Joe Biden signed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act on August 9. His advocacy in support of the Bill was summarised in his tweet, 'Here's the deal: America invented semiconductors. But after American manufacturing was hollowed out, we let semiconductors go overseas. Today, we bring microchip building - and the jobs that come with it - home.' The need to incentivise and develop domestic manufacturing capabilities of chips is not only driven by geopolitical tensions - the US-China trade war, the China-Taiwan-US tussle - but also by economic and technological factors.
The global value chain of the semiconductor industry has seven differentiated activities:
Pre-competitive research: 15-20% of industry R&D.
Design: R&D- and skill-intensive, with a value addition of 50%.
Front-end (wafer fabrication): Capex-intensive, with a value addition of 24% (April 2021 Boston Consulting Group (BCG)-Semiconductor Industry Association report, bit.ly/3QQo3zQ).
Back-end (assembly, packaging and testing).
Electronic design automation (EDA) and core intellectual property (IP): Provides sophisticated software support to design.
Equipment and tools.
Materials.
The US dominates design, EDA and core IP. So, it follows the 'fabless' (outsourcing fabrication) model. Manufacturing (front- and back-end) is concentrated in Taiwan, South Korea and China. Earlier, the US followed the integrated device manufacturer (IDM) model, where design, fabrication and assembly were done in-house by large firms like Intel, Texas Instruments and Micron Technology.
With fast-changing technology and diverse applications in end-user industries, the simultaneity and size of investment in R&D and capex increased. This resulted in US firms like Qualcomm, Broadcom and Nvidia adopting the fabless model. Consequently, US share in global fabrication, which was 37% in 1990, declined to 12% by 2021. In assembly, packaging and testing, a labour-intensive activity, US share is now only 2%.
Following the supply disruption of chips during the pandemic, which resulted in production disruption of end-user industries - and with China gaining both technological and manufacturing capability of chips - the US is shifting back to the IDM model even while holding on to its dominance in design, EDA and core IP activities. Further, with the demand growth expected at over 8% annually in the next decade, the global capacity of manufacturing is increasing with 29 new fabs, mainly in Taiwan and China.
The Chips are Up
The CHIPS Act strives to regain US supremacy by improving chip manufacturing competitiveness as well as technologically. The support to the industry includes $52 billion for producing chips, and tax credit for investment made in chip manufacturing. The purpose is to attract investment from majors like Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea's Samsung to establish fabs in the US, while also promoting domestic majors to establish new manufacturing capacities in the US.
To what extent the CHIPS Act can succeed will determine whether the US can play catch-up. But an understanding of these developments provides important lessons for India. A review of the following initiatives against these global developments in Asia and the US will provide insights into the effectiveness of India's targeted outcomes, innovative capacity, end-to-end manufacturing and design capability:
PLI: The production-linked incentive (PLI) scheme aims at large-scale electronics manufacturing, focusing on mobiles and specified electronics components. The threshold sales and investment requirements for providing incentives target MNCs to establish production facilities in India. As the threshold new investment covers R&D, transfer of technology, and plant and machinery, PLI aims at upgrading the technological processes in component manufacturing. This will promote contract manufacturing of chipmakers, which, over time, can develop competence for development activities.
Read more at: https://economictimes.indiatimes.com/opinion/et-commentary/what-india-must-do-to-get-its-semiconductor-hopes-up-and-running/articleshow/93761443.cms