The chip industry: the “ticket” for India’s dream of a big country
In recent years, India has made frequent and “high-profile” actions in investing in the development of the chip industry. On September 13, 2022, Indian mining giant Vedanta, Taiwanese foundry giant Foxconn and the government of Gujarat, India signed a memorandum of understanding to establish semiconductor and display manufacturing in Ahmedabad, the largest city in Gujarat. factory. The project is expected to invest approximately US$20 billion and is planned to create more than 100,000 jobs. According to reports, this is India’s largest corporate investment since independence in 1947, and it marks India’s accelerated entry into the global semiconductor chip manufacturing race.
Chip is a general term for semiconductor component products and is called “oil in the digital age”. It is not only a necessity for a country to maintain its social and economic operations, but also determines the country’s position and interest distribution in the global industrial chain and supply chain. Its geostrategic importance is beyond doubt. At present, the rise of India’s manufacturing industry is booming. The Modi government not only vigorously develops labor-intensive industries, but also attaches great importance to the development of capital-intensive and technology-intensive industries such as semiconductors, intending to make India at the top of the global value chain. An in-depth study of the Modi government’s semiconductor industry policy will provide us with an excellent perspective to gain insight into India’s political and economic trends and analyze the trend of China-India relations.
Against the background of intensified strategic competition between China and the United States, the spread of the new crown epidemic, and the escalating crisis in Ukraine, all countries hope that their economic operations will be more resilient and more independent. Therefore, the development of the local chip industry seems to have a certain “self-evident” necessity and rationality. However, this inference is difficult to establish in India: From the perspective of necessity, India has become a key partner that the United States and its allies rely on, and there is almost no need to worry about being “stuck” on the chip; from the perspective of rationality Looking at it, India, as a newly industrialized economy with weak industrial foundation and relatively scarce capital, vigorously develops the chip industry with large investment, slow effect and high risk, which will inevitably squeeze the development space of other industries, and the opportunity cost is high. That being the case, why does the Modi government still insist on developing the chip industry without hesitation?
First of all, the United States’ suppression of China’s semiconductor industry has deeply alarmed India. If it wants to become a “big country”, it must strive for the independence of the chip industry. In India’s strategic circles, many people realize that the United States promulgated the “Chip and Science Act” to suppress China’s semiconductor industry has nothing to do with intellectual property rights and communication security. It just cannot tolerate China’s rise. In this regard, the Modi government believes that India cannot repeat the same mistakes. To some extent, Indian policymakers have regarded the chip industry as an “economic atomic bomb”, a strategic industry that must be vigorously developed despite its weak foundation, high cost, and huge risks, and it is also the “entry condition” for becoming a major country in the digital age .
Second, the current international situation makes India see a huge opportunity to develop its own chip industry. The threshold for developing the chip industry is high and requires huge investment. Therefore, for a long time, the development space of this industry in the world has been mostly occupied by a few “top players” in North America, Western Europe, and East Asia. However, in recent years, the United States has accelerated its “decoupling” and “broken chain” with China, which will result in the coexistence of two sets of supply chains between China and the United States, which has inspired the speculative mentality of the Modi government: If India must develop the chip industry sooner or later, it is better to take advantage of the current situation as soon as possible. According to the international trend, join the US supply chain system, absorb capital, technology, and talents withdrawn from China to strengthen its own chip industry, and at the same time carry the banner of “replacing China” to “claim credit” to the US and Western countries, and strive for greater strategic benefits.
In addition, the surge in downstream production demand in the manufacturing industry has forced India to develop the chip industry to meet demand. At present, India has become the second largest producer of mobile phones in the world, and has also become a major producer of household appliances and automobiles. The demand for local chips has surged. According to industry insiders, India currently needs to import electronic products worth US$180 billion a year, of which chips account for about 10-20%, costing a huge amount of US$20-40 billion. At the same time, the Modi government launched the “phased manufacturing project” (PMP) in 2015, from simple local assembly, self-production of simple parts to self-production of high-value parts, step by step to increase the degree of localization, while self-manufacturing of screen displays, memory , Processors and other semiconductor core components are the “last hurdle”. This means that if the Modi government can establish a local chip industry, it can not only meet the huge demand for downstream production of the manufacturing industry, but also snatch tens of billions of dollars in excess profits from foreign suppliers every year.
On September 13, 2022, Indian mining giant Vandanta, Taiwanese foundry giant Foxconn and the government of Gujarat, India signed a memorandum of understanding to set up a semiconductor and display manufacturing plant in Gujarat.
“Ten billion subsidies” to promote the development of chips
The Modi government has placed unprecedented emphasis on the development of the manufacturing industry, and has successively launched initiatives such as “Made in India” and “India Self-Reliance”. However, these plans are mainly aimed at general processing industries, rather than technology-intensive industries at the top of the value chain. It was not until December 2021 that the Modi government promised to allocate US$10 billion for the development of the local semiconductor industry, and launched the “India Semiconductor Plan” (ISM) in March 2022, aiming to “establish India’s local semiconductor industry ecology and make India Rise to become a global electronics manufacturing and design center”.
Specifically, the “10 billion subsidy” of the Modi government is mainly distributed through the “Production Linked Incentive Program” (PLI) and the “Design Linked Incentive Program” (DLI), and is divided into four parts: one is to subsidize the fab, The purpose is to cultivate chip manufacturing capabilities; the second is to subsidize factories that produce thin-film transistor liquid crystal displays (TFT-LCD) and active matrix organic light-emitting diodes (AMOLED), aiming to cultivate screen display manufacturing capabilities; the third is to subsidize chip assembly and testing , marking, packaging (ATMP) facilities, aiming to improve ATMP capabilities; the fourth is to subsidize semiconductor design facilities, aiming to improve the design capabilities of various semiconductor components. At the same time, many state-level governments in southern and western India are also eager to try, launching local preferential policies in an attempt to attract foreign investment.
