
The big issue for both Taiwanese and South Korean fab companies is that the US sanctions dramatically reduce their ability to service demand from their Chinese customers. And the Chinese firms constitute a big chunk of their revenues.
The US meanwhile is giving huge incentives to bring domestic capacities to speed. Intel is building a fab foundry in Arizona capable of producing the most sophisticated chips. TSMC is also putting up a latest generation plant there. Arizona is emerging as a big chip hub.
TSMC is also looking at Japan to set up a fab to ensure that it still has foundries pumping out chips if China gets more aggressive on Taiwan. Japan, which used to be a leader in design and foundry in the 1980s before it let go of the industry, is now allocating money to catch up.
The consequences of this global play could be more chip shortages in the next few years. It could also drive up chip prices — because manufacturing in the US, EU or Japan is far more expensive than doing so in Taiwan or China.
India has so far not managed to attract any player into setting up a new generation fab foundry in the country, though it has been trying. The main problem has been that fabs require enormous investments running into billions, stable electricity and lots of water. India has often been evaluated and then rejected as a suitable destination by international fab players. One option for it is to invest in existing fab companies in the US and South Korea. Another could be long-term contracts with fab foundries outside of Taiwan. It complicates the game. But it is a necessity for India if it has ambitions of becoming a big global hub for manufacturing and technology innovation in the future.
The writer is former editor of Business Today and Businessworld and founder and editor of Prosaicview, an editorial consultancy
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