India and the US have signed a new major agreement on semiconductors. What does this mean, and how does it counter China?
India and the United States recently signed a Memorandum of Understanding (MoU) on semiconductor supply chain cooperation.
The monopoly over the electronic resources supply chains will determine the supremacy of nation states in the geopolitics of the present and the future. This is clearly evident in the priority placed on securing the production, processing and supply of resources that would drive technological advancement even further. Semiconductors occupy an important position in this regard.
Understanding the importance of semiconductors is very relevant in order to contextualise the ongoing developments to build active cooperation between India and the United States in this sector. These semiconductors form a formidable part of the creation of all the electronic devices around us. These devices steer the technological development of the world that transcends through from our daily lives or advanced medical equipment to state level cyber security infrastructure. These semiconductors are used in the creation of electronic chips that are an integral part of the electronic devices and computers.
As the world transitions into a technologically advanced age where artificial intelligence would likely occupy a large chunk of our day to day functioning as well, the people are becoming far more dependent on these electronic devices than they were even a decade ago. The high dependence on electronics signals a high dependence on semiconductors as well which are largely made up of silicon and germanium. This in turn translates into a supply chain competition that would set forth as the tech giant countries attempt to monopolise this resource to milk the benefits of the high demand.
This is primarily the backdrop of the recent attempts to foster a positive relationship between the United States and India when it comes to the production and supply of semiconductors. Before analysing the intricacies of the cooperation framework set forth in this partnership, it is important to understand the Indian vantage point and where India lies in this vast growing sector.
India and semiconductors
As far as the semiconductors are concerned, India has been largely import dependent. India even occupies the position of the second largest importer of semiconductors in the world after Vietnam.
Source: ITC Trade Map
The high demand of semiconductors in India fuels this rise in importing the resource. This high demand primarily results from India’s greater investment in the development of electronic devices and aiming towards technical and digital infrastructure. In order to build these microelectronic devices, a vast repository of semiconductors is necessary. Over the years, India has done so by majorly importing the resource but this also places the country at the behest of the main suppliers of semiconductors. While creating important partnerships for securing the supplies is important, the country also has a major need to incentivise the domestic production of the semiconductors.
Source: ITC Trade Maps
The sourcing of the semiconductors for boosting India’s electronics and technology industry happens through countries such as China, Singapore, the US, South Korea and now Taiwan as well. Over the years India has taken a careful consideration of the measures necessary to build partnerships in securing these supplies however the one major problem that faces the country in this regard is the problem of China. India , owing to the other political and strategic crises that face its relationship with China would seek to reduce its dependence on Chinese imports and hence the deals signed with countries like Taiwan and the US are significant in this regard. India’s reaching out to Taiwan for a cooperation in the semiconductor manufacturing and production was a huge deal in its opposition to the Chinese dominance. The countries of the west, typically the United States, are also driven by the desire to reduce dependence on China and work towards a ‘China plus one’ strategy that India could benefit well from.
The fabrication or the production of semiconductors in India faces several hurdles because the manufacturing of semiconductors takes several stages and it is rather a capital intensive industry. The production also needs the constant supply of water and energy. These resources need to be diverted in large amounts so as to sustain the domestic production of semiconductors. This is primarily the reason as to why the country needs to be import dependent for semiconductors.
The focus however, has been shifting in recent years. The need to develop a domestic base for semiconductor manufacturing is recognised further. Over the years the Indian government aimed to incentivise the fabrication of semiconductors domestically throughout all the stages of production. The schemes for Production Linked Incentives (PLI) and Design Linked Incentives (DLI) form a major part of the aim to improve domestic production.
India-United States Partnership- The implications
It was only recently that the United States Commerce Secretary Gina Raimondo met with the Indian government’s higher officials to discuss the plans to take the India-US partnership in the semiconductor industry even further.
The talks to strengthen this relationship have been going on since quite some time and the reason behind this is the mutual benefit that this relationship would bring for both the parties. While the United States, in its efforts to reduce and challenge the dependence on China for the supply of semiconductors aims to target the markets of India; it is equally beneficial for India to take advantage of the United States’ investments in order to build the domestic production and innovation capacity so as to secure the supply chain networks at home.
In order to incentivise the production and supply of semiconductors, it is also important to keep the demand alive. It was after the pandemic that the demand for semiconductor based electronic devices reduced as an aftermath to the sharp rise during the pandemic years. Thai reduction in the demand led to the production industries in countries like South Korea and Taiwan suffer huge losses. India can position itself to become an important player to incentivise demand in the electronics and technology industry that can offset the problem of excess supply as well.
Diversifying the usage of semiconductors in electronic devices and automotive industries could also become an important aspect in this regard. India and the United States are deeply conscious of the important role that they can play together in order to diversify the whole of the semiconductor supply chain and invest in all the stages of chip production.
One major outcome of the recently conducted India-US Commercial Dialogue was the signing of the Memorandums of Understanding (MoUs) over the innovative partnership on developing a semiconductor supply chain by also forming sub-committees to carry out the agenda of forming a secure semiconductor ecosystem.
While this industry could very well become a trillion dollar industry to invest in, all the major powers of the world want a piece of this cake. The series of partnerships that India is building with countries like the United States and Taiwan can prove to be a major tool in India’s bid to become self-reliant while also being present in the global supply chain networks of semiconductors which falls very well in line with India’s semiconductor mission.