Semiconductor Diplomacy: The 21st Century Oil

It’s hard to think of a component, in any product, more ubiquitous and essential than the semiconductor. Today, almost any device with an on/off switch has thousands or millions of semiconductors inside them. A transistor is a semiconductor device that is the building block of modern electronics. They can be used to conduct and insulate electric current or voltage. The more transistors a chip has, the more complex functions it can perform, the faster it can run, and the more energy-efficient it can be. Computer chips can have billions of transistors. They power our cars, airplanes, and trains. Communications rely on them. Factories, ordinary businesses, finance and banking sector, everyone uses them. Money moves, thanks to these chips. So, it isn’t a surprise that the major economies of the world today are actively engaging in building a semiconductor ecosystem. Building fabrication plants and a self-reliant semiconductor ecosystem has become a matter of nationalism and protectionist policy in the major economies of the world. We have witnessed the Cold War and the Gulf War in the 20th century because of geopolitical competition over control of oil resources. The ongoing US-China chip war adding to the geopolitical tensions in the Indo-Pacific and South China Sea is proof that semiconductor is the oil of the 21st century.

The US no longer manufactures the most bleeding edge chips (7nm and below). Taiwan manufactures 92% of them, 8% are manufactured in South Korea. In the last 4 decades, the US outsourced a lot of the manufacturing to Asian companies who already have a well setup system to manufacture good quality chips at large scale (owing to the semiconductor revolution of the 1970s in Taiwan and 1960s in South Korea). The risk of being heavily reliant on Asian companies like Taiwan became known to the US, in particular, after the COVID-19 pandemic when it witnessed a serious chip shortage for producing its cars, PCs, laptops, smartphones, etc. due to the global supply chain disruptions. Moreover, China’s aggressive expansion in the South China Sea and the Indo-Pacific region, has made the United States nervous about possible Chinese occupation of Taiwan and Chinese monopoly over the world’s largest semiconductor chip manufacturer.

America’s take

We are at a pendulum shift in political economy, and not just in the US. Chips are now the very heart of US-China tensions. Technological leadership has been the source of US strength since WW2. And that’s when the US discovered that if you have the most advanced technology, you can make your own security, and you could achieve leadership in the world. Passing the CHIPS and Science Act by the Biden Administration was a crowning jewel in the Biden policy crown. The CHIPS Act is a way of ensuring the security of the US far into the future. The whole Chips Act is $52.7Bn with $39Bn reserved for grants. There’s also an investment tax credit on top of this which gives a 25% tax credit off of any fab that’s constructed or improved upon. The focus of the CHIPS Act is on producing the chips that the US needs for its National Security requirements, the Department of Defence, intelligence agencies, and the associated companies that are going to build products for them. Intel’s CEO Pat Gelsinger has been a key player in trailblazing the design of the US CHIPS Act, and it almost seems like that’s the way it was meant to be since Intel is the only American company that owns an in-house fab and manufactures semiconductor chips on American land. Gelsinger has been instrumental in bringing the CHIPS Act into existence and securing adequate funding from the US Government for building more Intel Fabrication plants in the US. This is further proved by Intel’s decision to open a $50Bn chip plant in the US state of Arizona, which has been the center of semiconductor manufacturing in the US for several decades. The US has a chance to manage the conflict by giving a boost to in-house chipmakers (like Intel Foundry) and industrial policy. And that’s where the US CHIPS Act comes in and gives it self-reliance. The United States realizes that China’s lack of making advanced chips is the only thing holding it back from becoming an advanced technology power. For the pursuit of national interest in international relations, it stands to reason why the US is actively restricting China from gaining access to that chip technology.

China’s take

In 2014, Chinese President Xi Jinping identified semiconductors as a core technology that China should produce domestically. Since then, China has poured tens of billions of dollars a year, roughly one US CHIPS Act a year, into subsidizing its domestic production. At the center of the government-led investment is the National Integrated Circuit Industry Investment Fund, also known as the Big Fund. The fund aims to help China reach its national goal of achieving self-sufficiency in the semiconductor industry (as part of the Made in China 2025 plan) by investing in domestic semiconductor companies. Big Fund has been raising 340Bn Chinese Renminbi (RMB), which is 47bn USD, every year since 2014! China still seems to be years behind Taiwan and South Korea in actually producing industry-grade market-quality semiconductor chips. This makes Taiwan an all the more lucrative off-shore partner to the US in this chip battle between the world’s two largest economies. And so far, with little fruit from such a big investment, Beijing has to rethink whether its approach is economically useful.

