Can India Rupture the Semiconductor Market?

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Can India Rupture the Semiconductor Market?

Closer cooperation in semiconductor manufacturing is pulling India closer to Taiwan. 

 

In June 2023, India announced its decision to reopen the application process for businesses interested in constructing new semiconductor fabrication plants (commonly called fabs). The process will be undertaken by a new government agency, the India Semiconductor Mission (ISM), within the Ministry of Electronics & Information Technology (MeitY). The ISM is designated to implement a “long-term strategy” for developing semiconductors and display manufacturing “ecosystem.”

This “modified” government-approved $10 billion incentive program that aims to support (up to 50 percent) project costs will increase India’s attractiveness as a globally competitive partner. India is not yet comparable to major global semiconductor producers (and consumers) with deeper pockets (e.g., the United States, whose CHIPS Act provides $52 billion in subsidies for domestic semiconductor manufacturing). India’s wooing of the semiconductor industry notwithstanding, this is the second round: the government approved its first incentive policy in December 2021, and the application process closed in early 2022. Only a handful of companies applied, and little progress has yet occurred.

 

Things were looking up when the Indian conglomerate Vedanta signed a memorandum of understanding (MoU) with the Taiwanese technology giant (also a key Apple supplier) Foxconn for a $19.5 billion fab investment in Gujarat. But reportedly, the government will deny the project funding for not fulfilling its requirements.

In the wake of the new reapplication announcement, the speculation about funding rejection seems increasingly likely, and the joint venture might reapply. In addition, the chipmaking plans of the ISMC consortium, including Israel’s Tower, are similarly stuck owing to Tower’s delayed merger with Intel. The third applicant, a Singapore-based consortium led by IGSS Ventures, has also decided to resubmit its case.

Despite initial setbacks in the semiconductor manufacturing race, India expects to collaborate with major global partners, particularly Taiwan and the island’s high-tech companies known as the “national jewels.” Indian prime minister Narendra Modi’s recent state visit to the United States, which enhanced defense and technology cooperation in a big way, should also act as a catalyst. Reportedly, ahead of the trip, the Indian approved the U.S. chipmaker Micron’s plan to invest $2.7 billion in a semiconductor testing and packaging unit in Gujarat. But will top Taiwanese players like the Taiwan Semiconductor Manufacturing Company (TSMC)—the largest and most sophisticated chip manufacturer—and United Microelectronics Corporation also enter the fray?

In the post-COVID pandemic era, when supply chain disruptions continually challenge global trade, diversification is vital for both Taiwan—the world’s leading player in the global electronics industry — and India—the world’s fifth-largest economy with a young workforce and a top tech talent market. Unfortunately, India’s shaky infrastructure will obstruct development, particularly for an industry dependent on reliable, high-volume water supplies. On the plus side, both parties intend to redouble efforts to minimize such difficulties.

Modi envisions India as a globally competitive hub of Electronics System Design and Manufacturing (ESDM) under his “Make in India” and “Digital India” initiatives. Establishing the semiconductor wafer fabrication facilities will strengthen manufacturing and innovation and help establish a dependable value chain. According to some estimates, India’s semiconductor market will expand by about $85 billion and generate employment for 600,000 people by 2030, highlighting the industry’s vital role in global value chains.

For India, owning stakes in the high-technology ecosystem is crucial for not just removing supply chain obstacles for its rapidly expanding domestic consumption but also for strengthening its exports. Naturally, Taiwan features prominently in this vision. On the other hand, Taiwan’s dominance in the semiconductor industry—accounting for about 60 percent of the total global foundry market with the largest number of new fabs—has put a spotlight on Taiwan’s post-pandemic difficulties. Specifically, these problems include the ongoing U.S.-China trade war, the looming threat of Chinese invasion, and persistent water problems amid increased global demand.

In this context, Taiwan could effectively utilize India’s growing global profile, especially during and after its twin presidencies of the G20 and Shanghai Corporation Organization (SCO); its high-tech and security-oriented relationship with the United States; and its current vision of capitalizing on the country’s scale and magnitude of opportunities. Moreover, as manufacturing companies start “de-risking,” Southeast Asia and India gradually become ideal alternative destinations. Partnering with India will undoubtedly ease the ramifications of localized chipmaking, which is on trend globally and has compounded the talent or skill shortage concerns.

