The Aakhya Weekly #49 | When the chips are down...
The Aakhya Weekly #49 | When the chips are down...
Semicon Games I: Of Chips and Bets
By Sujaya Sanjay
[This is the first article in a new, recurring series that will document India’s foray into semiconductors. Stay tuned to the Aakhya Weekly for updates!]
The United States and China are locked in a major “chip war” that seems to be getting worse with each passing day. Last year, the US banned supply of software for making advanced chips to China. Reciprocally, China has banned a US chipmaker from key infrastructure projects, citing national security concerns. At the recent G7 summit in Japan, members issued a joint communique affirming their commitment to cooperate on “export controls on critical and emerging technologies such as microelectronics” in light of China’s “economic coercion”.
Why semiconductors are so important: Setting up the poker table
Semiconductors, or integrated circuits (ICs), regulate electricity flow and are essential for electronic devices, so they find applications across virtually any sector in one form or another. Transistors, computers, appliances, emerging technologies – all of them require semiconductors to function. They are the key to driving technological progress and have become indispensable to daily life everywhere. As a result, they are integral to the global supply chain.
The semiconductor race is essentially one of the great high-stakes poker tournaments of our time; and just like poker, it will take a combination of skill, strategy and luck to win. Consider the global semiconductor supply chain as the dealer at this high-stakes table. The dealer is responsible for distributing chips (in this case, semiconductor chips) and plays a vital role in ensuring that the game is fair. The dealer comprises the various semiconductor companies that are responsible for manufacturing chips, and collectively they play a role in determining the price and supply of the chips, as well as access to these chips by the countries who are interested in playing.
The table is set, the cards are shuffled, the chips are stacked. Let’s meet the players.
US and China
To participate in this vital race, nations will need to establish dominance by designing cutting-edge chips that have diverse use cases; creating large-scale units for their deployment through fabrication units (or fabs); a large talent pool of highly skilled employees; and adequate government support to create favourable conditions for supply of these chips to meet the rising global demand. The big players - the US and China - are raising the stakes each round with multiple investments into research and development, keeping an eye on their (technology) stack. The US is a world leader in semiconductor design with a virtually unlimited supply of funds for R&D. However, the disadvantage for the US is the prohibitively high cost of manufacturing. The US’s primary objective is to ensure that China does not dominate in arguably the most crucial sector worldwide. The US strategy, therefore, is encouraging other players to join the table - in the form of strategic partnerships with countries in the Indo-Pacific. By diversifying the supply chain and leveraging its own economic (and military) strength, the US hopes to preserve the status quo.
China, on the other hand, is growing exponentially in chip manufacturing – from 1,300 chip manufacturers in 2011 to 22,800 by 2020. However, China lags behind in R&D capabilities, as a result of which it is not able to produce chips beyond 24-nanometres, whereas the cutting-edge ones are as small as 5 nanometres. China’s Semiconductor Manufacturing International Corporation (SMIC) has claimed to have produced a 7-nanometre chip, but it remains to be seen whether they can be manufactured at scale. Even so, China’s growth in the low-end chip segment is worth noting. Its lack of R&D capabilities and reliance on imports for components (in addition to trade sanctions) have left it with fewer prospects at the table – its recent drop in semiconductor output by 17%, well over the global average of 11%, illustrates its woes.
Asiatic powers – Japan, South Korea, and Taiwan
There are a few other heavyweights at the table, such as Japan, South Korea, and Taiwan, who have the skills and have built up a good stack of high-value chips over time (yes, we are enjoying the poker analogy a bit too much), but the odds are stacked against them. With the stakes running so high, they have much more to lose in a shorter span of time, especially if one of the big players - China - gains dominance. South Korea, for instance, is the world’s second-largest producer of semiconductors, and has invested large amounts into R&D. Japan is a long-time player who made initial gains in the early years, but as any good poker player will know, the longer you’re at the table, the higher the chances are that you will suffer a few big losses. However, Japan is looking to make a comeback and has already pledged cooperation to expand its footprint in semiconductors. And the third - Taiwan - is the world’s largest manufacturer of semiconductors and advanced microprocessors. They have invested heavily into R&D and it has paid off handsomely. Taiwan today produces 90 percent of the world’s chips.
For these players, their priority is not about winning big. Their focus is on ensuring that they get to keep playing, and it is in everybody’s best interests that they do, because the dealer’s fate depends on it. They have a strong advantage in their ties with the United States - but that advantage is somewhat offset by the fact that they are all neighbours of China and that their companies rely heavily on the Chinese market. No one wants to poke the dragon in the eye, especially in the post-Covid era when economies have become so vulnerable. All three of these players boast superior chip capabilities when compared to China.
