Semiconductor - The hope, the Opportunity, the Game Changer
What can change India’s Growth Trajectory?
What happened in two decades that changed China from a closed economy to a Supersonic economy?
Why Taiwan is so important for China?
“A small vibration can change the cosmos.”
Some call it Butterfly Effect (small changes, gigantic impact) for some it’s just an Inflexion point.
Whatever may be the case, innumerable examples of such occurrences have been witnessed by the world whether it’s the case of Israel (one of the smallest nations in the middle east yet technologically advanced having one of the highest rankings in Human Development Index) or Hong Kong which emerged as a Powerful Financial Hub once called as Backwaters with 20 Villages by Queen Victoria in 1841.
One more country which begs attention in terms of turn around or changing the complete landscape in China, which is a matter of 25/26 years (1980–2006) became the Factory of the World.
In the 1970s & 1980s, China was an inward-looking, predominantly Agrarian economy, totally opposed to any private ownership, led by communist forces. Things changed and things changed rather quickly.
A few believe, the entry of China into the WTO (World Trade Organization, earlier GATT) in 2000/2001, led to its Exponential Exports growth. That’s not the complete truth. The truth lies a little deeper.
The building blocks of the Chinese economy were set in early 1987 when the Chinese mainland was opened for Taiwanese (Taiwan natives & Residents) to enter freely Mainland China and conduct as well as own business interests. This single event largely changed the entire landscape of Chinese businesses and the way China did business with the World. Deng Xiaoping, the former Chairman of PROC (People’s Republic of China) supported the cause and opened up the Chinese economy for foreign Investments. Deng realized that for fast-tracked growth one needs not only passion but capital as well. And thus NRCs (Nonresident Chinese) were invited to invest back in the Country. Native Chinese were still skeptical to come back to communism, however, Taiwanese saw a big business opportunity and they grabbed it with both hands.
Post-1987, the TaiShang (Taiwanese-based entrepreneurs conducting business in Mainland China) became the most potent force and source of foreign direct investment in Mainland China leading to export-oriented manufacturing and export-oriented development in China.
Foxconn, the manufacturer of Apple phones, Pegatron one of the biggest electronics companies for big branded Vendors, Wistron an information technology leader providing a variety of industrial products and services in communications, components, and software solutions are all Taiwanese companies.
What led the island country of Taiwan to dominate the world and create a shadow over China?
How did Taiwan grow from an underdeveloped Agrarian economy to an advanced economy and today the largest producer of Semi-conductors in the world?
In April 1895, after China got defeated in the Sino-Japanese War, Taiwan came under the umbrella of the Japanese Kingdom which ruled the Island for 50 years until Japan was defeated in World War II post the nuclear bombing of Hiroshima and Nagasaki. Japan’s intent was always to integrate Taiwan fully under Japanese rule and ensure the loyalties of Taiwanese remained intact to the Emperor of Japan.
Initial infrastructural development took place quickly. The Bank of Taiwan was established in 1899 to encourage Japanese private sectors, including Mitsubishi and the Mitsui Group, to invest in Taiwan.
By 1905 the island had electric power supplied by water power in Nichigetsu Lake (Sun Moon Lake), and in subsequent years Taiwan was considered the second-most developed region of East Asia (after Japan). Many major public works projects were completed as well as the Taiwan rail system connecting the south and the north was modernized including ports to facilitate transport and shipping of raw material and agricultural products.
Exports increased fourfold. 55% of agricultural land was covered by dam-supported irrigation systems. Food production jumped fourfold and sugar cane production increased 15-fold between 1895 and 1925 (15 times in 30 years). Taiwan became a major food basket serving Japan’s industrial economy. An efficient & effective health care system was established, eradicating infectious diseases (prevalent in the early 20th century) with the average lifespan for a Taiwanese resident to become 60 years by 1945.
Post-1945, KMT (Republic of China’s Kuomintang) took control of Taiwan and massive Agricultural reforms were undertaken in the 1950s. The predominant one is Land dwellings ownership transfer to the tiller. This gave a massive boost to productivity, drove up the income levels of the average Taiwanese household.
By the 1960s & 1970s, backed by early technology transfer from Japan (during the Japanese rule of 50 years), and capital accumulation, Taiwan became a hub of SMEs (Small & Medium enterprises) producing & exporting practically everything that the West needed from T-Shirts to pillow covers to every household requirements.
The entrepreneurial spirit, High Savings rate, rising labor Productivity, Astute government planning, and privatization led Taiwan to build an export-oriented economy.
The Taiwanese semiconductor industry got its start in 1974. In 1976 the government of Taiwan convinced RCA (Radio Corporation of America) one of the foremost companies in electronics in the US to transfer semiconductor technology to Taiwan.
In 1987, TSMC (Taiwan Semiconductor Manufacturing Company, Limited) pioneered the fabless (Fabrication less) foundry model, reshaping the global semiconductor industry. In 2007, the semiconductor industry in Taiwan overtook that of the United States. 3 Taiwanese companies took lead.
