Broken chips

Just as India’s economy is charting a tentative recovery from Covid, its automobile and electronics industries are at the receiving end of global semi-conductor supply chain disruptions threatening the turnaround. With manufacturers such as Maruti and M&M cutting output significantly, the chip shortage looks likely to take the sheen out of upcoming festival sales. While the industry is hoping it will be resolved in a quarter, agencies such as Goldman Sachs predict, based on manufacturing lead times, that it could be 2023 before global chip supplies get back to pre-pandemic levels.

The proximate trigger for the shortage was the onset of Covid in early 2020 when global automakers cut back on their chip orders to trim inventories. Simultaneously, as telecommuting and home schooling took off, demand for chips from laptop and electronic device-makers shot up, prompting chip-makers to divert their limited capacities to these high-margin users. With the unlocking, automakers have looked to resume their contracts only to find themselves left high and dry. A winter storm in Texas, a factory blaze at a Japanese fabrication giant and a Covid surge at Malaysia that have prolonged this disruption, have underlined the risks of the world coming to rely on a highly oligopolistic industry for a critical component which powers everything from communication devices to medical and defence equipment. As much as 63 per cent of global chip fabrication is today outsourced to Taiwan with just three firms from Taiwan, South Korea and China controlling over three-fourths of all fab supplies.

The chip crisis is now triggering a structural change in the procurement policies of global manufacturers, which their Indian counterparts must follow. Automakers are busy replacing their just-in-time sourcing for semi-conductors with long-term supply contracts, while electronics firms like Samsung are sinking multi-billion-dollar investments into semi-conductor production. The US-China trade wars last year, in which chips featured prominently, highlighted the strategic implications of external dependence for such a critical input; the US, Europe and China have committed billions in subsidy to on-shoring production. Given that chip fabrication is capital-intensive (an average sized facility costs $7-10 billion) with long gestation and rapid technological obsolescence, it appears infeasible for India to strive for full self-sufficiency on chip fabrication. But the country can still consider a two-pronged strategy to secure its strategic interests in semi-conductors. One, it can double down on budgetary outlays to expand and upgrade government-owned semi-conductor facilities already operated by ISRO and DRDO. Two, it can showcase its high-potential consumer electronics market and skilled talent pool in R&D to woo global consumer electronics manufacturers to onshore part of their semi-conductor supply chain to India. The production-linked incentive scheme will be an apt vehicle for this.

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