In the movie Interstellar, directed by Christopher Nolan, there is a scene depicting the protagonist Joseph Cooper, played by Matthew McConaughey, chasing an "Indian drone powered by solar cells". The movie, released in 2014, had scenes that were suggestive of a futuristic world. The scene has relevance to modern-day India and its manufacturing ambitions.
Fast forward to 2024, a decade after the movie was released, India's Adani Group is supplying drones to Israel. While not powered by solar cells, Indian manufacturing of drones and supply of defence and technology to pioneers such as Israel is a noteworthy development.
Shift From Service To Manufacturing
Over the last decade, the Narendra Modi government has made a concerted effort to diversify its economy from being a service-oriented to a manufacturing-oriented one. The Centre's policy efforts complementing the private sector's initiatives have paid dividends in the manufacturing of drones, solar panels, electronics, Apple's iPhone, and could very well do the same in the future for semiconductors too.
New Delhi is reducing its reliance on the service sector to create jobs for its burgeoning youth. Cognisant of the risk of its huge demographic dividend turning into a demographic curse, that is, the graph of population growth not meeting the graph of employment opportunity growth, the government is implementing targeted industrial policies to increase its manufacturing base and, subsequently, export footprint.
Making Use Of Geopolitical Realignments
For the private sector, it's a question of securing its supply chains and capitalising on the opportunities offered by changes in the global trade architecture. India's electronics minister Ashwini Vaishnaw recently announced the approval for three semiconductor plants-Tata's fabrication unit in Gujarat's Dholera, which will make 28 nm, 40 nm, 55 nm, 90 nm and 110 nm chips with a capacity to churn out 50,000 wafers a month; an assembly, testing and packaging unit in Assam; and Micron's ASAT unit in Dholera-in addition to two pending projects, namely, Japan's Renesas ASAT unit in partnership with CG Power in Sanand, Gujarat, and Tower Semiconductors' proposed investment in Karnataka. All of this is aimed at making use of the opportunities arising out of geopolitical realignments. Semiconductors make up a vital part of the fourth industrial revolution. As crude was to the third, semiconductors will be to the fourth.
Fortunately, the administration in Delhi is patently aware of the challenge. Almost five years ago, PM Modi remarked that India missed the bus in the last three industrial revolutions, but it won't be missing the fourth. Its efforts to manufacture advanced and critical technologies, such as semiconductors, are part of that resolution.
Lessons From Covid-19
From smartwatches to cars, these chips are omnipresent in modern society. The Covid-19 pandemic, followed by Russia's invasion of Ukraine, has put conversations about supply chain resilience and diversification at the forefront of trade and economic discussions. Gone are the days when market efficiencies and the free movement of trade were priorities. The last few years have witnessed a growing intersection in policymaking of trade and national security, with the private sector becoming part of discussions on geopolitical risks.
The pandemic caused disruptions across various sectors. While work-from-home jobs led to a surge in demand for chips for computers, laptops and Wi-Fi routers, there was simultaneously a crash in demand for chips used in transport and logistics, such as for automobiles. This created an unprecedented volatility in the supply chain. The impact on the Indian industry was so acute that at one point, the Ministry of External Affairs was dialling its diplomats around the world, in countries such as Germany, Japan and Taiwan, to source chips. Customers of automakers like Tata and Mahindra faced severe delays in the delivery of their automobiles as a result of the crunch.
Why Tata's Semiconductor Foray Is Significant
It's interesting that it's Tata that will be kickstarting India's semiconductor journey with fabrication and assembly plants in Gujarat and Assam. Diversified and well-vertically integrated companies like Tata have reasons to and a lot to gain from venturing into semiconductor manufacturing. Tata has an opportunity to increase efficiency through vertical integration across its verticals/companies like Tata Motors, TEJAS Networks, and even Tata Consultancy Services. Tata has been a pioneer in many industries in India, and its foray into the semiconductor field may pave the way for other Indian companies to successfully invest and operate in the highly complex and capital-intensive industry.