In light of China’s activities in the disputed South China Sea, this raises the stakes for the three players even higher, forcing them to form alliances with each other. The US has already invested heavily in Taiwan and is looking to partner more closely with Japan and Korea. Major semiconductor suppliers from the US and Taiwan are also flocking to Japan and South Korea. The game cannot be played fairly without the dealer – the global semiconductor supply chain – enforcing the rules. With more players, there are more chances of subverting Chinese dominance in the supply chain. Others like the EU, Vietnam, and the UK, too, have expressed an interest in placing their bets at this table. We will be covering this in a future article, so stay tuned!
And so, we come to India.
India’s a new entrant into the sector of semiconductor manufacturing and is at a nascent stage of developing its capabilities. Although a rookie player in comparison, India has immense potential and is taking a measured and more holistic approach, instead of relying on ‘beginner’s luck’ and rushing ahead with simply focusing on the creation of fabs.
The Government of India is engaged in multiple focus areas simultaneously – such as engagement of highly skilled technical experts and , while also providing incentives for industry-academia collaboration and support for start-ups and MSMEs. Interestingly, India is also exploring a sustainability-centred approach, with plans to use green energy to power its semiconductor manufacturing. Ashwini Vaishnaw, Minister for Electronics and Information Technology, anticipates that India will emerge as a semiconductor hub in the next 5-10 years. India is set to play a nuanced and, more realistically, a long-term game – which is not a bad strategy, when we consider the time and investment involved in setting up capabilities in this sector.
So, what is India’s strategy to win? Join us next week when we will be breaking down India’s policy, its biggest challenges, and its advantages in this new game.
Top Stories of the Week
Notes of INR 2000 withdrawn
In a move that has raised many a memory of the tumultuous weeks of late 2016, the RBI has announced the withdrawal of all INR 2000 notes. Citizens have been asked to deposit or exchange all INR 2000 notes by September 30, 2023. Notes worth a total of INR 20,000 can be exchanged at one go, while any amount of the note may be deposited in bank accounts. Unlike the “demonetisation”, however, the notes shall continue to be legal tender in the interim.
Many reasons have been offered for the decision - ranging from the note always having been a temporary measure, to the need to curb the circulation of black money, heading into election season later this year.
Several public interest litigations, on the other hand, challenge the propriety of the move, asserting that it lay outside RBI’s powers. Earlier this year, Justice Nagarathna had pointed to similar procedural flaws with the 2016 demonetisation. While those were then swept away as having become obsolete over time, they may rear their head again, now.
Analysts believe that the move shall be significantly less disruptive than the 2016 demonetisation. Around INR 3.62 trillion worth of INR 2000 notes are currently in circulation, making for 10.8% of the total Indian currency in circulation. While a sizeable sum, this is well short of the ~86% that was demonetised in 2016. Moreover, the massive uptake of digital payments in the following years has ensured that, unlike 2016, many have an easy fall-back option to cash.
The RBI believes that INR 2000 notes are rarely used in common transactions, and was already in the process of phasing them out. A vast majority of INR 2000 notes - almost 89% - were issued before March 2017. It stopped printing the note in FY 2019, and many notes printed then are nearing the end of their lifespans.
International card usage to now attract 20% TCS under new RBI rules
The RBI, in a notification released on 16th May, 2023, effectively removed the tax exemption granted to consumers using credit cards abroad under the Liberalised Remittance Scheme (LRS). Per the notification, the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, now include international credit card payments in the LRS, therefore requiring authorisation from the RBI. The rules will kick in from 1st July this year.
The 2023-24 budget hiked Tax Collected at Source (TCS) rates to 20% from the prevailing 5% on overseas tour packagesand funds remitted under LRS. This excludes remittances for educational and medical purposes, which will continue to be taxed at 5%. The domestic based tour and travels package providers are up in arms about the decision, voicing their concerns vociferously. As a result, the government in a clarification released on 19th May conveyed that amounts under Rs. 7 lakhs will be excluded from the TCS.
This Week in Policy
Economy and Taxation
FPIs returned to Indian markets, as inflows hit a five-month high in the first half of May, zooming up to ₹30,946 crore - a reassuring trend after outflows early in the year.
Sustainability and Energy
India’s first offshore wind tender is expected to be launched in 4-6 weeks, revealed Dinesh Jagdale, Joint Secretary, Ministry of New and Renewable Energy.
The Ministry of Ports, Shipping, and Waterways to provide financial support for building green shipping projects worth 30% of the project cost. For other vessels, the assistance stands at 20%, depreciating by 3% every year.
Emerging Technology and Media
MeitY Minister of State Rajeev Chandrasekhar clarified on Tuesday that the Government will be regulating artificial intelligence (AI), but its regulation under the forthcoming Digital India Act (to be released in the first week of June 2023) would be strictly through the prism of “user harm” and its prevention, and will not stifle innovation.
OTT platforms will soon be required to display anti-tobacco warnings and disclaimers, similar to those issued in film theatres and on television.
