Can India-Taiwan’s Semicon Deal Partly Address Chip Shortage Issue

India is in talks with the Taiwanese government that would bring a chip facility to the country, along with tariff reductions on components for producing semiconductors by the end of the year. The move, according to experts, can partly address the global semiconductor chip shortage issue, but at the same same, it can also rekindle tensions with China.

A report by BloombergQuint mentioned that the deal would bring a chip plant worth an estimated $7.5 billion to India to supply everything from 5G devices to electric cars. India is currently studying possible locations with adequate land, water and manpower, while saying it would provide financial support of 50% of capital expenditure from 2023 as well as tax breaks and other incentives, the report said.

Almost all of the world’s semiconductors (that’s used as everyday electronics) are made by Taiwan Semiconductor Manufacturing Co. (TSMC). But with higher demand for cellphones, laptops and the increased use of internet, demand for semiconductor chips has increased tremendously and the industry continues to face an even greater shortage of semiconductor chips.

Meanwhile, TSMC’s dominance puts the world in a vulnerable position as Taiwan remains the focal point of tensions between the US and China, which claims Taiwan as its own territory. Over the past few years, TSMC has increased its R&D spending.

The trade talks between India and Taiwan come at a time when democracies across the world are boosting economic and military links to stand up against an increasingly assertive China.

The discussions have accelerated in recent weeks as U.S. President Joe Biden seeks to shore up supplies of chips, strengthen supply chains among democracies and improve military capabilities in the region.

In fact, Taiwan has long sought a trade deal with India. In 2018, India and Taiwan inked a bilateral investment agreement to increase revenue and strengthen economic connections between the two countries. The trade between the two countries totaled $5.7 billion in the year 2020. For so long India was reportedly hesitant as strong trade ties with Taiwan may anger China.

Meanwhile, experts point out that global chip shortage will persist. A report published by Gartner in May estimates that the chip shortage across categories of devices could continue well into the second quarter of 2022. As Kanishka Chauhan, principal research analyst at Gartner said, “The semiconductor shortage will severely disrupt the supply chain and will constrain the production of many electronic equipment types in 2021. Foundries are increasing wafer prices, and in turn, chip companies are increasing device prices.”

According to data from Society of Indian Automobile Manufacturers (SIAM), automobile wholesales in India declined 11% year-on-year in August. For example, Maruti Suzuki, India’s largest carmaker will see a 60 percent cut in production in September due to shortage in supply of semiconductors.

Production of electronic devices has also been impacted by the shortage of semiconductors. During a post-earnings call with analysts, Apple CEO Tim Cook had said that “supply constraints will hurt sales of iPads and iPhones.”

Many tech companies have begun developing their own chips, a move that will not only alleviate the current supply concerns but will likely help the industry in the long-run.

There is a strong likelihood that the semiconductor shortage will impact sales during the upcoming festive season in India.

While the India-Taiwan deal is still under evaluation, once India starts creating chip design it could be a relief to an extent to the chip industry, as it will reduce the tariff reductions on components used to make semiconductors. As a recent report by Semiconductor Industry Association (SIA) and Boston Consulting Group (BCG) also highlights the chip shortage crisis can be addressed by government actions, including funding incentives to boost domestic chip production and research as the way forward.

But given a lack of ecosystem for setting up a chip fabrication plant in India, coupled with concerns on the supply of water and electricity, there could be uncertainties in the way the deal may materialize.