India & Japan’s silicon handshakes

8 August 2023
  • Future India-Japan semiconductors trade agreed.
  • The collaboration is part of a plan to reach $35.9 billion Japanese investment in India by 2027.

Semiconductors and resilient supply chains are a key point of interest in India’s plan to reach $35.9 billion Japanese investment in the country by 2027, according to officials.

During a two-day visit to New Delhi in July, Foreign Ministers of India and Japan, S. Jaishankar and Yoshimasa Hayashi, met in the Indian capital to explore deepening technology and defence equipment collaboration. Both emphasised “the crucial role of a strong partnership between India and Japan in ensuring an open and prosperous Indo-Pacific region that is inclusive and rules-based”, according to a statement by India’s External Affairs Ministry. The two countries share strong economic ties: trade between India and Japan reached $20.57 billion in fiscal year 2021-2022.

On July 21, India and Japan signed a memorandum of understanding (MoU) on semiconductor development. Information Technology Minister Ashwini Vaishnaw described the agreement as a substantial step in creating a resilient and complete value chain.

Resilince for semiconductors’ manufacture in India

“The MoU is on five fronts, viz. semiconductor design, manufacturing, equipment research, talent development, and bringing resilience to the semiconductor supply chain,” said Vaishnaw.

Semiconductors are materials used in electrical circuits and components that partially conduct electricity. Usually comprised of silicon, they conduct less electricity than a conductor (e.g. copper) and more than an insulator (e.g. glass). Semiconductors can be found in a huge variety of products, from computers and smartphones to medical equipment. Their properties and conductivity can be altered by a process called doping, which introduces impurities to the material so that it can meet the needs of different electrical products. Because of this, semiconductor devices have a large range of useful applications, and are widely used across almost all industries.

Chip manufacturing can generate huge profits when times are good, but the industry is also notoriously cyclical. In 2022, for example, worldwide sales reached a record $574.1 billion, but the industry experienced a significant downturn in the second half of the year. Demand for chips is generally consistent with market demand for personal computers and other electronic equipment, so while manufacturers often struggle to meet high demand when things are going well, periods of lower demand can have a significant detrimental impact. If we look at long-term trends, however, the semiconductor industry has displayed consistent growth over the last two decades. This can be partly explained by a shift in the customer base, given that retail PCs and hard drives are no longer the primary market for semiconductors. Corporate spending on chips has increased as technology has increasingly permeated our everyday lives.

India’s semiconductors prioritized

India is therefore prioritizing chip manufacturing for two reasons. Firstly, India is a major consumer of electronics, and currently spends around $24 billion annually on importing semiconductors. This is expected to rise to USD$110 billion by 2030. This heavy reliance on imports became particularly troublesome during the pandemic, which caused significant supply disruptions. Geopolitical conflicts such as the Russia-Ukraine war have also led to disruptions in the supply chain. Secondly, the Indian government has identified electronics manufacturing as a strategic economic sector. By developing a self-sufficient domestic industry, the government hopes to both meet the country’s domestic needs and to promote economic growth. Financial incentives of up to 50% of total project costs form part of a $10 billion government plan for semiconductor and display manufacturing projects.

This is not the first time India has tried to establish a strong domestic semiconductor industry. Efforts go as far back as 2006, when the Andhra Pradesh government partnered with SemIndia to establish a $3 billion manufacturing facility. The project never materialized, and despite multiple expressions of interest in the decades since, a number of projects have had to be abandoned. Most recently, in July this year Prime Minister Narendra Modi’s government suffered a potential setback when Foxconn walked away from a $19.5 billion semiconductor joint venture with mining conglomerate Vedanta Ltd.

India’s history with semiconductor trade

Another recent initiative is the Indian Semiconductor Mission (ISM), launched in late 2021 by Minister Ashwini Vaishnaw. A specialized and independent Business Division within the Digital India Corporation, ISM’s vision is to “build a vibrant semiconductor and display design and innovation ecosystem to enable India’s emergence as a global hub for electronics manufacturing and design in a more structured, focused, and comprehensive manner”. Its objectives include the formulation of a long-term strategy for developing semiconductors; supporting start-ups; and promoting mutually beneficial partnerships with national and international agencies, industries and institutions.

By coordinating on incentives and rules, India and Japan will hope to strengthen partnerships between the Indian and Japanese private sectors. Both will invest in their strongest areas – Japan’s raw materials, for example, and India’s 50,000+ design engineers – with the ultimate goal of building an optimal supply chain.