What the chip industry and the petroleum sector have in common

Source– The post is based on the article “What the chip industry and the petroleum sector have in common” published in The Indian Express on 7th November 2022.

Syllabus: GS3- Economy

News- The article explains the similarities between the petroleum and semiconductor industry.

What are similarities between the petroleum industry and semiconductor industry?

Both industries are dominated by a handful of countries and corporations. Both are capital intensive and cyclical. both sit at the centre of interdependent global relations. Both are in the cross hairs of international geopolitics and are characterised by technological dynamism.

Domination by few– The supply of petroleum is dominated by the OPEC and mega-sized public and private multinational companies, often referred to as the “super majors”.

The US is the most powerful player. Every chip produced in the world has a direct or indirect connection with the country. The software for chips  is provided by three US based companies.

Samsung  and Hynix, which together produce 44% of the world’s memory chips. TSMC,  fabricates 37% of the world’s logic chips and 92% of the most advanced chips. Both companies are Korean and Taiwanese respectively. Both are protected by the US military security blanket.

Geopolitics– Geopolitics is at the core of both industries. Every oil import dependent country has reached to the Middle East to secure access to petroleum. At times, they have weaponized their efforts to safeguard this objective. The Saudi embargo of exports to the pro-Israeli Western world in 1973; the US intervention in Iraq in 2003 and the current cutback of Russian gas to Europe are three examples of this phenomena.

Semiconductors have also been the consequence of the “technology Cold War” between the US and China. The US has imposed sanctions on the physical and intellectual export of chip technology to China. President Xi has called for a “full scale assault” to “rejuvenate” China.

Global scale– Both petroleum and semiconductor chips have a global footprint. Petroleum is tradable across the world. Oil and gas prices are cyclical. They reflect the capital intensity and long lead times of the investment cycle.

The value chain of semiconductors straddles the globe. Investment to create part or all of this value chain runs into billions and the returns depend on engineering precision and technical talent.

What is the case for India?

India has struggled for more than five decades to reduce its dependence on external sources of petroleum supply. It has not been successful. India’s import dependence is now more than 80 per cent.

India has recently embarked on a journey to develop domestic chip fabrication facilities.. There are two lessons they should internalise from historical experience-

One, chip nationalism will be economically costly and could be technologically regressive. They should be cautious about decoupling from the international supply chain.

Two, government support should be limited to financial support, nimble cooperation, and the creation of an innovative ecosystem. Bureaucratic intervention should be minimal.