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The global race for AI chips intensifies. Where does India stand?
The escalating tensions between the US and China have prompted a relay for tech dominance. Meanwhile, India targets significant breakthroughs in chip production before the end of this "techade"
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On April 8, the world’s largest chipmaker from Taiwan, TSMC, won a $6.6 billion US subsidy for producing the most advanced 2 nanometer processor chips. The latest investment under the CHIPS and Science Act of 2022 will support TSMC's $65 billion investment in building three fabrication facilities in Phoenix, Arizona, US. These chips will drive the next wave of tech revolutions like artificial intelligence, data centres, smartphones, and high-performance computing.
The US is going all out to set up chip fabrication plants in order to be less reliant on other economies. A couple of weeks ago, the country's biggest chipmaker, Intel, also received the largest grant of $8.5 billion for building new facilities in Arizona and Ohio while upgrading existing facilities in New Mexico and Oregon. It will invest up to $100 billion in chip facilities over the next five years. Intel CEO Pat Gelsinger hopes his company becomes the world’s second largest chip manufacturer by 2030, displacing Korean chip giant Samsung Electronics.
The looming geopolitical tensions have triggered these investments as the US strives to boost domestic manufacturing. Back in the 1990s, the country’s semiconductor manufacturing capacity was close to 40 percent, but it currently stands at 12 percent, as per Citigroup. Now the US targets producing about 20 percent of the world’s leading-edge chips by 2030. Reportedly, Samsung is next in line to receive the subsidy support and is already building a foundry plant in Texas.
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The world had just recovered from the chip supply chain disruption due to the pandemic and the Russia-Ukraine war, but now there’s another glaring shortage. During the pandemic, the shortage was in the types of chips that were widely used in industrial and automotive applications. Today, there's a dearth of chips that are used for artificial intelligence, explains Chris Miller, author of the 2022 book Chip War: The Fight for the World's Most Critical Technology.
“Chips produced by Nvidia, for example, are still in deficit relative to where demand is. The chip market is so complex that you often have shortages of some and surpluses of others,” he adds.
The US has been imposing export control since 2022 to prevent China from accessing AI chips and chip-making tools, and recently revised rules to further tighten control. It is a matter of national security, and even China is reportedly blocking the use of American processors in government computers.
The Chinese government is spending roughly as much money as the rest of the world combined each year on subsidising its chip industry. Since 2014, China has been spending tens of billions of dollars a year trying to build its own domestic supply chain, and it's still a long way away from being able to do that. According to Miller, the country produces around 25 percent of the chips it uses domestically and imports the rest.
Apart from the US and China, other economies like Europe and Japan are also trying to boost their own chip manufacturing industries via incentive programmes. It's worth noting that in Southeast Asia, countries like Vietnam, Malaysia, and Thailand are attracting more foreign investment and moving up the value chain.
The cost of building a semiconductor manufacturing facility has shot up, which has prompted many semiconductor companies to outsource a portion of their manufacturing to foundries to keep capital expenditures lower. The ten-year cost of a state-of-the-art fab, including both initial investment and annual operating costs, ranges from $10 billion to $40 billion today, an exponential increase from less than $1 billion in 1997, as per the Semiconductor Industry Association estimates.
There are only four Integrated Device Manufacturers (IDMs) with a scale large enough to support the construction of leading-edge fabs (10 nanometer processes and below)—Samsung, Intel, Hynix, and Micron. The rest of the semiconductor companies—such as Nvidia, AMD, Qualcomm, Marvell, and most others—have outsourced anywhere from 20 percent to 100 percent of their manufacturing to the leading foundry, TSMC, a report from Citigroup highlights.
India has just dipped its toes in this sector, but the global investments from companies like US-based Micron and Taiwan's PSMC Semiconductor look promising. The experts mention that the country has the talent for fabless design but needs help from high-tech manufacturing companies like Intel, GlobalFoundries, Samsung, and TSMC to manufacture chips until India has the capability to manufacture its own chips. But they have yet to make their way to India.
Global companies play a big role in India's chip design capabilities. The Indian semiconductor ecosystem is still developing, and the challenge that the country faces right now is two-fold, says Miller. “First is to continue attracting large amounts of investment from international companies. Second, there’s a need to build a venture capital ecosystem that is capable of funding new companies founded in India. The talent that's necessary for that to emerge is present in India. It'll take a bit of time, but we will see more chip design firms founded in India over the next 10 years.”
Speaking of talent, a large number of Indians are employed at these leading semiconductor companies, and the chances of encountering reverse brain drain are likely. This can happen if the country achieves its five-year target of gaining a foothold in chip manufacturing.
For instance, Aalay Kapadia has been employed with Intel for eight years and currently works as a senior physical integration engineer at Hillsboro in the US. He intends to move back in five years if there are similar opportunities in India. “Honestly, there is no lustre left for US citizenship. I’m aware that the salary package won’t match in India, but at least I’ll be closer to home,” says 33-year-old Kapadia, who hails from Ahmedabad, Gujarat.
Similarly, another Indian employee from Taiwan’s TSMC, who spoke to Forbes India on condition of anonymity, expressed a desire to move back to the country soon. “It’s good to work in a different environment and culture but can’t stick around for longer, primarily due to language barriers.”
Ease of doing business and government incentives will play a major role in helping the semiconductor industry take off in India. Additionally, both private and public investments will be key to boosting the financial support needed to build this high-capex industry, which is the biggest barrier apart from intellectual property, explains Neil Shah, vice president of Counterpoint Research.
“The government should continue to work on infrastructure, skilling, attractive policies, and favourable regulations for ease-of-business to help the world's leading companies consider India a top contender for their diversification strategy and help industry spread risks in case of calamities such as pandemics, earthquakes, or other macroeconomic challenges,” he adds.