International Trade and Foreign Affairs
India and Australia are setting up a Green Hydrogen Task Force for exploring sustainable collaboration opportunities, finalised during PM Modi's visit to Australia this week.
India and Zambia hold the 3rd Foreign Office Consultations where they explored bilateral cooperation in education, agriculture, health, mines & minerals, and other sectors.
Healthcare
Cough syrups must now be tested by a Government laboratory before it can be exported, according to a Government notification. The move follows deaths in Gambia and Uzbekistan due to Indian-made cough syrup.
The National Medical Commission has announced a unique ID that shall be mandatory for all registered practitioners in the country.
Banking, Finance and Insurance
RBI has asked all foreign funds investing in the country to identify their parent financial institution to help unravel opaque ownership structures.
The Central Board of Direct Taxes (CBDT) is proposing to exclude a host of foreign investors, including sovereign wealth funds and pension funds, from the purview of the so-called "angel tax", offering much-needed relief to the startup sector. Entities facing this tax will also have more valuation flexibility while computing it, as per the draft rules put out by CBDT.
Retail, E-commerce and FMCG
The Ministry of Commerce and Industries is in talks with regulators and other departments to put in place systems that will level the field between exports through e-commerce and traditional channels, when it comes to tax refunds.
The Ministry of Commerce and Industries is trying to address issues pertaining to the promotion of exports through ecommerce medium such as remission of duties and incentives, and ensuring postal bills flow among others.
Logistics and Infrastructure
The government is working to bring down India’s logistics cost to 9% of GDP in the next three years from the current 14-16%, says Union Minister, Nitin Gadkari.
To further strengthen the bilateral relationship between India and Bangladesh, the Ministry of Railways in India handed over 20 Broad Gauge (BG) locomotives to it’s eastern neighbour.
Labour
More than 13 lakh members were added to the rolls of the ESIC in March 2023, according to a report by the NSO.
Kerala is working on a bill to provide job security to domestic workers and home nurses, chief minister Pinarayi Vijayan announced.
Tracking the G20
The highly anticipated 3rd Tourism Working Group meeting concluded in Srinagar this past week. China and Saudi Arabia boycotted the meet, with the former citing its firm opposition “to holding any kind of G20 meetings in disputed territory”. Turkiye, Egypt and Oman stayed away as well - a gesture appreciated by Pakistan's foreign office.
In the other major meet, the third Environment and Climate Sustainability Working Group (ECSWG) meeting took place in Mumbai, covering aspects of Blue Economy and ocean habitat preservation.
Upcoming Events
India Sustainability Summit, 2023
27 May, 2023 | Auditorium IIC Annexe, Lodhi Estate, New Delhi
Policy Circle is organizing a Sustainability Summit on May 27, 2023, which is its third in the series of events to coincide with India's G20 presidency. The event aims to meet the urgent needs of the green energy transition, sustainable food systems, and economic growth through business strategies and regulatory changes without upsetting the long-term strategy against the climate challenge. The key speakers of the event shall be Jyotiraditya Scindia (Minister of Civil Aviation, GOI) and Leena Nandan (Secretary, Ministry of Environment, Forests & Climate Change, GOI). More information
EV Charge India, 2023
31 May, 2023 | Radisson Blu Plaza, New Delhi
E-mobility is hosting an EV Charge India event on May 31, 2023, at the Radisson Blu Plaza, New Delhi. The event aims to understand the role of different stakeholders in building a nationwide charging network and help shape the future of e-mobility in India and it will be attended by a diverse set of stakeholders in the EV ecosystem. Registration Link
A Few Good Reads
In the face of some recent debacles in financial policy, Gautam Chikermane [lays out](https://www.orfonline.org/expert-speak/eight-reforms-to-reimagine-policymaking-for-21st-century-india/?) eight best practices for Indian policy-making in the 21st century.
Technology is no longer a ‘sector’ to be governed to a ministry. Nor can it be governed by one country. With the advent of AI, argue Sameer Saran and Manuel Muñiz, we shall have to think of a holistic, global approach for tech governance.
Western economies’ ambivalence towards Africa has given China the room to dominate conversations in the continent. A change of track is necessary to protect green transition, write Theophile Pouget-Abadie and Rachel Rizzo.
Read The Economist’s obituary for Robert Lucas, a veritable giant of macroeconomics.
“Castes are ant-national”, writes Nitin Pai, and India needs to find a pathway towards their annihilation to become a unified nation.
Tweets of the Week
Tenzing Lamsang points to an unintended consequence of discontinuing the Rs. 2000 note:
The story of a fascinating diplomatic showdown, courtesy Shashank Mattoo:
Rory Medcalf illustrates how a career in policy is to survive an unending war of attrition:
Key Notifications and Reports
The Global Wind Energy Council released a report of recommendations for offshore wind development in India Report.