Many advocate that India should enter into chip fabrication. However, the economics of chip fabrication is far too complex.
To begin with, it is a highly capital intensive business, and does require recurrent capital investments year after year. An oil refinery requires one time capital investment, but then it functions for several decades. Chip manufacturers invest several billion dollars in R&D every year.
Another point is the rate of failure in this industry despite the high investments. As we know, miniaturization has led to the packing of billions of transistors in the smallest possible area. The distance between the transistors is measured in nanometres(nm). An nm is one billionth of a metere. The lower the nam or distance, the more powerful is the chip. Apple’s iPhone 13 uses a 5-nm chip. Apple soon proposes to use a 3-nm chip for its iPad. It is 15 per cent faster than a 5-nm chip, and consumes 25 per cent less electricity. China, despite its heavy investments in this area and two decades of government support, could only produce a 14-nm chip, which is at least two generations behind the 5-nm chip.
In the chip industry, finally, there is going to be a market glut — a surplus capacity in chip production. There is US-China rivalry, which has led to heavy investments in the chip industry. The US intends to invest $50 billion on chip manufacturing. Intel is expanding its fab building activity. TSMC from Taiwan proposes to invest $100 billion on new fabs. There are many other proposals on the anvil.
Of course, chips are to this century what oil was to the last. The US controls the IP, design and technology. Japan makes silicon wafers on which chip circuity is etched. Lithography machines from Netherlands etch the circuitry on wafers. Taiwan Semiconductor Manufacturing Company (TSMC) makes chips on order for anyone. Samsung from South Korea too is an advanced fab manufacturer.
India should focus on chip value chain except fab. It is almost 40 per cent of the chain revenue. Chip design, assembling, testing and packing (ATP) should be of interest to India.
China buys 60 per cent of chip production of the world . Its import bill on this account exceeds $300 billion. China could succeed in making low-end chips. It has failed to make advanced chips. Its efforts to buy the US firms to enhance its capability have been thwarted by the alert US government, and other European and Asian governments.
Huawei developed a chip for use in 5G equipment. But it has to depend on the US firms for chip design. US has banned the American firms from helping Huawei. Even other firms were told by the US to stop selling to Huawei. It is the US monopoly in the IP and chip design. Thus chip making has its own politics.