Chip shortage: Can India tap into the multi-billion-dollar opportunity?

In every adversity, there’s an opportunity. And India could be sitting on one that is literally worth billions of dollars.

As the world grapples with an acute semiconductor shortage, India could be on the cusp of an unprecedented opportunity –only if it could grab it. 

The shortages have led to the world running out of semiconductor chips that power practically all our electronic products from smartphones, tablets, computers and gaming devices to even our automobiles, trains and airplanes.

Trade wars, a drought and a fire

The shortages were first caused first by the coronavirus pandemic and then a supply chain disruption after the US placed restrictions on China’s Semiconductor Manufacturing International Corp, the Asian nation’s biggest chipmaker. This prompted US companies to approach manufacturers in other countries to satiate their voracious demand for the silicon chip, blocking companies from other regions out. 

A crippling drought in Taiwan and a fire at a major chip manufacturing plant in Japan, the Renesas Electronics Naka factory, took out more capacity from the market and worsened the supply shortage.

To be sure, the world was witnessing a semiconductor chip shortage even before the coronavirus pandemic hit in early 2020. But as economies began shutting down in the wake of global lockdowns, chip manufacturers began cutting back on production, anticipating a fall in demand. 

However, as people took to remote work and staying at home, they began ordering laptops, computers, TVs, gaming consoles, smartphones and other electronic devices to work and to keep themselves entertained.

This boosted demand for chips, so much so that the worldwide semiconductor market is now projected to grow in double digits this year and next.

Demand surge

The global semiconductor market is projected to grow 25.1% in 2021 to $551 billion, accelerating from a 6.8% expansion in 2020, according to World Semiconductor Trade Statistics (WSTS). Growth will ease to 10.1% in 2022 with the market reaching $606 billion, as per the WSTS, a non-profit group of semiconductor product companies.

In 2021, all geographical regions are likely to show a double-digit growth. The Asia-Pacific region is expected to grow 27.2%, followed by Europe (26.4%), the Americas (21.5%) and Japan (17.7%), the WSTS forecasts.

On the flip side, the high demand has exacerbated the shortage of chips even further and put pressure on leading chipmakers.

More than half the world’s semiconductors are supplied by just one company—the Taiwan Semiconductor Manufacturing Co (TSMC), whose facilities have been impacted by a severe drought on the island. TSMC supplies chips not only to electronics giants such as Japan’s Sony and US-based Apple Inc but also to Intel, the world’s biggest semiconductor company.

Automakers take big hit

The chip shortage has hit manufacturing across several industries that use electronic components. A case in point is the global auto industry, which has been forced to cut back on production. In India, too, several automakers have had to cut back on production lines in August.   

Maruti Suzuki India, the country’s largest carmaker, reported a 19% decline in total sales at 130,699 units in August from 162,462 units in the previous month thanks in part to lower production because of the shortage.

The Business Standard newspaper said in a recent report that Maruti is making an up to 60% cut in production this month after Bosch – oneof its largest chip suppliers – shutdown its factory in Malaysia owing to the pandemic.

Gurgaon-headquartered Maruti is not the only carmaker that has had to take a steep production cut. Mahindra & Mahindra and Bajaj Auto reported a drop of more than 23% and 8%, respectively, in August sales compared with July. Toyota reported a fall of about 2%. News reports even say car sales can drop by as much as 30% during the upcoming festival season, which generally accounts for a third of the yearly sales for most dealerships. 

The semiconductor shortage could mean that dealerships would be considering a maximum of 30-day inventory during the Diwali-Navratri season this time, as against the usual 45-60 days.

Eicher managing director Siddhartha Lal has said the chip shortage is likely to hamper production for the company’s iconic Royal Enfield motorcycles for the ongoing quarter, and possibly through the rest of the year as well.

The Society of Indian Automobile Manufacturers, the industry lobby group, has asked the foreign ministry to intervene so as to ensure that when semiconductor plants do reopen, Indian manufacturers are prioritised. 

Jio Phone Next launch delayed

Automakers are not the only ones facing the brunt of the chip shortages. Mobile handset manufacturers have been at the receiving end as well. For instance, billionaire Mukesh Ambani’s Reliance Industries Ltd has had to defer the launch of its much-awaited Jio Phone Next smartphone because of the shortage.

The new smartphone, touted as the cheapest 4G-enabled device yet in India, was set to launch on Ganesh Chaturthi last week. However, because of a lack of chip availability, the company has had to defer introducing it by Diwali, in October. Other handset makers, too, have been under tremendous pressure to meet demand.   

So, what can India do about it?

Experts say India needs to develop its own chip research and development system and industry. While India did unveil a National Policy on Electronics in 2019, little by way of developing an ecosystem has happened since. Even in countries like Taiwan, companies like TSMC have thrived only with government backing over several years.

Having said that, it is not as if nothing has been done so far. IIT Bombay professor Udayan Ganguly and Mudit Narain, the chief technology officer in the office of the principal scientific advisor to the Indian government, say that the government has indeed taken several steps in this direction. 

In a piece on the news website Bloomberg Quint, the duo note that the country’s IT ministry is looking to attract global companies to make the chips in India. Moreover, they say that a recent government study has shown that human resources can be leveraged effectively in India to develop an R&D ecosystem in the country. 

In the Union budget of 2017-18, the Indian government had upped the allocation for incentive schemes like the Modified Special Incentive Package Scheme (M-SPIS) as well as Electronic Development Fund (EDF) to Rs 745 crore, in a bid to help spur semiconductor manufacturing in the country. Later, the union cabinet amended the M-SIPS, increasing its allocation further to Rs 10,000 crore.

Moreover, it has also established an Electropreneur Park in Delhi University, to incubate 50 early-stage startups. 

Finance minister Nirmala Sitharaman said last month that Indian industry should invest in the semiconductor manufacturing business. So, are any Indian companies looking to enter the semiconductor industry?

For one, the Tatas have said they want to. Tata Group chairman N. Chandrashekharan said last month that the conglomerate is eyeing the semiconductor manufacturing industry and has already set up a business to do so.

The Tata Group hopes that the excessive reliance on China and Taiwan, when it comes to chip manufacturing, will end in the years to come, as other countries look to become self-reliant and set up manufacturing facilities. 

However, setting up a semiconductor facility is expensive. It can take anywhere from $3 billion to $6 billion to set up a semiconductor wafer fabrication facility. Will Tata Group make the pioneering move or will any other company step up? It’s too soon to say. But the time to act is now.