FABS: The East Asian lesson for India

Source– The post is based on the article “FABS: The East Asian lesson for India” published in the mint on 4th October 2022.

Syllabus: GS3- Economy

Relevance– Semiconductor manufacturing

News– The article explains the experience of East Asian countries in promoting semiconductor manufacturing.

Recently the central government has announced some changes in the production-linked incentive linked scheme for semiconductors.

It is now offering fiscal support of 50% of total project cost to companies setting up semiconductor plants irrespective of chip type.

The government wants to promote the chip making industry amid the global move to de-risk semiconductor manufacturing. There is a global effort to diversify their production after the pandemic.

What are the challenges in chip manufacturing?

High investments are needed both from cost and technological perspective.

Lower labour cost counts little in chip manufacturing.

Market is dominated by the biggest players that are both highly profitable and technologically sophisticated. It is not easy for new players to be competitive.

The chip manufacturing industry is highly dispersed geographically. The US leads in designing and Taiwan in manufacturing chips. They are highly interdependent. It creates a competitive advantage for them. Local players do not have the capability to match their scale.

What is the backstory of Taiwan in chip manufacturing?

In the 1980s, Japan assumed a major share in chip manufacturing at the expense of American products.

To lower Japan ‘s share, America outsourced low-tech processes in the chip value chain such as packaging to countries like South Korea and Taiwan.

Later developments in Taiwan were different from other Asian countries. Foreign investment was not very helpful in shifting up to high-tech processes of the supply chain.

It was government intervention in the form of promoting research that proved beneficial. The government supported the setting up of a research institute called Industrial Technology Research Institute. It transferred technology to the private sector.

Another important component of Taiwan’s strategy was the foundry model. Manufacturers did not design their own chips. They manufactured chips for American companies who had design experience.

What was the South Korean experience?

Initial developments were the same for almost all Asian countries. South Korea also benefited in the initial stage from low tech processes outsourcing by America.

But in later stages, Japan and the USA were reluctant to share licensing technology.

South Korea’s large industrial conglomerates hired engineers from Silicon Valley.

They approached Silicon startups for design experience. These startups were provided capital by industrial houses.

How have the governments of these countries helped in semiconductor manufacturing?

Financial support by the government was important but it was not a deciding factor for growth of semiconductor manufacturing in East Asian economies.

Investment in semiconductor fabrication was financed almost entirely by companies themselves.

Government support was crucial in the form of providing facilities for research. Government coordination and encouragement of investment in early stages was beneficial for these companies.