Significance of Semiconductor Industry for an Aspiring Nation

Having access to semiconductor chips or ability to harness computing power will decide the national security, economic and geopolitical power of any aspiring nation. Professor Chris Miller in his book “Chip War” states that semiconductor chip technology has become the most critical technology of the modern world. Semiconductor chips are embedded in every aspect our lives today. They are embedded in our smartphones, watches, cameras, earphones, microwaves, cars, rockets, airplanes, drones, satellites, mobile towers, missiles, data centers or any modern device we can think of.

Yet only a handful of countries namely USA, Netherland, Taiwan, South Korea, Japan, UK and Germany are part of the semiconductor supply chain. To understand this incredibly complex semiconductor supply chain let us look at an example. Design engineers based in California and Israel design a chip based on a architecture of a UK based company called ARM, using American design software such as CADENCE or Mentor Graphics. Design is then sent for fabrication to a Taiwanese company called TSMC. TSMC buys ultra-pure silicon wafers and special gas from Japan. Then the design is carved into the silicon wafers using photolithography tools, that can etch and deposit materials up to few atoms thick on the silicon wafer, made by the Dutch company ASML which in turn uses key components made in USA and Europe. The manufactured chips are assembled and tested in Malaysia or China and then distributed across the world. Notice that the supply chain up to the assembly and testing part is made entirely of US allies. If any one point is disrupted the modern world will come to a standstill. Imagine China takes over Taiwan. There are many such choke points-tools, chemicals. Design software- in this supply chain which we will discuss later.

The common sentiment is that whoever leads the artificial intelligence race powered by cutting edge semiconductor chips will have dominant position in the world economy. But there will be no future tech such as AI, IOT, 6G, without cutting edge semiconductors. Also, America’s military primacy stems largely from its ability to use semiconductor chips to military use. There will be no precision guided missiles, satellites, radars, sonar, modern fighter jets, drones etc without semiconductor chips. So, every nation is waking up to this reality and are trying hard to acquire chip technology.

Why most nations failed to acquire or develop cutting edge semiconductor technology so far? It is not for not trying. We will have to look at the evolution of semiconductor technology to understand this. American scientists and engineers understood that flow of electricity can be controlled in a semiconductor. They added impurities to the semiconductor and created three layers: the donor, the acceptor and the gate. By applying voltage to the gate one can make electrons flow from the donor to acceptor layer thus a transistor was born. Soon engineers turned the transistor into a switch. Another engineer found out that transistors as well as connecting wires can be carved into the semiconductor wafer using photo lithography thus Integrated circuit was born. Today we call the integrated circuits semiconductor chips or microchips in short.

American capitalism took over after the invention of Integrated Chips. Venture capital started pouring into semiconductor startups and thus the famous Silicon Valley was born. American engineers and their tech companies started producing memory chips and logic chips for the military but soon found use case for the consumer markets. One of the pioneers Gordon Moore noticed that the number of transistors doubled in a chip annually so he predicted that computing power of chips would continue to grow exponentially in 1965. This prediction remained true till date and came to be known as Moore’s law. The making of Moore’s law is a story of manufacturing experts, supply chain specialists and marketing managers as much as engineers and scientists. This phenomenon made semiconductor chips cheaper while increasing the computing power year after year.

The USSR understood the importance of semiconductor chips and employed their scientists, engineers and all resources to build their own Silicon Valley outside Moscow. At the beginning of the cold war Russians could match the Americans from tank to tank, missile to missile or all weapons but by the end of the cold war they Soviet Union failed to match the accuracy and precision of the American weapons powered by chips. Russians failed because they failed to continue running the semiconductor race. Russians adopted the “Copy It” strategy which worked well while acquiring other technologies that does not evolve very fast such as nuclear weapons. The strategy was to let Americans take risk, spend all their resources, and develop the chip. Russian spies will acquire the American chips from neutral European zones and then reverse engineer it. Initially Russians were able to copy the semiconductor chips but kept falling behind because by the time they copy a chip the technology gets outdated. Americans continued adding computing power exponentially every year. After few years Americans tech giants found a civilian consumer electronics market which helped it scale up even more and reduce costs. Meanwhile Russian Engineers were completely depended on their military for use case. Moreover, Russian engineers never had the economic freedom to make market-based decisions. The decisions were made by a bureaucrat appointed by the communist government. By the end of the cold war Russians were behind by few decades and simply gave up.

