Can India Rupture the Semiconductor Market?

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

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

Things were certainly 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 US$19.5 billion fab investment in Gujarat. But reportedly, the project will be denied government funding for not fulfilling the requirements, namely no technology partner and no manufacturing grade technology license for the construction of 28-nanometer chips.

In the wake of the new re-application announcement, the speculation about funding rejection seems increasingly likely; and the joint venture would be expected to reapply. In addition, chip-making plans of the consortium ISMC that included Israel’s Tower are also 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 “re-submit” its case.

Nonetheless, despite the initial disappointment in the race to be a semiconductor manufacturing hub, this time around, with an extended window until December 2024, India would be expecting collaborations with major global partners, particularly Taiwan and the island’s “national jewels,” namely the high-tech companies. Indian Prime Minister Narendra Modi’s state visit to the US, which is set to enhance defense and technology cooperation in a big way, should also act as a catalyst: Reportedly, the US chipmaker Micron’s plan to invest US$2.7 billion to set up a semiconductor testing and packaging unit in Gujarat has already been approved by the Indian government just ahead of the trip. But will top Taiwanese players like the Taiwan Semiconductor Manufacturing Company (TSMC) – the largest contract chip manufacturer dominating the world’s most-sophisticated semiconductor production – and United Microelectronics Corporation (UMC) – the TSMC’s rival that is expanding its production of mature chips – enter the fray, sooner rather than later?

In the post-COVID pandemic era when supply chain disruptions have been continually challenging global trade, diversifying options is important for both Taiwan – the world’s leading player in the global electronics industry facing water shortages primarily due to climate change and  – India – the world’s fifth largest economy with a young workforce and a top tech talent market but facing the woes of weak infrastructure and other systemic challenges including unreliability of the “water-electricity nexus.” On the plus side, both parties are intent on redoubling 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 is a focus area to strengthen “manufacturing and innovation” and help establish a “trusted” value chain. According to some estimates, India’s semiconductor market is set to expand to the tune of about US$85 billion and generate employability for 600,000 people by 2030, highlighting the industry’s vital role in global value chains.

For India, having stakes in the high-technology ecosystem is important for not just removing supply chain obstacles for its rapidly expanding domestic consumption but also to strengthen 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 total global foundry market with the largest number of new fabs – has in the post-pandemic era put the spotlight on Taiwan’s difficulties – the US-China trade war, the ever-looming threat of Chinese takeover, and persistent water problems – amid the increased global demand.

In this context, Taiwan could effectively utilize India’s growing global profile, especially during and after the twin presidencies of the G20 and the Shanghai Corporation Organization (SCO); its high-tech- and security-oriented US-bent to counter China’s military belligerence in the borders; and its current vision of capitalizing on the country’s scale and magnitude of opportunities. Moreover, as manufacturing companies start “de-risking” by shifting bases, Southeast Asia and India would gradually become ideal alternative destinations. Partnering with India will certainly ease the ramifications of localized chip-making, 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 “third-location” investments, ensuring protection in line with international standards, as well as a dedicated desk (called Taiwan Plus) to address the concerns of Taiwanese investors and facilitating their operations in India. Since then, the bilateral trade has maintained a steady upward trajectory (about US$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 US$30 billion toward building its own semiconductor supply chain primarily to curtail India’s overdependence on imported chips. For now, India is not concerned about advanced chip-making but is seeking to produce “mature chips” used in everyday applications, such as electric vehicles, home appliances, and medical devices, that are likely to 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 is expected to be more than US$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 (covering areas from electronic manufacturing to green technology) led by Deputy Minister of Economic Affairs Chern-Chyi Chen in late 2022 has given a new momentum to the strategic cooperation including the potential for a free trade agreement (FTA): the  inauguration of 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 major outcomes.

Further, 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, especially in generating renewable electricity and the government’s efforts to harness its hydrogen capacity should allay some concerns about energy shortages; moreover, the turn toward sustainability – a much-needed component in semiconductor manufacturing – will work to India’s favor.

As of now, around 140 Taiwanese companies have invested in India, as foreign direct investment (FDI) has increased significantly with the growth in Taiwan-India trade, and semiconductor collaboration could boost this even more. Taiwan has the expertise and experience to aid India in setting up its domestic manufacturing capabilities. Firstly, Taiwanese companies could help train and upskill Indian talent. Secondly, India’s new extended-window reapplication decision should encourage companies like the PSMC that was in news early this year for scouting potential partners like the Tata Group for entering into joint production in India. Finally, Taiwanese companies can also be useful for India in gradually scaling the steps of establishing its own 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 in setting up plants in China and is already geared to cooperate with India, and the TSMC, which is currently spending US$40 billion to build two fabs in Arizona (US), would drive greater growth for India and for India-Taiwan strategic ties. Modi’s US visit has certainly invigorated India’s semiconductor plans, and perhaps propel the top Taiwanese contractors to invest in India especially after top US firms enter the race – India and the US signed an MoU on creating resilient, innovative semiconductor supply chains in March this year that will boost India’s aspirations.

Importantly, the China-related geopolitical concerns certainly figure into the semiconductor collaboration. India’s adversarial equation with China is getting more fragile amid the growing tilt with the US; China is not yet wary but certainly watchful of the direction and momentum of India’s economic-technological cooperation with Taiwan. Taiwan’s “silicon shield,” affected by the China-US hegemonic battle particularly for gains in critical technologies and the US CHIPS Act that restricts semiconductor equipment sales to China, has begun to find safer pastures away from China. However, the weaking of China’s dependence on Taiwanese semiconductor industry has raised questions about security fears for the island- a result of the lowering of the shield.

Against such a scenario, Taiwan’s diversification plans would certainly look to gain at least limited political support from India. Even as India is unlikely to forsake the “One China” policy, it already appears that New Delhi does have a favorable disposition toward Taiwan given that it has not re-affirmed the “One China” Policy in more than a decade and has even expressed concerns about the militarization of the Taiwan Strait.

The event of a Taiwan contingency would have devastating effects on India’s economy and regional security, and so Delhi continues to walk a tightrope between China and Taiwan – but today, the geopolitical winds, especially in new technologies, are pushing India to incline toward Taiwan. Whether the two partners will find enough resonance as democratic territories constantly withstanding Chinese military threat and enough convergence in their economic-technological future-oriented cooperation to develop greater strategic bonhomie is, however, in question.

 

This piece is first published at The National Interest.