Written by 3:49 pm EU Investment

India must invest in manpower to succeed in the game of chips

Washington’s wide-ranging sanctions on China’s semiconductor industry will go far in containing the US’s geopolitical rival. Not only will they set China’s chip makers back by years, but also restrict the country’s progress in several areas, from personal computers to data centres, from artificial intelligence (AI) systems to hypersonic missiles. This may well be America’s most consequential move in the ongoing contest among global powers.

To be sure, a country as large and resourceful as China can overcome the hurdles that have been thrown its way, but it will take time. In the five to ten years it might take to catch up or render the sanctions irrelevant through innovation, the US-centric technology ecosystem would have moved ahead several generations. The opportunity cost of lost time, in terms of both economics and politics, will be massive. China brought this upon itself. In her latest book, Overreach, Susan Shirk explains how Beijing’s decision to confront the US began as early as 2006, under the collective leadership of the Hu Jintao years. It took the US over a decade to recognize this reality, overcome denial and decide to fight back.

How will China respond? Once its political system gets back to work after the grand spectacle and event management of its Party Congress, it is likely to explore a combination of sanctions evasion, circumvention and indigenization, reaching out to countries such as Germany, Israel, South Korea and perhaps Malaysia and Singapore. Since most of these are US partners, Washington will retain leverage over Beijing’s progress. This route may allow Chinese firms to satisfy their domestic requirements with import-substituted products, but unable to compete in export markets for high-end and high-value products.

There’s another possibility. It is further-fetched and foolish, but we are in a period where it cannot be ruled out. Beijing could well regard a semiconductor blockade as the trigger and pretext to invade Taiwan and take over Taiwan Semiconductor Manufacturing Company and other chip-making facilities concentrated on that island. Even if such an invasion succeeds, unless its managers and engineers cooperate, China’s army would merely be flying the Chinese flag over some high-tech real estate. But Beijing could well turn off the supply of chips to the rest of the world.

That, in part, is the reason why the US and European governments are providing tens of billions of dollars in fiscal incentives to build fab units outside Taiwan, preferably on their own soil. These will take 4-5 years to come on stream, after which it would theoretically be possible for Taiwanese professionals fleeing Chinese invaders to take a trans-continental flight to new workstations. Therefore, on current trends, we should expect higher geopolitical risks across the Taiwan straits around 2027.

India has already benefited from the world’s desire to manage risks to high- technology supply chains. Sensing this window of opportunity, the Union and several state governments have announced policy frameworks to attract some global investment in the shifting semiconductor industry. Fiscal incentives of over $10 billion to attract investment in fabs and assembly plants are a step in the right direction. India must have the baseline capability to produce advanced semiconductors on its own soil, not only to serve national security requirements but also equip its talent pool with the skills needed to master the entire semiconductor industry cycle.

India must double down on the basic source of its strength in the technology industry: the quality and quantity of its skilled manpower. The economics of semiconductor manufacturing mean that the hundreds of billions of dollars required to set up fast-depreciating state-of-the-art plants are beyond the reach of most governments. While India should welcome private investors to build the most advanced plants in the country, public funds are better invested in manpower development. India’s goal should be to use human resources to dominate the semiconductor industry, just as it does the IT services industry today. It will be a good idea to set up half a dozen industry institutes that create professionals in design, production and management of the silicon industry.

Government support has been critical for the development of a semiconductor industry worldwide. Where incentives have been applied to shift production, as in Singapore, they have met with modest success. Where they have been used to fund upstream scientific breakthroughs, as in the US, or change the industry paradigm, as in Taiwan, they have had tremendous impact. India should explore how its strength in manpower can transform the industry. Can we do to software what Taiwan did to foundries?

Every country that has a semiconductor industry today, China included, has done so while being Washington’s geopolitical partner. The same holds true for us. A ‘bubble of trust’ with the US and its partners such as Japan, Taiwan and the EU is crucial to secure investments, technology, markets, expertise and movement of people. For the past three decades, there was no need for economic and geopolitical ecosystems to be significantly correlated, but in the post-pandemic era, such a correlation is necessary for economic growth.

Nitin Pai is co-founder and director of The Takshashila Institution, an independent centre for research and education in public policy

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