After the Russians failed the Japanese led by Akio Morita, the founder of Sony, came up with a different strategy. The idea was to integrate Japanese businesses with that of Silicon Valley and American consumers. Japanese used to buy American chips and embed it into their consumer electronic products such as a Walkman, calculator, stereo etc. and sell it back to the Americans. It was a very successful strategy and Japanese consumer goods became synonymous with quality at reasonable price. Soon the Japanese firms licensed the American chip technology and started producing DRAM chips in Japan. Around the same time wages in California rose under pressure from unions. American companies, in response, started building assembly plants in Japan, Singapore, Taiwan etc. where cheap labor and union free environment was available making it a sweet deal for the American companies. As years passed by the cost of moving from one generation of fabrication technology to the next generation of technology became very high within America , American companies started building fabrication plants in Japan. By the mid 80’s Japanese tech giants started producing better DRAM memory chips, better photolithography tools and put American giants such as Intel, TI and National semiconductor out of business. Till then Japanese were quietly downplaying their technological achievements and the number of Japanese Nobel Laurette in Physics they created. Once they made better and cheaper memory chips arrogance set in. Akio Morita and a Japanese nationalist politician wrote a paper saying Japanese can now say no to America in geopolitics and may provide advanced chips to Russia also. No senior partner likes it when the junior partner starts doing better than the senior partner and thus began a trade war. American giants such as Intel who invented DRAM happily gave away DRAM technology to the South Koreans who started undercutting the Japanese. Intel also invested on the Dutch company ASML, an offshoot of Philips, to produce cutting edge lithography tools, this ultimately put Japanese company Nikon out of business. Intel itself moved into producing processors with X86 architecture which became an integral part of personal computers. Qualcomm started producing wireless chips that could pack huge amount of data into the spectrum. TI and Analog Devices started producing all sorts of analog circuits such as Analog to Digital converter, Amplifiers transmitters etc. While the Japanese companies remained stuck into the commodity business of DRAM but could not sustain under pressure from the cheaper chips by the South Koreans. Only Sony survived because it still innovated and moved into producing CMOS image censor chips for digital cameras. A new American company called Micron Technology backed by a billionaire potato supplier came up with even better methods of producing DRAMS cheaply. I would like to mention here that I was fortunate to have worked for Micron for few years at Boise, Idaho. American tech companies were back with a dominant position by the 90’s. The Japanese dream of beating American economy never materialized.

Then came the era of globalization. All the American tech giants started building semiconductor fabrication and assembly plants across Taiwan, Hongkong, Singapore, South Korea. Globalization worked great for these Asian countries because it removed their low skilled labors from subsistence farming. In the process these countries moved from poverty to affluence. American companies also could purely focus on designing advanced chips for next generation technology.

Asian countries gained experience in assembling and fabricating chips and also learned from the mistakes of the Russians and Japanese. Taiwan and South Korea elbowed their way into cutting edge semiconductor technology by licensing Dutch or American technology, subsidizing chip firms, funding training programs, keeping exchange rates low and imposing tariff on imported chips. After two decades Taiwanese gov backed Morris Chang, a Chinese American, who was overlooked for CEO position at TI after being the backbone of manufacturing for TI (Texas instruments) all his life. Morris Chang was offered a freehand to set up a fab in Taiwan. He licensed technology from Phillips and acquired some funding from abroad and created the present production giant known as TSMC. The business model was to produce chips for all American and European companies. Soon most American companies outsourced fabrication to TSMC. TSMC under Morris Chang took all possible risks and invested insane amount of money to keep Moore’s law alive. All American, European or even the Chinese chip companies are dependent on TSMC.

Today TSMC alone produces 37% of the computing power and almost all advanced semiconductor chips. Two Korean companies produce 44% of the memory chips and one Dutch company produces 100% of the EUV lithography machines. It took three decades and billions of dollars for the Dutch company ASML to create the EUV machine that TSMC and Samsung uses.

