India must restart its trade policies and its ecosystem must build its own TSMC
Talks have accelerated between India and Taiwan to build a state-of-the-art semiconductor manufacturing unit in the country. Officials from both sides have met regularly to discuss the possible results of Taiwan’s investment in a manufacturing plant in India. The Taiwanese government and its major foundries, which hold the lion’s share of the global semiconductor manufacturing supply, have reportedly agreed to invest $ 7.5 billion in India to set up a long-standing manufacturing plant in the country.
This follows the recent Quad Summit in the United States, where semiconductors were recognized as one of the focus areas of the emerging and critical technologies working group established by the alliance. The geopolitical relevance of semiconductors has come to the fore as each technically advanced state seeks to assert itself in the global supply chain. Currently, the Taiwan Semiconductor Manufacturing Company (TSMC) remains the largest foundry in the country, accounting for nearly 54% of global semiconductor manufacturing revenue. India’s effort to build an indigenous semiconductor manufacturing plant is nothing new with multiple state-facilitated attempts since the early 1980s itself.
The Semiconductor Complex Limited (SCL), which was set up by the Indian government in Mohali, was the state’s attempt to create India’s own TSMC. SCL had the investment and support of the state, but a major fire in 1989 derailed its progress and it could not recover. Similar attempts were made with AMD’s “FabCity” project in 2006 with a $ 3 billion investment that succumbed to poor industry conditions. The most recent attempt came when two groups of investors made separate proposals worth $ 10 billion, both of which were accepted by the government in 2014, but ultimately failed to achieve. the desired result. This shows that there is both institutional support and private investment to make the manufacturing facility a reality, but it has failed so far.
What are these deep-rooted issues that have caused repeated failures for the state to resolve this time around?
The business ecosystem
A semiconductor manufacturing plant requires an uninterrupted supply of electricity and water to operate efficiently. Water is absolutely essential to ensure the smooth running of the manufacturing process. For context, TSMC alone uses 156,000 tonnes of water per day to run its manufacturing plant in accordance with its latest sustainability report. Such numbers alone are enough to discourage any state government in the country from committing to support the construction of a comparable facility. There must be a central state alignment in the supply of surplus water and electricity in a country like India to complete the project. This has been a thorn in India’s attempt to attract potential investors to build the plant. Acute droughts, constant power cuts, and unreliable state machinery to ensure a constant supply of electricity and water to industries have discouraged anyone considering building the manufacturing plant.
The semiconductor manufacturing process has a critical negative externality in the form of its impact on the environment. High pollution levels, toxic gas emissions and a massive amount of industrial effluent are all by-products of the manufacturing process. With pollution levels in the country already reaching record levels, it is absolutely necessary to assess the potential impact of a manufacturing plant on the environment and the local population. In view of the growth of the semiconductor manufacturing industry, environmental degradation from manufacturing has decreased significantly in recent years. However, a manufacturing facility project might need to ensure compliance with environmental regulations and sustainability before starting large-scale operations.
International companies have constantly complained about the very complex process of acquiring land in the country. For a semiconductor manufacturing project, access to a large lot is essential. The delay in land acquisition and the failure to rationalize this process may further hamper India’s ambition to realize its dream of becoming a major player in the semiconductor manufacturing industry.
The ease of doing business in the country needs to be overhauled to achieve the desired results and the manufacturing facility will provide India the perfect opportunity to reexamine how the ecosystem can be improved for the better.
One of the main reasons Taiwan has become a semiconductor manufacturing powerhouse is the benefit of a technology transfer agreement they signed with the Radio Corporation of America (RCA) in the 1970s. Older technological processes were taught to Taiwanese engineers who later managed to implement them in their own foundries. India still does not have the technology to make cutting edge or even cutting edge technology nodes. While semiconductor design remains a strong point for the state, its expertise in manufacturing processes is still in its infancy. It is essential that technology transfers occur between Indian stakeholders and foreign entities before a factory starts operating.
There is also the question of the presence of skilled labor in the manufacturing sector. Semiconductor manufacturing, unlike other manufacturing units, consists of a wide variety of advanced equipment to be used. They need skilled workers who are trained in the handling and use of these machines. As the entire Indian manufacturing sector is still unable to reach the heights of world powers, there is a need to provide basic training for those who may be employed in the foundry. Semiconductor manufacturing is still a complicated process and will require skilled personnel in the field to be successful.
Previous attempts to build a semiconductor manufacturing plant in India have never taken off due to the country’s protectionist trade policy. Equipment for the manufacturing process, such as photolithography tools and chip testing tools, had to be imported from technically advanced states such as Europe and Japan. But the high import duties that were levied on these products further prevented these countries from exporting their manufacturing equipment to India. The unavailability of semiconductor grade materials available in the country has also made the country highly dependent on imports to enter the manufacturing arena.
Taiwan, during the talks, called for a trade deal with India that would effectively reduce import tariffs on specific semiconductor manufacturing materials and equipment. This would encourage the Taiwanese government, and whoever is involved in the project, to invest and bring the project to fruition rather than abandoning it halfway due to the increased costs. The Taiwanese semiconductor industry flourished and succeeded in dominating the sector through its liberal trade policies in the 1970s, reducing tariffs and tariffs on specific goods or materials, which in turn brought them down. helped develop the national semiconductor industry.
India should see this as an opportunity to build a strong semiconductor supply chain in the country and to grant some tariff concessions to the Taiwanese government and companies that wish to invest capital here. Initial economic incentives such as support for capital expenditure and tax exemptions rather than refunds can increase support and investment for the establishment of the plant. The government, as part of its 2020 industrial policy, can also provide financial support to those who express an interest in moving the project forward.
The semiconductor manufacturing industry is a capital intensive field that would require a continuous influx of money to remain competitive on the global stage. Cutting-edge nodes such as 5nm and 3nm digital technology are the future, but India, with its institutional capacity, needs to focus on manufacturing other cutting-edge nodes like 65nm analog technology which is less capital intensive but offers equal leverage in the global market.
While some critics have argued for India to focus on its comparative advantage in semiconductor design only, a manufacturing facility in the country will benefit the industry’s overall progress in the long run. But simply entering into investment deals for the establishment of the plant will continue the historic trend of ending similar projects. The inherent problems which prevented India from having a world-class semiconductor manufacturing plant in the past must be addressed for any progress in the future.
Disclaimer:Arjun Gargeyas is Research Analyst and Pranay Kotasthane is Deputy Director of Takshashila Institution
(The opinions expressed in this article are those of the author and do not represent the position of this publication.)