The US and China have been doing a sort of supply-chain dance for over 4 decades now. Nationwide restrictions applied on China by the US with regards to their chips, and not just to individual companies marked the formal start to the technological competition between the two superpowers. This has led the US and other countries to implement the “China Plus One” strategy and look for an alternative to Chinese chips that encourages companies to diversify their supply chain sources. We seem to be nearing a zero-day when we begin to see the status quo shaken and a new multi-polar global supply chain taking birth. The question is how is India placed in this clash of the titans? Is India ready to be the alternative to China for the Western semiconductor market? Can India hope to be self-sufficient in terms of its domestic requirements? 

The Semiconductor Ecosystem

The semiconductor industry has seven different segments. Each of these distinct industry segments feeds its resources up the value chain to the next until finally a chip factory (a fabrication plant or “Fab”) has all the designs, equipment, and materials necessary to manufacture a chip. Taken from the bottom up these semiconductor industry segments are: 1) Chip Intellectual Property (IP) Cores 2) Electronic Design Automation (EDA) Tools 3) Specialized Materials 4) Wafer Fab Equipment (WFE) Make the Chips 5) “Fabless” Chip Companies 6) Integrated Device Manufacturers (IDMs) 7) Chip Foundries (Fabs).

Think of a Fab as analogous to a book printing plant:

1) Just as an author writes a book using a word processor, an engineer designs a chip using electronic design automation tools.

2) An author contracts with a publisher who specializes in their genre and then sends the text to a printing plant. An engineer selects a fab appropriate for their type of chip (memory, logic, analog).

3) The printing plant buys paper and ink. A fab buys raw material; silicon, chemicals, gases.

4) The printing plant buys printing machinery, presses, binders, and trimmers. The fab buys wafer fab equipment, etchers, deposition, lithography, testers, packaging.

5) The printing process for a book uses offset lithography, filming, stripping, blueprints, plate making, binding, and trimming. Chips are manufactured in a complicated process of manipulating atoms using etchers, deposition, and lithography. Think of it as an atomic level offset printing. The wafers are then cut up and the chips are packaged.

6) The plant turns out millions of copies of the same book. The plant turns out millions of copies of the same chip.

While this sounds simple, it’s not. Chips are probably the most complicated products ever manufactured. As chips have become denser (with trillions of transistors on a single wafer) the cost of building fabs has skyrocketed – now >$10 billion for one chip factory. One reason is that the cost of the equipment needed to make the chips has skyrocketed. Just one advanced lithography machine from ASML, a Dutch company, costs $150 million. There are ~500+ machines in a fab (not all as expensive as ASML). The fab building is incredibly complex. The clean room where the chips are made is just the tip of the iceberg of a complex set of plumbing feeding gases, powder, liquids, and silicon, all at the right time and temperature into the wafer fab equipment. The multi-billion-dollar cost of staying on the lead has meant most companies have dropped out. In 2001, 17 companies were making the most advanced chips. Today there are only two – Samsung in Korea and TSMC in Taiwan (Intel is still trying to catch up in the race but seems to have significantly fallen behind). Given that China believes Taiwan is a province of China this could be problematic for the West.

India’s take

India, with its demographic dividend and a tech-savvy talent hub, is poised to be an attractive partner and an alternate chip supplier to the West. India also sees this as an opportunity to build its local fabrication plants and become self-reliant in this space. However, there are significant challenges in becoming an industry-grade chip manufacturer. Firstly, as discussed, the industry has significant barriers to entry with respect to initial capital investment. Secondly, the domain being skilled-labor intensive necessitates in-depth technical education and skills training for the Indian youth. The third challenge is the large time to market involved. India is entering the semiconductor space by opening an ATMP (Assembly, Testing, Marking and Packaging) plant, or OSAT (Outsourced Semiconductor Assembly and Test) in partnership with Micron. In June 2023 Micron was approved for setting up a semiconductor assembly and test facility in Sanand, Gujarat. OSATs provide packaging to silicon devices that are manufactured by foundries and provide testing devices before shipping to the market. With the surging demand for high-end packaging solutions and rising packaging costs, OSAT vendors witnessed a considerable surge in demand from all the end-user industries, especially consumer electronics and automotive applications. Tata Semiconductor Assembly and Test Pvt Ltd will set up a plant in Morigaon, Assam, with an investment of $3.26 billion (Rs.27,000 crore), to develop “indigenous advanced semiconductor packaging technologies including flip chip and integrated system in package technologies” for automotive, EVs and consumer electronics segments. Tata Electronics will partner with Taiwan’s Powerchip Semiconductor Manufacturing Corp to build one of the fabrication plants in Dholera, Gujarat, with an investment of nearly $11 billion (Rs.91,000 crore), according to the statement. The Dholera and Morigaon facilities were inaugurated by the Hon’ble PM of India, Narendra Modi, on March 13, 2024. Dholera, where one of India’s first chip manufacturing plants will be set up, is not far away from the historical town of Dholavira in Gujarat which was home to the Indus Valley Civilization, one of the oldest known civilizations. This can be seen as an interesting happenstance where the state of Gujarat which was once home to one of the oldest known civilizations in the world is now going to become home to the 21st century Indian chip revolution which might propel us into a new age of civilization with the advent of silicon revolution in India. CG Power, in partnership with Japan’s Renesas Electronics Corporation and Thailand’s Stars Microelectronics, will also set up the third factory in Sanand, Gujarat, specializing in chips for consumer, industrial, automotive, and power applications. It will see an investment of nearly $1 billion (Rs 7,600 crore).

