On the Horizon: A Semiconductor War

Context: Growing importance of Semiconductors or chips/integrated circuits (ICs) and China’s experience with the manufacturing and design of the same provides a strong case for focusing on chip designs.

Growing importance of Semiconductors or chips/integrated circuits (ICs):

• It is the lifeblood of all digital products and digitalisation: increased importance with the advent of 5G, electric vehicles, and autonomous cars.
• Strategic importance: chips are now more important than oil.
  • China imports 50% (by value) more IC’s than oil, and it is their single biggest import.
  • United States (US) weaponised its technological lead in semiconductors: cripple any company that it saw as a strategic challenger. 
    • E.g. Huawei had to cede market share and product leadership due to US sanctions.

Reasons for India to focus on chip design:

• China’s experience:
  • Poor performance in chip manufacturing:
    • Limited presence in the higher value parts of the semiconductor value chain: no presence in the semiconductor capital equipment, software, or materials like specialised chemicals, wafers and gases, used to make chips.
    • Failed to create a global leadership: Even with large chip manufacturing capacity (almost 20 % of global capacity), the majority of this is controlled by foreign firms.
    • Failed to narrow the technology gap with manufacturers in countries like US.
  • Success in chip design:
    • Success in creating world-class chip designing firms: like HiSilicon, focused on designing chips for mobile and telecom use.
    • Grabbed substantial market share in fabless chip design revenues globally
• Manufacturing is costly:  Firms that had success in semiconductor fabrication were the ones that kept a pace with the relentless march of Moore’s law and continued miniaturisation of chips. 
  • E.g. Intel spends more than $20 billion annually in semiconductor capital expenditure.
• Manufactured products can be imported easily: from US, Europe, Japan, China, Korea, and Taiwan.
• The strategic importance of chip design.

Conclusion: India should use its scarce capital to incentivise and promote chip design and niche areas of manufacture in older generation chips rather than manufacturing contemporary technology semiconductors.