Ever since China opened up its economy under Deng Xiaoping it also tried to replicate the same business model of integrating its economy with that of USA. Over three decades China became an assembling giant and came to be known as the factory of the world. In the process Chinese population too moved out of poverty by giving up subsistence farming making China a huge market for all the American companies. As more and more American companies started setting up assembling and testing plants in China, China developed a skilled population and made tremendous progress in developing modern technology. China started spending billions of dollars on research and created amazing tech companies such as Baidu, Weibo, TenCent and Alibaba powered by American chips manufactured in Taiwan. China also created a multinational company named Huawei that specializes in telecommunication’s equipment, consumer electronics, Artificial Intelligence and cloud computing. Huawei also designed amazing in-house chips but needed TSMC to manufacture it. Its progress in artificial intelligence could match the American giants. As China became a dominant player in the world economy it started flexing its muscles against its neighbors geopolitically and started challenging the preeminence of America thus triggering another trade war. China under Xi Xinping wanted its future tech independent of American chips. It tried creating its own Morris Chang and spent billions of dollars and was on the verge of succeeding. It even stole engineers and technology from Micron and bullied micron through its courts by banning sale of micron chips in China. No company including Micron could directly take on China because of its huge market. Americans asked Trump administrations for help. American government responded by blocking access to ASML tools and design software for the concerned Chinese fabs thus killing the Chinese dream of cutting-edge semiconductor technology. During the corona pandemic American think tanks were worried that China might be weaponizing synthetic biology and AI. In response America assaulted Huawei by convincing its allies-Canada and Australia- to ban Huawei equipment from their mobile towers.  America is also exerting huge pressure on TSMC to shift its fabrication plant to America and stop taking orders from mainland Chinese tech companies. China still has access to older generation semiconductor technology and continues to smuggle high end American chips. China is still pouring billions of dollars to acquire cutting edge semiconductor technology. World is still worried If China captures Taiwan and TSMC, America will have no option but to go for war or else China will rule the world. If China destroys TSMC using its missiles it may take a decade or two to recreate the modern world again.

Now here comes an opportunity for India. In the trade war between Japan and USA, South Korea integrated itself with the semiconductor supply chain. Now in the trade war between China and USA, India must integrate itself with the semiconductor supply chain. America and its allies are already saying China + 1 strategy for the future. India already has the engineering talent that can design chips but lack manufacturing talent. I am aware that the fastest parallel pipeline ADC chip was designed by an Indian team based in Bangalore some years back.

Now according to media reports three semiconductor Assembly and Testing units and one Fabrication plant are coming up in India.

1)      Micron Technology will set up Rs 22516 crore Assembly, Testing and Packaging unit in Sanand, Gujarat

2)      Tata Semiconductor Assembly and Test Pvt Ltd. will set up a Rs 27000 crore assembly plant in Jagiroad, Assam

3)      CG Power in partnership with Renesas Electronics, Japan and Stars Microelectronics, Thailand is setting up a Rs 9000 crore Assembly plant in Sanand, Gujarat

4)      Tata Electronics Private Limited in partnership with Taiwan based Power Chip semiconductor manufacturing Corp is setting up India’s first Rs 91000 crore fab in Dholera, Gujarat.

The Micron plant will create 20000 jobs and the other three will together create 20000 high technology jobs and 60000 indirect jobs according to media reports. We need to understand that when we enter a supply chain for the first time, we have to enter through the lowest value end of the supply chain. Assembly units need low skilled workers who can may be cut the wafer into 5000 chips and attach it to plastic or ceramic packages. Testing a chip will need some coding skills to run test scripts while placing the silicon wafer on a probe station. Basically, we will be doing what the Asian tiger countries such as Taiwan, Hongkong, Singapore and Thailand did in the 80’s. If we do it right, we will also be able to remove at least 40000 families out of subsistence farming just as the Asian countries did.

However, the fabrication plant in Dholera will have a clean room that will require engineering skills and manufacturing expertise to run it round the clock. It will also need low skilled manual labor along with high skilled engineers. As a nation we are getting into a cut throat business. As a people we must learn this business and compete. Micron is into memory chip business which is a commodity business so we will be competing with the Koreans. Looking at the foreign partners in the other three assembly units I can assume we will be producing older generation chips which are still relevant in some industries such as automobiles and some consumer electronics.

With regards to Assam, our engineering colleges must collaborate with these companies. Do research for them, send interns for exposure. We should do everything to make the Jagiroad Assembly plant a success. After a decade we will gain enough credibility and experience to ask for a cutting-edge fabrication plant. Once a fabrication plant comes in, we should install chip design software in our engineering college campuses. We should let students design a chip, get it fabricated and run it for projects.

We should also try to bring in the lay out design jobs to these assembly units because anyone without engineering knowledge can be trained to do it. When I was in Silicon Valley, I saw that American companies trained the unskilled Vietnam war refugees settled around San Francisco to do these jobs.

Government is playing a great role by paying up to 50% of the investments in these plants. Along with that government will also have to figure out a way to keep the work environment free of militant unions generally seen in eastern part of India. Asian tigers especially Singapore kept the factories and assembly units union free.

There is a poverty of aspiration among our youth. Unfortunately, the highest aspiration among our youth is to become a glorified government babu. Time has come for our youth to be bold and aim to solve problems larger than life. From 2024 to 2034 we need to master the low end of the supply chain but from 2034 onwards we need our youth to do cutting edge research on EUV lasers, modern finfet transistors, future tube transistors, and develop cutting edge tech for the nation. As a nation we need to take risk and spend billions on research.

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