Rising semiconductor competition between the US and China offers India a strategic opportunity

 Rising semiconductor competition between the US and China offers India a strategic opportunity

stepping up US sanctions on China India has a chance to enter the global value chain of the semiconductor sector. However, there are strong barriers for semiconductor manufacturers to establish themselves in India.

2022 was a turning point in the geopolitical contest between the US and China. Washington set the stage for a fierce competition in developing and crucial technologies, with semiconductors at the forefront, with the unveiling of the CHIPS and Science Act in August and the subsequent implementation of chip export curbs in October.

The goal of the CHIPS and Science Act was to bring chip production back to the United States from East Asia, which is home to 85% of the world's present fabrication capacity. The goal of the export restrictions was to prevent China from obtaining cutting-edge semiconductors and to maintain China's manufacturing capability at least ten years behind those of the US. Restrictions were also placed on international businesses that operated in China and depended on US-sourced cash and technology.

The United States strengthened regulations last month, focusing on alleged gaps in the current framework and expanding their purview to include a wider range of chip varieties and chip manufacturing machinery. 21 more nations outside of Macau and China also experienced license limitations.

Due to its 38 percent shares of the market in the Outsourced Transistor Assembly and Testing (OSAT) sector, which handles chip assembly, testing, marking, and packaging (ATMP), China has been integrated into the semiconductor Global Value Chain (GVC). ATMP is the lowest level of the chip value chain. China has a 15 percent market share in the foundry industry, which produces chips. Out of this share, foundries operated by South Korean and Taiwanese enterprises contribute around 10 percent.

India has thus become a serious rival for companies wishing to expand or diversify their activities. In addition to negotiating an FTA with Taiwan, India is involved in cooperative agreements with nations such as the US. For instance, activities in semiconductor design, technology, and talent transfer might be supported by the Quad Initiative on Critical and Emerging Technologies (iCET).

However, given the fierce rivalry from Vietnam and Thailand, India has to continue to be aware of certain "dos" and "don'ts" in order to effectively capitalize on this geopolitical moment.

Use OSAT to Establish Connections

The GVC's foundry and OSAT divisions are particularly affected by China+1 diversification plans. The chip foundry industry requires a lot of money, resources, and expertise. But, recent events such as the US's perpetual exemptions allowing firms like as Samsung and SK Hynix to carry on fabricating high-end memory chips in China suggest that traditional CMOS device foundry activities are unlikely to relocate anytime soon.

But there's a chance to draw in compound and analog semiconductor fabs that don't need as much money or sophisticated technology. Partners that want to establish these foundries will be encouraged by the availability of OSAT/ATMP services as they reduce time-to-market and operating costs.

India's immediate chance, therefore, is to take the OSAT/ATMP portion of the GVC. We can progressively advance along the GVC if we can draw in OSAT activities and compound/analog fabs in the near to medium future.

Relax Tight Local Sourcing Guidelines

India shouldn't penalize foreign companies that meet a minimal criterion of components that must be acquired domestically. Requirements for local sourcing are justified by the need to help MSMEs, encourage domestic value addition, generate jobs, and lessen reliance on imports. However, both local manufacturers and international investors may face unnecessarily high costs and restrictions as a result of this strategy.

India is a recent addition to this market. It lacks deep backward links that might meet the quantity and quality requirements of future chip assembly units. Making companies obtain parts via undeveloped domestic channels might discourage them from opening stores, which would ultimately undermine the long-term strategic goal of GVC integration.

Instead of focusing on value addition, regulators should concentrate on luring and keeping companies in the ATMP area. As a result of extensive GVC engagement, which transfers knowledge and technology from global players to local suppliers, backward supply links will eventually naturally arise.

Enable International Talent Hiring 

Creating semiconductor ecosystems requires not only public and private financial investment but also a specialized labor force, which is a challenging task. Talent for highly specialized semiconductors is available in every nation in the semiconductor GVCs. For instance, Taiwan has people specialized in managing pure-play foundries, whereas India has a substantial workforce dedicated to chip design.

But as creating robust supply chains becomes a bigger priority, nations like the US, China, and Korea are realizing how important it is to hire people from outside. Observe China. It has put laws into place to entice seasoned professionals and recent graduates with incentives like home-buying subsidies in return for a brief commitment to work in China.

In a similar vein, India has to provide higher compensation and other benefits for foreign expertise in semiconductors. As they are exposed to various GVC sectors, a generation of local talent will be upskilled by an experienced foreign labor.

Stability of Policies and Harmonization of Duty Structures

GVC players will seek out nations with stable, predictable, and advantageous policy environments as they move away from a sanctioned China. India falls much behind in this regard. A current instance? the abrupt announcement—and equally swift withdrawal—of a licensing scheme for imports of laptops and tablets.

An ad hoc trade policy and inverted tariff structures also prevent domestic manufacturing goals, which are supported by industrial programs such as the Production-Linked Incentive (PLI) schemes, from having a stronger impact. The latter raises manufacturing costs, which PLI subsidies cover. Both reduce the competitiveness of native products and undermine government support for assembly units.

These are powerful deterrents for established companies to establish operations in India since, unlike Apple, these companies are unlikely to be able to afford such expenses. Redesigned trade regulations might make India a far more appealing place for chip manufacturing.

One of the primary long-term strategic objectives is integration into the semiconductor GVC. To make it a reality, India has to seize the chances presented by the US-China chip battle as soon as possible.