As Indian Semiconductor Mission (ISM) begins its first round of due-diligence on the submitted proposals to flag off its chip fabrication industry, a word of caution is in order. Recently, Ashwini Vaishnaw in charge of Ministry of Electronics and Information Technology outlined the importance of the chip industry and government’s long-term perspective explaining the policy initiative. With this long-term view and strategic importance of Fab-in-India initiative, it is prudent that India exercises caution in belling the cat and does good homework. An example is in order to illustrate the point.
The Origin Smoke Screen – Examples From Indian Steel Industry And EU Bicycle Industry
At the onset of US-China trade spat in 2018, China had more than 50 per cent of world’s output in steel. In the absence of a free trade agreement (FTA) between India and China and to avoid Chinese steel dumping in India, India devised a naive additional duty of 18.9 per cent on top of standard customs duty and thought its local industry has been fenced sufficiently.
However, in 2019 at the backdrop of increasing complaints to Indian Stainless-Steel Development Association (ISSDA), the organisation wanted to ascertain how the Chinese stainless steel is entering Indian market?
Because the official import data did not show any spike in the Chinese stainless steel in Indian market but ISSDA kept receiving complaints from its members of price undercutting and 30-40 per cent reduced operating of Indian capacity.
On careful sieving of import data revealed an interesting anomaly. The import of stainless steel from Indonesia into India had skyrocketed from 8000 tonnes in 2017-18 to 67,000 tonnes in 2018-19. A seven time increase in a single year. A country can’t increase its capacity in 365 days by seven times without new capital infusion, without installing new manufacturing plants, machinery and skilled labour.
Further investigation revealed that the Chinese origin steel was routed through Indonesia because China had an FTA with the Association of Southeast Asian Nations (ASEAN) of which Indonesia is a member and ASEAN has an FTA with India.
Therefore, Chinese exporters could export to Indonesia duty free and then reach Indian market again duty free, thanks to FTA between India and the ASEAN. Chinese exporters managed to obtain ‘certificate of origin’ in Indonesia with cosmetic value addition (example, slitting or rebranding hot-rolled to cold-rolled) and foxing Indian Customs.
Domestic manufacturing infrastructure takes years to develop organically and be productive so when exporters dump goods at cheap price, they drive the domestic industry out of business, once the local industry is wiped out and begins relying on single source, surge pricing comes into play and as they say “the rest is history”.
This behaviour of the northern neighbour is not an aberration but a norm.
In fact, the art has been perfected. A three-decade-old instance is also worth mentioning. In 1993, EU imposed restrictions on Chinese bicycles whereas Japan and the US did not bother placing any barriers, today there is no indigenous bicycle industry in the US or Japan. Even though EU manufacturers battled being vigilant but Chinese bicycles continued to sneak into EU via Indonesia, Malaysia, Tunisia and Sri Lanka.
Investigations revealed that in Indonesia and Sri Lanka there was no value addition and in Malaysia and Tunisia, the value addition was less than the EU mandated 25 per cent resulting in Indonesia, Malaysia, Tunisia and Sri Lanka joining the EU anti-dumping list in 2013.
A year later in 2014, new countries had emerged as alternatives namely Pakistan, Cambodia and The Philippines. A physical inspection of the manufacturing plants in these countries revealed that they merely assembled the imported parts. In 2015, EU anti-dumping duties were extended to Pakistan, Cambodia and The Philippines.
Caution For Chip Fabrication Due-Diligence
In June 2014, the State Council (People's Republic of China's highest executive agency) outlined the national integrated circuit industry development outline creating a national steering committee supervised by Liu He, (the chief economic adviser to Chinese Premier). This outline (termed the Big Fund) has the goal of establishing world-leading semiconductor industry in all areas of integrated circuit supply chain by 2030 and aims to attain 70 per cent self-sufficiency by 2025 (termed Made in China, MiC 2025).
The plan restructured the financing and tax relief measures include state-linked equity investment funds at the national and regional levels. Under these initiatives the northern neighbour bank-rolled and egged many provincial administrations (example, Wuhan, Jinan) to take a plunge into chip fabrication and many of them did.
The success of these initiatives has been found wanting, in 2020, this self-sufficiency was estimated at just 16 per cent. The authorities have stopped citing the MiC 2025 targets since last year which is not a surprise. In the last three years, at least six major chip fabrication endeavours (including the notable HSMC and QXIC) have gone belly-up sinking at least $2.3 billion without producing a single chip. Beijing mandarins and investors are scavenging this wreck in hopes of salvaging some parts by routing the equipment and other stuff through favourable conduits.
Chip fabrication is a highly-specialised industry that takes time and significant technical expertise and it has been detailed in Indian media, how some other countries have succeeded or failed trying to establish this industry on their home turf. Even though the Indian media is wrongly focused on the aspects of water and electricity, this is missing the woods for trees.
India needs to be cautious of the babushka entities posing as technology partners attempting to make a quick buck from the initiative. If they make tall promises to bring over a process node that they lack the experience and technical credential of manufacturing or engaging a global clientele. It would defeat the atmanirbharta and long-term goal that the Indian government has envisioned, if we settle for the jugaad of allowing Chinese investors to set up shop and our bureaucratic machinery changes the goal-post to herald “we have addressed the import imbalance and ticked the local shop box as well, two birds in one shot”.
The key here is not the cheap equipment, instead it is the establishment of linkages of technical know-how and gaining insights standing on the shoulders of a seasoned global player.
In this context, the evaluation criterion of the received proposals has to be based on the technology offering with proven track record of at least couple of node generations and demonstrated technical know-how with experience in churning significant wafer lots with acceptable yield.
The bleeding edge node shouldn’t be the criteria instead the emphasis should be to find a reliable partner, who has witnessed the complete cycle of technology development for multiple technology nodes and who has a global customer base and good understanding of market expectation in quality and deliverables.
A mere brand in adjacent aspects without any first-hand know-how in churning chips through 4,000 plus fabrication process steps is not a right fit to act as a Sherpa in our Fab-in-India journey.
India needs to be vigilant of shell entities bringing wooden horses to the Indian shores, promising a silicon gift.
Som is a semiconductor industry professional with 16+ years of bleeding edge industrial R&D, having worked in proximity with multiple global fabs, and design houses.
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