In Quad’s semiconductor bet against China, India stands to gain
Traditionally, the semiconductor supply chain has operated in the background, enabling everything from everyday devices and devices to advanced defense equipment. This complex and hyper-global supply chain worked so smoothly that it was taken for granted.
This perception changed in a few months. First, semiconductors have become an area of confrontation between the United States and China. And then the shock of demand for COVID-19 resulted in a severe shortage of chips in automobiles, medical devices, and other industries. And finally, fears of a Chinese takeover of Taiwan, which alone accounts for nearly 73% of global contract chip manufacturing, have prompted countries to seek alternatives. Thus, after having been on the margins of the technological policy agenda of several countries, semiconductors have become a priority area. It’s no wonder then that the first in-person Quad Summit meeting on September 24 had semiconductors on the agenda.
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What was discussed at the Quad Summit?
One of the outcomes of the very first Quad Summit meeting on March 12, 2021 was the creation of a Critical and Emerging Technologies (C&ET) Working Group. At the time, there was no common understanding of the technologies categorized as “critical” and “emerging”. The technological cooperation plan appeared too dispersed to allow concrete action.
Six months later, we have a much clearer picture. The Quad Leaders Summit identified four focus areas: 5G communications, collaboration on technical standards, biotechnology and semiconductors.
Regarding semiconductors, Quad launched an initiative to “map capacity, identify vulnerabilities and strengthen supply chain security for semiconductors and their vital components.” The summit information sheet adds that Quad’s partners should collectively support a diverse and competitive market for semiconductor production. The last sentence is significant: it signals a change of mindset from national indigenization to strategic cooperation. Here’s how.
As of 2015, China’s “Made in China 2025” – a state-led industrial policy for technology, including the indigenization of semiconductors – has destabilized many democracies. In response, these countries began to offer massive incentives and subsidies to attract local semiconductor manufacturing.
In February 2021, US President Biden signed an executive order to address the shortage. Earlier in April 2020, India launched its Production Incentive Program (PLI) to ‘attract’ investment in this sector. Then, in June 2021, Japan formulated a draft growth strategy promising generous financial incentives to advanced chip manufacturing facilities. Despite these initiatives, self-sufficiency in semiconductors remains a distant dream for all of these countries.
The complexity and costs of the semiconductor supply chain demand a global supply chain. Rapid improvements in the processing capabilities of our devices have occurred precisely because of a globally diverse semiconductor supply chain. This approach has allowed companies to specialize and excel in one or two stages of the supply chain, relying on companies from other countries for the remaining stages. Semiconductor Industry Association, an important voice of the industry, estimates that a typical semiconductor production process covers more than 4 countries, 3+ trips around the world, 25,000 miles traveled and 12 days in transit. To reverse the economic logic of comparative advantage, countries would have to continually divert scarce resources to build and support local semiconductor manufacturing.
This is why a multilateral approach such as Quad’s Semiconductor Supply Chain Initiative makes perfect sense. Instead of aiming for national self-sufficiency, Quad countries now seem to agree that they need to ensure redundancy in the global semiconductor ecosystem so that an adversary does not dominate it.
Multilateral strategic cooperation can achieve this goal. Using the existing comparative advantages of countries instead of duplicating them will lead to cost sharing and complement each other’s strengths to accelerate innovation.
It is in this respect that Quad is suitable for semiconductor collaboration. The United States is a world leader in the semiconductor design phase. American companies also dominate two key stages upstream of the design process: Electronic Design Automation (EDA) and Licensed Intellectual Property. Japanese companies occupy a dominant position in semiconductor materials and chemicals used in chip manufacturing. Japan is also the market leader in silicon wafers, the substrates on which integrated circuits (integrated circuits) are made. Australia occupies an important place in the wider electronic supply chain, as it has access to critical materials and advanced mining capabilities. Finally, semiconductor design requires a large number of skilled engineers, this is where India’s strength lies. Collectively, the Quad has most of the building blocks to make the semiconductor supply chain resilient and China-free.
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Is this supply chain initiative sufficient?
Supply chain vulnerability mapping should only be the first step in collaboration. The cluster can directly enhance the security of the supply chain in the following ways.
First, Quad can form a consortium to build a diverse semiconductor manufacturing base. The consortium could create a roadmap for new manufacturing facilities in Quad countries. The goal should be to collectively have access to manufacturing at the cutting edge nodes (5 nanometers and below) and the critical cutting edge nodes (45 nanometers and above). These will remain workhorses for automotive, communications (5G) and AI.
Second, Quad can sponsor new standard developments such as composite semiconductors and create a Center of Excellence (CoE) in each Quad country in an area of immediate interest to them. For example, Australia could host the CoE for new materials in electronics, Japan could host the CoE for silicon manufacturing equipment, and the United States and India could host CoEs on architectures of specific factory-free design.
Third, Quad can facilitate strategic alliances between companies in their respective countries. For example, faster visa processing and lower barriers to employment for semiconductor professionals in Quad member countries could facilitate higher technology exchanges and joint levels of development. Removing restrictions on technology transfer could facilitate licensing abroad. The easing of capital flows in this sector could again encourage more joint development projects.
What is India gaining?
India is expected to use the Quad collaboration to get a Japanese or American company to manufacture semiconductor in India, even if it is at a peak node such as 65nm. Collaborating with partners would minimize the risk of failure while ensuring the defense of India’s defense and strategic interests.
Additionally, the AUKUS defense alliance has shown that the United States is willing to share sensitive technology with key partners, which it has not been willing to do in the past. This new technological alliance mentality should also become the norm at Quad. India should push the United States to lower investment barriers and reduce export controls.
Besides manufacturing integrated circuits, India is expected to double its core strength. In a report by the Takshashila Institution entitled The Indian Semiconductor Ecosystem: A SWOT Analysis, we observed that India has a clear advantage in semiconductor design. The next step should be to encourage the creation of indigenous intellectual property. The meeting of PM Modi with the CEO of Qualcomm is vital in this regard. With more and more multinationals moving their advanced semiconductor design to Indian offices, the Indian ecosystem will grow organically.
Finally, given India’s development challenges, its financial incentives for technological R&D are unlikely to match what richer countries can afford. In such a situation, India must take an allied approach to technological cooperation. To develop critical and emerging technologies, multilateral cooperation is a necessity, not a choice.
Pranay Kotasthane is Deputy Director of the Takshashila Institution. He co-edited the India Marathon: Reshaping the Post-Pandemic World Order. The opinions expressed in this article are those of the author and do not represent the position of this publication.
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