It is clear that the current government is making a significant push to set up fully functional fabs in India and rise as a viable alternative to the China-owned fabs. But as far as self-reliance is concerned, have we ensured that we also develop a sound ‘fabless chip design’ ecosystem for our chips? Chip design is the initial and key part of electronics engineering that involves the knowledge of logic formation and circuit design in software before sending the designed chip to be manufactured in hardware at the foundry. Fabrication is what happens in the foundries after the chips are designed in software. Fabrication is basically reading the software design of the chip, and actualizing it in hardware, using chemicals, gases, and other raw materials. So, chip design in some ways can be viewed as the “brains” behind having a very fast-performing computer. Currently, chip design is undertaken by fabless companies, mostly in the US. With Moore’s law ending, and chip fabrication reaching a stagnation point in how small a transistor can be, it is becoming evident that there needs to be more innovation in the way fabless chips are designed to make them faster. And chip design needs highly skilled labor, preferably with advanced academic degrees in the domain, and intensive RnD. Is India ensuring that it gives a push forward to the local fabless chip design start-ups and companies with as much capital as it is giving for the setting up of fab plants? Are the Indian university programs equipped with courses in advanced chip design? From a foreign policy perspective, it is understandable that India wants to be a viable alternative to China in chip manufacturing. But from a self-reliance perspective, New Delhi should not overlook the importance of ensuring that the chip design ecosystem also is established, lest we may end up being dependent on the US for innovative chip designs. And history will tell us that when it comes to innovation, the US is notoriously good at the patent game. India should take the necessary steps to ensure that it is not only giving a boost to industry-grade chip manufacturing but also to high-quality chip designing, so that we’re not only the “brawn” but also the “brain” behind our chips.

AI chips

“Chip rush is bigger than any gold rush” – Elon Musk. What we’re seeing in terms of AI compute is something out of our imagination. The Artificial Intelligence compute coming online appears to be increasing by a factor of 10 every six months. This is also why we see NVIDIA’s market cap being so gigantic because they currently have the best neural net chip, which can support the fastest machine learning and AI algorithms. With the ever-increasing speed of advancement in AI there is no doubt that the world will need highly efficient and high-performance neural net semiconductor chips that can support the fast-growing AI presence. We are on the edge of one of the biggest technology revolutions that ever existed. Revolutionizing software developments like cryptocurrency is giving rise to a hardware revolution since fast computing software needs state-of-the-art hardware chips to support it.

Geopolitics

Controlling advanced chip manufacturing in the 21st century may well prove to be like controlling the oil supply in the 20th. The country that controls this manufacturing can throttle the military and economic power of others dependent on it. The process of producing a semiconductor chip is so expansive in time and cost that it is practically impossible for a single country to own the entire process. If the US has the base for fabless chip design, then Taiwan and Korea have the base for fabrication and actualization of those chips currently. If UK-based ARM has the monopoly in making IP Cores, then US-based Applied Materials is the leader in materials engineering solutions. If the Dutch company ASML is the pioneer in making the world’s best lithography machines used in fabs, then China accounts for 79% of global raw silicon and is the largest producer of critical raw materials like Gallium, Germanium, Arsenic, Copper, and Rare Earth Elements (REE). Each step in the processing and manufacturing is equally essential for end-use high-quality chips. And each step also happens in a different country. The entire end-to-end process of semiconductor chip design and manufacturing is spread across many countries of the world. The semiconductor industry is one of the most complex because of the more than 500 processing steps involved in designing & manufacturing different products amid the challenging environment faced by industry workers, including volatile electronics markets and unpredictable demand. For the first time in history there is an industry/ecosystem which any one single country cannot own end to end, or at least, seems infeasible in the short term. This shows us that now more than ever we need to rely on an efficient, cooperative, diplomatic, and well-connected global supply chain in order to manufacture these all-pervasive chips regularly and with high yields. Strategic importance of chip supply chain diversity is gaining ground to protect countries against future headwinds. An industry previously only of interest to technologists is now one of the largest pieces in the great power competition. 

[Image by u_8t3emw1yia from Pixabay]

The views and opinions expressed in this article are those of the author.