However, though the COVID-19 pandemic is behind us, geopolitical risks persist in the form of Black Swan and Gray Rhino. The concentration of chip manufacturing in Taiwan makes industries vulnerable to the conflict in the Strait. Any military action by China on Taiwan will have a catastrophic effect on semiconductor supply chains, and, consequently, on several technology items, from day-to-day kitchen hardware like microwave ovens to national security priorities like fighter jets.
West Wants To Move Away From China
There are three major nodes in the semiconductor value chain: a) Design b) Fabrication/manufacturing, and c) Assembly, testing and packaging, or ATP. At present, Western companies command the lion's share of design and hold patents, Taiwan is a leader in manufacturing, and China is one of the largest ATP nations. The US and other Western nations, as part of their China+1 and other supply chain diversification strategies, are moving industries out of China.
In the case of semiconductors, this is a drastic step and has been implemented through a slew of export control measures and domestic industrial policies, such as the CHIPS Act, a legislation in the US supporting onshoring of the semiconductor industry to the country. Over the last few years, industrial policies have become the norm in major economies, particularly to onshore, 'nearshore' and 'friend-shore' critical and advanced technology supply chains.
Nevertheless, industrial policies are not the silver bullet for completely securing supply chains, nor do they address national security risks that manifest either in the form of technology security challenges or acts of economic coercion by adversarial nation-states.
India Has Its Share Of Challenges
In India's case, the push to semiconductor manufacturing comes with four unique challenges. One is the industrial policies used to spur manufacturing itself. The government has relied on production-linked incentive (PLI) schemes to stimulate investments from both the Indian private sector and global semiconductor companies. However, these generous subsidies with limited restrictions have not always attracted top-tier firms in the space.
As with any industrial policy, a lack of sufficient regulatory oversight and checks and balances could lead to the wastage of tax money and inefficient allocation of resources. For example, last year, Vedanta, an Indian mining company and Foxconn, a Taiwanese company, announced a joint project. The project eventually fell through. Neither company had a background in chip manufacturing or advanced technology manufacturing, barring Foxconn's experience in the assembly of Apple's iPhones. Similarly, in 2022, a Singapore-based firm, IGSS Ventures, announced plans to build a fab of $3.5 billion in Tamil Nadu, but critics raised doubts about the feasibility of their proposal and their background.
Infrastructural, Labour Issues
Two, infrastructure challenges continue to plague India. While successive budgets have prioritised capital expenditure, particularly for public infrastructure such as roads, power and waterways, even the most developed parts of India have power outages and poor roads, increasing the overall logistical cost and the risks for disruption. As analysts have noted, disruptions in semiconductor manufacturing process can lead to millions in losses. Furthermore, semiconductor manufacturing is highly water-intensive and is known to deplete aquifers in towns. Hence, there is a looming environmental risk with semiconductor manufacturing initiatives.
Third, the increasing dependence on East Asian partners for semiconductor manufacturing could create labour and workforce management issues. India's External Affairs Minister is currently on a trip to Seoul and Tokyo to discuss semiconductors and the securing of supply chains of advanced technologies, among other shared interests. However, days before his trip, the labour minister of Taiwan, while announcing the MoU between her country and India for the movement of workers, made a racially charged remark in an interview, which created controversy. Reliance on East Asian partners for high-technology manufacturing should not become a mainstay, and, over time, a dependence, wherein unethical and racist practices are overlooked for technological gain.
The Risk Of International Sanctions
Lastly, an understudied and often overlooked challenge is the risk of sanctions when dealing with advanced and critical technologies which have a potential for dual-use. The sanctions imposed by the European Union recently on Indian microelectronics manufacturer Si2 for supplying the Russian defence sector with chips originating in the US when they were under export controls is a symptom of a larger problem. India's strong economic and defence ties with nations such as Russia, which have come under sanctions recently, will make India vulnerable to third-party curbs. De-conflicting supply chains will be a challenging task given that India has strong defence ties with Russia and rapidly expanding and strengthening technological and economic ties with the West.
India is entering the semiconductor value chain at the lower end with fabrication of larger chips as well as assembly, testing and packaging. Time will tell whether it manages to become a crucial player in the fourth industrial revolution.
(Akhil Ramesh is director of the India Programme and Economic Statecraft Initiative at the Pacific Forum)
Disclaimer: These are the personal opinions of the author.