At present, at least three chip manufacturers and more than ten screen display manufacturers and other companies have applied to share the “ten billion subsidy”. For example, in June 2022, Singapore investment group IGSS has signed a memorandum of understanding with Tamil Nadu, planning to build a wafer factory within three years. For another example, in May 2022, ISMC, a joint venture jointly established by Abu Dhabi’s Next Orbit Ventures Fund and Israeli chip manufacturer Goto Semiconductors, plans to build a $3 billion semiconductor factory in Bangalore, India’s “high-tech capital”.
It is worth noting that the ISM plan initially set up a step-by-step subsidy. For example, chips with an advanced process below 28nm can enjoy a capital subsidy of up to 50%, and chips with a process of 28-45nm can enjoy a subsidy of up to 40%. The production of chips with a 45-65nm process only enjoys a maximum of 30% subsidies. However, it may be that it is found that the higher the chip manufacturing process is not, the better it is in line with India’s actual interests. ISM plans to revise the rules in September 2022, so that all chip production projects of all specifications can enjoy a uniform subsidy of up to 50%, and guide related investment more effectively.
The Paradox Behind the Policy
By analyzing the specific terms of the ISM plan, it is not difficult to see that the essence of the Modi government’s chip policy is still a “strategic trade policy”, that is, to promote the rapid formation of scale effect of the local chip manufacturing industry through trade protection and financial subsidies. On the one hand, the Modi government is trying to use this to retain excess profits in India; on the other hand, it can also use the positive externalities generated by this to drive all upstream and downstream industries to improve their competitiveness and form a complete industrial ecology. However, the plan will not be easy to realize.
First of all, the investment intensity required to develop the chip industry is extremely high. Although the Modi government promised to subsidize tens of billions of dollars, these subsidies have to be divided into different fields, different links, and different projects. The funds that can be obtained by a single project may be very limited. For example, the cost of building a wafer manufacturing plant can reach 2 billion U.S. dollars. Therefore, it is difficult to form scale effect and industrial ecology by relying on “tens of billions of subsidies” alone, and it is also difficult to generate positive externalities. Therefore, some experts criticize the Modi government’s chip industry policy as still implementing “import substitution” in essence, relying on financial subsidies to support inefficient investment, and once the subsidies dry up, the project will be unsustainable due to lack of competitiveness .
Secondly, chip manufacturing has a very low fault tolerance rate for water, electricity, and material supply. Any supply interruption in production may cause losses of millions of dollars. This is a major challenge for India, which has a weak infrastructure. Although manufacturers can expand safety redundancy by building backup power sources, water sources, and strengthening material inventories, this also means higher production costs and lower market competitiveness. Therefore, some experts suggest that India should focus on developing “soft” links such as chip testing, marking, packaging, and design, rather than “deadly knocking” links that require extremely high-level hardware facilities, so as to make better use of the existing resources of the Indian economy. Advantage. From the perspective of comparative advantages, some Indian experts pointed out that India has scarce capital and sufficient manpower, and should focus on the development of human resource training and service industry cultivation related to the semiconductor industry, rather than investing precious resources in expensive, fast depreciation, and high-risk chips. manufacturing. After all, there are currently 25,000 chip design engineers in Bangalore alone, designing ultra-large-scale integrated circuits for industry giants such as Samsung, Intel, and Qualcomm.
On April 29, 2022, the Indian government held the country’s first semiconductor industry conference “SemiconIndia 2022” in Bangalore, the “high-tech capital”.
In addition, the United States, China, the European Union, the United Kingdom, Japan and other economies are all guided by “onshore production” and investing tens of billions or even hundreds of billions of dollars to expand the scale of the local chip industry. In this context, the Modi government followed suit and invested. It is very likely to fall into a passive situation of rushing to buy resources at high prices when investing in the construction of factories, and rushing to sell products at low prices after production. Therefore, some experts suggest that India should focus on investing in chips with mature process technology above 45nm, rather than advanced process chips that require more sophisticated and expensive investment. This will not only avoid fierce international competition, but also conform to the reality of the downstream manufacturing industry in India need.
At the same time, some people suspect that India’s chip industry policy is actually a “subsidy trap”, making it easier for Indian mining giant Vandanta and other consortiums close to the Modi government to join hands with foreign capital to grab subsidies under the banner of “assuming national strategic tasks”. At present, in response to these doubts, the Modi government has established three special committees, aiming to bring together government officials, technical authorities, and industry representatives to comprehensively evaluate the strategic value, financial feasibility, and technical applicability of funded projects. It is worth noting that the committee has gathered senior Indian technical experts from all over the world, including Vinod Dham, a former executive of Intel Corporation known as the “father of the Pentium processor”. Their joining will greatly improve the quality of Indian chips. The pertinence and effectiveness of industrial policies.
In fact, there is an interesting paradox hidden behind India’s chip industry policy: Focusing on comparative advantages according to resource endowment, India’s capital is scarce and manpower is surplus, so in any case, it should not develop the chip industry so vigorously; Under the condition of insufficient development of the manufacturing industry, a capital-intensive and intelligence-intensive industrial base has been developed. From this point of view, it is not impossible for India to “get a blessing in disguise”, that is, relying on a certain industrial foundation and a favorable international environment to develop a semiconductor industry with certain competitiveness. And this deserves our close follow-up and great attention.