TSMC and United Microelectronics Corporation (UMC) became the two largest contract chipmakers in the world, while MediaTek continues to be the fourth-largest fabless semiconductor company globally.
TSMC today fulfills nearly 50% of the World’s demand for Semi-Conductor, employing 53000+ employees and having a market cap of ~ 650 billion USD.
The other large Semiconductor manufacturers including Intel and Samsung use their entire produce, for their own indigenous use.
Before we move ahead, let’s understand what is Semi-Conductor Chip and why is it so important for the World?
A semiconductor is a product mainly made of silicon, which conducts electricity more than an insulator, such as glass, but less than a pure conductor, such as copper or aluminum. Their conductivity and other properties can be altered with the introduction of impurities, called doping, to meet the specific needs of the electronic component in which it resides.
Also known as semis, or chips, semiconductors can be found in millions of products such as computers, smartphones, appliances, gaming hardware, medical equipment, tires, bulbs, air-conditioning practically anything and everything that can be operated by WIFI and needs to be tracked.
Success in the semiconductor industry depends on 3 Simple Factors
Smaller,
Faster,
And Cheaper.
In the 1980s, chipmakers could only manage yields (number of operational devices out of all manufactured) of 10–30%. Today, few chip makers can deliver yields of 80–90% (less wastage, higher efficiency).
The term “Fabless Company” refers to a company that designs and markets hardware while outsourcing the manufacturing of that hardware to a third-party partner. Examples of such companies are NVidia, AMD, Qualcomm, etc.
A semiconductor foundry like TSMC, Samsung (commonly called a Fab; also known as a semiconductor fabrication plant) is a factory where devices such as Integrated Circuits (IC) are manufactured.
TSMC decided not to manufacture any products under its own brand name so that the company never engages in direct competition with its customers. Under this strategy, TSMC became the world’s largest semiconductor foundry and a key supplier to large tech companies.
The next part of the conversation revolves around:
How the Semi-conductor industry can change the trajectory of India’s growth story?
India is the second-largest market of Smart Phones, fifth-largest auto market, and amongst the top five in consumer durables, laptops, etc. With the rise in India’s domestic demand and accelerated global requirement of Chips, the Opportunity clearly lies to be grabbed upon.
A large part of domestic demand is currently met by Imports and that’s what India is gunning for, to replace imports with indigenous production and use India as a HUB to manufacture (be a foundry) to export Semi-Conductors.
The way Taiwanese have transformed the Chinese business environment, India is hopeful of a similar transformation if Taiwanese and Indians can collaborate well.
India has announced a 10 billion USD commitment under PLI (Production Linked Incentive) Scheme for Semiconductors thus pushing and positioning itself to be a serious contender in the annual 500 billion USD global high tech Semi-conductor business.
The Indian government has been pursuing TSMC to set up a Foundry Unit in India, sign up a free-trade agreement, and set up a semiconductor manufacturing hub on Indian soil. The estimated cost of the project is expected to be ~7.5 billion USD.
Despite willingness, opportunity, and market, the road of this journey may not be smooth, as it needs 4 essentials in large quantum beyond land.
Capital: Semi-Conductor Foundry needs a minimum investment of 6–10 billion USD, some part of the cost can be offset using resources provided by the Indian government under the PLI scheme.
Power: Uninterrupted Powersupply round the clock is a bare necessity for a Semi-conductor Foundry. The fact that some of the other industries have similar requirements and they have met with an uninterrupted power supply gives one confidence. The aluminum plant is one such example that needs uninterrupted power, else liquid alumina can quickly solidify in absence of heat, thus causing huge losses to the producer.
Aluminum producers have put captive power plants as well as supply from the national grid thus tackling the issue of Power. The same model can be adopted by Semi-Conductor Manufacturers as well. Just to give a sense of Power requirement in Semi-Conductor manufacturing, it is estimated that by the end of 2022, TSMC is expected to consume ~7.2% of the total annual energy production in Taiwan, higher than the Taipei City, Capital of Taiwan.
Ultra-Pure Water: Semiconductor manufacturing, requires large volumes of ultra-pure water to avoid the contamination of electronic devices. A typical semiconductor manufacturing facility uses ~ 20 million liters of ultra-pure water per day (equivalent to an Indian small city’s requirement on a daily basis).
Security: Both internal, as well as external security, is a high priority for chip manufacturing as internal sabotage can bring the Yield down dramatically and external sabotage can cause huge losses not only limited to infrastructure but a contractual liability as well in case obligations with timelines are not adhered with.
India had made a bid in 2017, but it failed to attract the big players to set up Semi-Conductor Foundries in India. Hopefully this time it will be different.
This opportunity does not only bring growth and prowess but huge employment by creating over one lac jobs for skilled personnel including electronics, electrical, mechanical, control, Chemical, practically all types of engineers and technology savvy crew.
With the geopolitical situation changing fast between US and China, US tech companies are surely looking for Options for CHINA + 1 in the space of Semi-Conductors, and if TSMC inks the deal with India, surely the trajectory for the Indian economy will not remain the same.
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