India-Taiwan mega semiconductor deal: Semiconductors and the impact of their shortage on the industry
With an exponential surge in the demand for semiconductors, there is a global shortage of chips which has hit manufacturing and sales in various countries. To address this issue, India and Taiwan are in talks for an investment agreement to bring chip manufacturing to South Asia along with tariff reductions on components for producing semiconductors by the end of this year.
People familiar with the development have said that the deal would bring a chip plant worth an estimated $7.5 billion to India to supply everything from 5G devices to electric cars. At present, India is searching for locations having adequate land, water and manpower. It would also provide financial support of 50% of the capital expenditure from 2023 as well as tax breaks and other incentives.
The bilateral agreement comes at a time when the world democracies are boosting economic and military ties to stand up against an increasingly assertive China. The Taipei Officials want quick progress on the agreement that would include tariff reductions on dozens of products used to make semiconductors -- a precursor to a broader trade deal also under consideration.
While India wants to become self-reliant on chips, Taiwan wants to strengthen its diplomatic presence across the world. India is hesitant to anger China which claims the island democracy as its own and is working towards unifying it with mainland China.
What are semiconductors?
Semiconductors have properties in between conductors such as metallic copper and insulators such as glass. They are usually made up of silicon and are used to power a wide range of electronic devices such as cars, laptops, smartphones and more.
Why there is a shortage of semiconductors?
Since the onset of the COVID-19 pandemic, multinational companies have reported a scarcity of semiconductors. The demand for the semiconductor is exceeding the supply and the situation is not expected to improve anytime soon until 2023. Their shortage will have a direct impact on the sales of electronic devices.
The other major factor is the strained relationship between the US and China. This is because many US companies do business with Chinese companies. For instance, Huawei has been blacklisted by the US government.
Its impact on the industry
Manufacturing of the semiconductor cannot be pushed on such short notice as it takes more than three months to manufacture it. The process involves giant factories, dust-free rooms, multi-million-dollar machines, molten tin and lasers.
Many domestic and international automobile manufacturers have temporarily halted production due to a shortage of semiconductors. The industry’s trouble has grown manifold which was already hit by the COVID-19 pandemic. The disruptions in production will result in the recovery of the industry.
For instance, Maruti Suzuki will see a 60% cut in production in September due to a shortage in the supply of semiconductors. Mahindra and Mahindra M&M would also cut output by 20-25% in September due to the shortage of semiconductors.
Earlier, Apple CEO Tim Cook said that supply constraints will impact sales of iPads and iPhones. The shortage is not in high-powered processors, but chips that perform functions like driving displays or decoding audio, which can be manufactured using older equipment.
Chip shortages have delayed the launch of a smartphone by Reliance Industries Ltd. that has been co-engineered with Google.
Foundries are increasing wafer prices and chip companies in turn are increasing device prices. The shortage of semiconductor chips will impact the supply chain and will constrain the production of much electronic equipment in 2021. Experts believe that the supply crunch will begin easing with the start of next year but this year will be pretty difficult for the industry. Many tech giants have begun developing their own chips.
Initiatives undertaken by the world leaders:
The world leaders have expressed the need to shift manufacturing within their countries and become self-reliant. The Indian Ministry of Electronics and Information Technology (MeitY) has already introduced the Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS).
The Biden administration’s $2 trillion infrastructure investment package includes $50 billion of the semiconductor industry. Similarly, the South Korean government has announced a massive $451 billion investment to help companies boost the production of semiconductors.