India’s Trade Policies Need To Be Rebooted On Semiconductors, And Build Its Own TSMC

Taiwan and India have accelerated their negotiations to build a semiconductor manufacturing facility in India. The two sides meet frequently to discuss the possibility of Taiwan investing in a fabrication facility in India. A long-pending fab in India will be built for $7.5 billion by the Taiwanese government and its major foundries, which make most of the world’s semiconductors. An announcement like this follows the Quad Summit in the US, which designated semiconductors as one of the focus areas of a new working group organized by the alliance on emerging and critical technologies.

The Business Ecosystem

Technologically advanced states have stepped up to take part in the global supply chain, increasing semiconductors’ geopolitical significance.

In terms of revenue, Taiwan Semiconductor Manufacturing Company (TSMC) currently commands almost 54% of the global semiconductor manufacturing industry. In the 1980s, the government of India helped build multiple semiconductor manufacturing facilities on its own.

The Indian government set up Semiconductor Complex Limited (SCL) in Mohali to create TSMC in India. The state-supported SCL and had invested in it, but a major fire in 1989 unhinged its progress. It was an attempt similar to AMD’s ‘FabCity’ project in 2006 that was doomed due to bad economic conditions. AMD invested $3 billion in the project. Both investor groups made separate proposals worth $10 billion, which were both accepted by the government in 2014, but both eventually failed.

A fabrication facility has institutional and private investment behind it, yet it has yet to be realized. The production of semiconductors depends on an uninterrupted supply of power and water. The power supply is essential to the fabrication process as well as water. The latest sustainability report from TSMC shows that the manufacturing plant uses 156,000 tonnes of water per day. An analysis of such statistics alone would make any state government disinclined to support the construction of a similar facility. 

For a project like this to go forward in a country like India, a national alignment is needed to provide surplus water and electricity. Trying to attract potential investors for the project has been difficult because of this issue. Weak weather conditions, constant power cuts, and unreliable government systems which provide electricity and water for industries have discouraged any investment in manufacturing facilities. In addition to its environmental concerns, semiconductor manufacturing has an important negative externality. Fabrication processes generate high levels of pollution, toxic gases, and huge quantities of waste.

The level of pollution in the country is already at an all-time high, so it’s imperative to assess the impacts of a fabrication plant on the environment and the local population. In recent years, environmental degradation caused by semiconductor fabrication has declined significantly because of the growth of the industry. The project must, however, meet environmental regulations and be sustainable before operations begin on a large scale.

A highly complex land acquisition process has constantly been cited by foreign companies as a source of frustration. A semiconductor manufacturing facility requires a lot of lands. India may still struggle to become a major semiconductor company if the land acquisition is slow and the process is not streamlined. To achieve desired results, India should relook at how the ecosystem can be created so that it is easier to do business in the country, and the fabrication facility will present an opportunity to do so. 

Technical Expertise

An important reason Taiwan has become a semiconductor manufacturing powerhouse is so many decades of technology transfer agreements with American companies. A Taiwanese engineer learned old technology processes and then successfully implemented them in his foundry. Indian technology shortage still prevents it from manufacturing any cutting-edge or even trailing-edge nodes. Despite the state’s strength in semiconductor design, its manufacturing expertise ranks at a very early stage. 

Any factory that starts operating must be supported by technology transfers between Indian stakeholders and foreign entities. Manufacturing sectors may also struggle with a shortage of skilled labor. In contrast to other industries, semiconductor production requires a wide range of advanced equipment to function. To operate and handle these machines, skilled workers are required. 

It is essential to provide basic training to individuals who may be employed in foundries in India since the industry is still not capable of competing with global powerhouses. To succeed in semiconductor fabrication, it will take a team comprised of experts in the field.

Trade Policies

India’s protectionist trade policy has deterred previous attempts at creating semiconductor fabrication facilities. To manufacture this product, technically advanced states such as Europe and Japan were required to import photolithography tools and chip testing tools. Due to high import duties, this equipment could not then be exported to India. 

Similarly, semiconductor-grade materials were not available in the country, so the country became extremely dependent on imports to enter the manufacturing field. As part of the talks held with India, Taiwan has requested a trade deal that will effectively lower import tariffs on specific semiconductor manufacturing materials and equipment. The government of Taiwan, and others involved in the project, would then be incentivized to pump in investments and continue the project beyond completion rather than abandoning it midstream.

Throughout the 1970s, Taiwan’s liberal trade policies led to a boom in semiconductor manufacturing due to slashing custom duties and tariffs on certain goods or materials that helped grow the domestic semiconductor industry. Taiwan’s government and companies that wish to invest here need some custom duties concessions from India, allowing them to build a robust semiconductor supply chain. It is more important to offer economic incentives upfront rather than reimburse for capital expenditures and tax exemptions. 

Additionally, the government can supply monetary support to those expressing an interest in the project through its Industrial Policy of 2020. Semiconductor manufacture is a capital-intensive field that would need ongoing investment to remain competitive. Leading-edge nodes such as digital 5nm and 3nm are the future, but with its institutional capacity, India should still focus on manufacturing other trailing-edge technology like the analog 65nm. It is less capital intensive but provides comparable leverage on the global market.

Despite arguments that India should exclusively focus on semiconductor design to capitalize on its comparative advantage, a fabrication facility here would benefit the entire industry to a great extent. Just signing off on investment agreements will continue the historic trend of pullouts on similar projects. To continue to progress, the inherent problems in India need to be resolved.