The semiconductor crisis has been one of the most severe risks to the global economy for the last year. Now that the crisis has gotten so bad that Apple has lost $6 billion in revenue, Maruti has had to cut 60 per cent of its production, Mahindra has had to cut 20 per cent of its production, and the auto industry has already lost $100 billion in revenue due to chip shortages, India’s economy is once again vulnerable to a massive threat from this crisis.
The question is, how has the semiconductor situation deteriorated to such an extent. What strategy is the Indian government pursuing to become an abortionist in this circumstance, and most importantly, how the Aatma Nirbhar Bharat can turn the semiconductor crisis into an opportunity?
A semiconductor chip is essentially the brain of any electronic device. It is responsible for conducting every small activity in our electronic devices and automobiles.
For instance, in your refrigerator, the temperature is controlled by a semiconductor chip. Hundreds of semiconductors manage everything from keyless entry to the automatic doors and even the engine’s operation in a car. Today, in the digital age in which we live, semiconductors are the most critical components that keep the world running, from mobile phones to the world’s most sizeable servers. They are just as critical, if not more so than the internet itself.
Thus, the question is why there is an unexpected scarcity of semiconductors and their effect on various industries.
The first reason for this shortage is that the industry had already grown at such a quick phase that it was on the verge of running out of raw materials. According to the organisation of the semiconductor industry, over 100 billion integrated circuits are in use daily throughout the world, which is about equal to the number of stars in our small patch of the Milky Way galaxy. This industry is so massive that there is still insufficient supply to meet growing demand even with global leaders such as Intel, NVidia, AMD, and Qualcomm. Therefore, when the pandemic struck, on the one hand, demand for electronic gadgets skyrocketed due to work-from-home opportunities and demand far exceeded supply capacities. This shortage is difficult to recover because manufacturing a microchip typically takes three months and involves giant factories with clean rooms and billion-dollar machines. Moreover, because manufacturing capacity cannot be increased on such short notice, chip wait times are alarming, increasing from 11.8 weeks in September 2019 to 21 weeks in August 2021.
Meanwhile, Statista estimates that the chip sector, already worth 440 billion in 2020, will increase to 550 billion in 2021 and reach 600 billion by early 2022. Because of this dramatic imbalance in supply and demand, businesses from all sectors worldwide have begun experiencing production challenges. The key industries that are feeling the heat are automotive, LED lighting and consumer electronics. While Ford and General Motors have been severely impacted in the United States, in India, as recently as the second quarter of 2022, Maruti could not produce an estimated 1.16 lakh vehicles due to a semiconductor shortage. This is why Maruti’s output was over 60 per cent lower in September, just before India’s festive season. While HP increased the price of its printers by an average of 20% in a single year, Sony announced that it would not be able to meet the demand for its PlayStation 5 console until at least 2022. Similarly, many businesses have been adversely affected by the global semiconductor shortage. This is when many countries, including India, recognise how critical it is to be a member of the semiconductor ecosystem.
Furthermore, it is time for us to reduce our reliance on other countries simply by purchasing semiconductors. Thus, the question is what India’s position in the semiconductor industry is and what the government is doing to mitigate this risk. The unfortunate news is that even though Intel and Samsung have R&D centres in India, we have no significant chip manufacturing capacity. Even looking at India’s semiconductor trade, while we exported 425 million dollars worth of semiconductors in 2020, we imported 10.59 billion dollars worth of semiconductors. With a growing electronics market, our semiconductor imports increased by 100 per cent from 5.2 billion dollars in 2016 to 10.59 billion dollars in 2020.
The frightening part is that almost 40% of our goods come from China, while 26% come from Hong Kong. We are all aware of China’s infamous attempt to seize control of Hong Kong. As with solar wafers and ingots, this puts India at risk of further semiconductor shortages, which might cost us billions of dollars. The question is what India is doing to address the situation and reduce its reliance on China.
The answer to this rests in the quad summit, a leader convened by US President Biden on 24th September 2021 to debate how to address many economic difficulties facing their respective countries, one of which was the world’s semiconductor shortage.
Here is a summary of what transpired at the quad summit so that you are aware of these vital international policies and, more importantly, the role of your country and the contribution of the government you chose. Because chip production is a complex process requiring numerous steps, establishing five divisions for five distinct processes is costly and time-demanding. This is why India, Australia, Japan, and the United States have opted to collaborate to execute only those processes that align with their strengths and delegate the remainder to other countries.
For instance, the United States is the world leader in semiconductor design. American firms also dominate electronic design automation and licenced intellectual property. Japanese firms are world leaders in semiconductor materials and chemicals required to manufacture chips. Japan is also a market leader in silicon wafers and substrates used to manufacture integrated circuits. Australia, similarly, plays a crucial role in the broader electronic supply chain due to its access to critical materials and modern mining skills. Finally, semiconductor design requires many highly trained engineers and labelling, which India brings to the quad peak. Australia, the United States, Japan, and India have joined forces to develop a robust semiconductor supply chain based on their capabilities to reduce their reliance on China, Taiwan, and Hong Kong.
This is where India’s 76 000 crores Production Linked Incentive (PLI) scheme comes into play. The country’s central government intends to develop 20 semiconductor manufacturing facilities over the next two years. The obvious question is how this works. The government has drawn up an appealing incentive package for businesses engaged in silicon semiconductor manufacturing, display manufacturing, compound semiconductor manufacturing, silicon photonics manufacturing, semiconductor packaging, and semiconductor design.
Moreover, due to the PLI, land schemes, semiconductor grade water, power, logistics and research ecosystem, these businesses will be able to establish two Greenfield semiconductor facilities and building solutions (fabs) and two fabs in the country at subsidised rates. The government has also launched the design-linked reward programme and the India semiconductor mission. These new initiatives are intended to contribute to the trillion-dollar digital economy by 2025-26. Its production objective is close to 128 billion dollars over the next two decades, while exports will reach 68.97 billion. Suppose this occurs along with the successful implementation of the quad summit agreements. In that case, India will undoubtedly develop into a semiconductor hub.
More crucially, we will become less reliant on China. This is how India intends to transition from importer to significant exporter of semiconductors in the global market. India is now cooperating with Taiwan, which is vehemently fighting the Chinese invasion, in order to create semiconductor manufacturing facilities in India.
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