Fortunately, their growing bonhomie reflects a new direction in ties. In 2018, Taiwan and India signed two bilateral agreements that covered both direct and indirect “third-location” investments, ensuring protection in line with international standards and a dedicated desk (called Taiwan Plus) to address Taiwanese investors' concerns and facilitate their operations in India. Since then, the bilateral trade has maintained a steady upward trajectory (about $8.45 billion in 2022, an increase of 9.8 percent from 2021).

In 2022, the director-general of the India-Taipei Association—India’s de-facto embassy in Taiwan—highlighted the Indian government’s plans to invest about $30 billion in building its own semiconductor supply chain to curtail India’s overdependence on imported chips. For now, India is not concerned about advanced chipmaking. Still, it seeks to produce “mature chips” used in everyday applications, such as electric vehicles, home appliances, and medical devices, that will likely face maximum pressure in the coming years. At the same time, India is looking to boost self-reliance in display manufacturing for home-grown production of household electronics, smartphones, and automobiles—the domestic consumption of display components will reach more than $10 billion by 2025.

In this context, India hosted a delegation of semiconductor manufacturers, including Powerchip Semiconductor Manufacturing Corporation (PSMC), the world’s sixth-largest contract chipmaker and the third-biggest in Taiwan, in August 2022. Months later, the visit of the Taiwanese business delegation led by Deputy Minister of Economic Affairs Chern-Chyi Chen in late 2022 has given new momentum to the strategic cooperation, including the potential for a free trade agreement (FTA). Additionally, the inauguration of the Taiwan-India CEO roundtable and the signing of three MoUs, including one between Taiwanese memory chipmaker Adata Technology and the Electronic Industries Association of India (ELCINA), are noteworthy milestones in bilateral economic cooperation.

Furthermore, India’s “Act East” policy and Taiwan’s “New Southbound” policy will enable resource and talent sharing in these times of great shortage, especially in the resource-intensive semiconductor industry. India’s steady growth in clean energy and the government’s efforts to harness hydroelectric capacity should allay some concerns about energy shortages. Moreover, the turn toward sustainability—a much-needed semiconductor manufacturing component—will work in India’s favor.

Currently, over 100 Taiwanese companies have invested in India. Semiconductor collaboration could boost this figure higher. Taiwan has the expertise and experience to aid India in setting up its domestic manufacturing capabilities. First, Taiwanese companies could help train and upskill Indian talent. Second, India’s new extended reapplication window decision should encourage companies like PSMC to enter into joint production arrangements in India. Third, Taiwanese companies can also be useful for India in gradually establishing its own tech ecosystem: connecting with local fabless chip design houses; building assembly, testing, marking, and packaging (ATMP; referring to outsourced semiconductor assembly and test) plants; and then finally setting up the fabs.

Partnerships with giants like the PSMC, which has experience setting up plants in China, and the TSMC, which is currently spending $40 billion to build two fabs in Arizona, would drive higher growth for India and India-Taiwan strategic ties. Modi’s U.S. visit has invigorated India’s semiconductor plans and may attract Taiwanese contractors to invest in India, especially after top American firms enter the race. In March this year, India and the United States signed an MoU to create resilient, innovative semiconductor supply chains to boost India’s aspirations.

Notably, China-related geopolitical concerns figure in the semiconductor collaboration. India’s adversarial relationship with China is getting more fragile amid the tilt towards the US; China is watchful of India’s economic-technological cooperation with Taiwan. Taiwan’s “silicon shield,” affected by the China-U.S. hegemonic battle, has found safer pastures away from China. However, the weakening of China’s dependence on the Taiwanese semiconductor industry has raised security fears for the island.

Against such a scenario, Taiwan’s diversification plans would look to gain at least limited political support from India. Even if India is unlikely to forsake the “One China” policy, New Delhi has an increasingly favorable disposition toward Taiwan and has even expressed concerns about the militarization of the Taiwan Strait.

The event of a Taiwan invasion would have devastating effects on India’s economy and regional security. So New Delhi continues to walk a tightrope between China and Taiwan. Yet, today, the promise of new technologies pushes India toward Taipei. Whether shared democratic values and economic-technological convergence will develop greater strategic bonhomie is, however, an open question.

Dr. Jagannath Panda is a Contributing Editor for The National Interest. He is the Head of the Stockholm Center for South Asian and Indo-Pacific Affairs at the Institute for Security and Development Policy, Sweden, and a Senior Fellow at The Hague Centre for Strategic Studies, The Netherlands.

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