Growing US-China chip rivalry presents India with its geopolitical moment

India must capitalise soon on the opportunities the US-China chip war provides to turn it into reality.

In the US-China geopolitical tussle, 2022 was a watershed moment. In August, Washington unveiled the CHIPS and Science Act and followed it up with chip export controls in October, setting the tone for an intense rivalry in emerging and critical technologies with semiconductors at the forefront.

The CHIPS and Science Act had but one objective: reshoring chip manufacturing back in the US from East Asia, where 85 percent of the current global fabrication capacity is concentrated. The export controls aimed to restrict China's access to advanced semiconductors and keep Chinese chip manufacturing capabilities behind the US by at least a decade. The controls also imposed restrictions on foreign companies operating in China, which relied on technology and capital sourced from the US.

Last month the US tightened the controls further, targeting perceived loopholes in existing rules, extending their ambit to more types of chips and chipmaking equipment. Additionally, 21 other countries outside China and Macau were also hit with licensing restrictions.

China's integration into the semiconductor Global Value Chain (GVC) is due to its 38 percent market share in the Outsourced Semiconductor Assembly and Testing (OSAT) segment that engages in Assembly, Testing, Marking, and Packaging (ATMP) of chips – the bottom-most leg of the chip value chain. In the foundry segment (which fabricates chips), China's market share is 15 percent, of which ~10 percent is contributed by overseas foundries owned by Taiwanese and South Korean companies.

Consequently, India has emerged as a critical contender for businesses looking to relocate or diversify their operations. India is in collaborative partnerships with countries like the US and is also working on an FTA with Taiwan. For example, the Quad Initiative on Critical and Emerging Technologies (iCET) can bolster semiconductor design, technology and talent transfer efforts.

But to fully capitalise on this geopolitical moment, India must remain mindful of certain 'dos' and 'don'ts', given the stiff competition from Vietnam and Thailand.

Utilise OSAT To Create Linkages

For China+1 diversification strategies, foundry and OSAT segments are the most impacted in the GVC. The chip foundry segment is capital-, resource-, and skill-intensive. However, developments like indefinite waivers granted by the US to companies like Samsung and SK Hynix to continue high-end memory chip fabrication in China mean that conventional CMOS device foundry operations are unlikely to move to other countries in the short term.

However, an opportunity exists to attract compound and analog semiconductor fabs that aren't as capital and technology-intensive. The availability of OSAT/ATMP services will incentivise partners wishing to set up these foundries as they lower operational costs and time-to-market.

Therefore, the immediate opportunity for India lies in capturing the OSAT/ATMP segment of the GVC. Attracting OSAT operations and compound/analog fabs in the short to medium term will enable us to move up the GVC gradually.

Loosen Strict Local Sourcing Requirements

India should not penalise incoming businesses with a mandatory minimum requirement for locally sourced components. The rationale behind local sourcing requirements is to promote domestic value-addition, create employment opportunities, support MSMEs, and reduce import dependence. However, this policy can impose excessive costs and constraints on foreign investors and domestic producers.

India is a new entrant in this segment. It does not have deep backward linkages that cater to potential chip assembly units' quality and quantity needs. Forcing businesses to source components from underdeveloped domestic channels may deter them from setting up shop, eventually derailing the long-term strategic objective of GVC integration.

Without worrying about value addition, policymakers must focus on attracting and retaining businesses in the ATMP segment. Backward supply linkages will, in due course, organically develop as intense participation in the GVC leads to the transfer of knowledge and technology from global players to local suppliers.

Facilitate Foreign Talent Acquisition 

Establishing semiconductor ecosystems needs a specialised labour force in addition to public and private capital investment, a tough proposition. Each country in the semiconductor GVCs provides highly specialised semiconductor talent. For example, India has a sizable chip design workforce, whilst Taiwan has talent specialising in running pure-play foundries.

However, as the larger goal of building resilient supply chains becomes imperative, countries like the US, China, and Korea have recognised the need to recruit foreign talent. Take China. It has implemented legislation to recruit industry veterans and fresh trainees with perks like home-purchase subsidies in exchange for a limited-time commitment to working in China.

Similarly, India must ensure elevated pay and other incentives for international semiconductor talent. An experienced foreign workforce will upskill a generation of indigenous talent as they are exposed to different segments of the GVC.

Policy Stability And Harmonising Duty Structures

GVC players moving away from a sanctioned China will gravitate towards countries offering stable, predictable, and beneficial policy environments. India lags significantly in this aspect. A recent example? The sudden
announcement of a licensing system for laptop and tablet imports and its equally quick reversal.

Domestic manufacturing ambitions bolstered by industrial policies like the Production-Linked Incentive (PLI) schemes also fail to achieve greater effect due to an ad-hoc trade policy and inverted duty structures. The latter increases production costs, which are paid for by PLI subsidies. Both negate government support for assembly units and reduce indigenous competitiveness.

These are significant disincentives for dominant players to set up operations in India, who, unlike Apple, are unlikely to absorb such costs. A revamped trade policy could significantly increase India's attractiveness as a potential chipmaking destination.

Integration into the semiconductor GVC is an essential long-term strategic goal. India must capitalise soon on the opportunities the US-China chip war provides to turn it into reality.

Satya S. Sahu is a Research Analyst with the Takshashila Institution's High-Tech Geopolitics Programme. Amit Kumar is a Research Analyst with the Takshashila Institution's Indo-Pacific Studies Programme. Views are personal, and do not represent the stance of this publication.