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Similarities Between Semiconductor and Petroleum Industries

Context

  • The article sheds light on the similarities between the petroleum and semiconductor industries, as well as the lessons that must be drawn for India to manufacture chips domestically.
  • India has recently begun a journey to develop domestic chip fabrication facilities.
  • Given the similarities involved with electronics, it can draw useful lessons from her ‘failed’ experience in the petroleum sector.

Relevance

GS Paper 3: Industries and Indian economy

Mains Question

If India makes natural gas the “next stop” on its energy journey, it will have a better chance of arriving at the goal of a predominantly clean system. Discuss. (250 Words)


Common structural denominators in the chip industry and the petroleum sector

  • Both industries are dominated by a few countries and corporations
  • Both are capital intensive and cyclical
  • Both are at the crossroads of interdependent global relations
  • Both are in the crosshairs of international geopolitics

An overview of the chip industry

  • Vast ecosystem: The global chip manufacturing ecosystem is so large that each segment of semiconductor manufacturing involves approximately 25 countries in the direct supply chain and 23 countries in allied functions.
    • Additionally, a semiconductor-based product could cross 70 international borders before reaching the end user.
  • Close-knit value chain: The semiconductor value chain is relatively close-knit, with the United States arguably the most powerful player. For example, every chip manufactured in the world has a direct or indirect link to the United States. Cadence, Synopsys, and Mentor are three US-based companies that provide software for chips, for example.
  • Hardware mechanics: A Dutch company is the sole manufacturer of EUV (Extreme Ultraviolet Lithography) equipment, but it relies on its wholly-owned San Diego-based subsidiary Cymer for manufacturing tools.
    • Korean and Taiwanese companies, Samsung and Hynix, which together produce 44% of the world’s memory chips, and Taiwan Semiconductor Manufacturing Company Limited (TSMC), which manufactures 37% of the world’s logic chips and 92% of the most advanced chips. The US military security blanket protects both.
  • Important cogs in the semiconductor life cycle: Aside from the United States, other critical linkages in the semiconductor value chain exist. For example, if TSMC’s fabrication facilities were to fall into an earthquake fault or be destroyed by military action, one-third of the world’s computing power would halt, the 5G network would fail, and the economic loss would be trillions of dollars.

Geopolitical scenario convergence

  • Geopolitics is central to both the petroleum and semiconductor industries, as illustrated below:
  • Oil industry: Every oil-importing country has travelled to the Middle East to secure access to petroleum, and has at times “weaponized” their efforts to achieve this goal. Three examples of this phenomenon are as follows:
    • Saudi Arabia’s official ban on exports to the pro-Israeli Western world in 1973 o The US intervention in Iraq in 2003 o Russia’s current cutback on gas exports to Europe
  • Semiconductor industry: Semiconductors have been both a cause and a result of the “technology Cold War” between the United States and China.
    • For example, the United States has imposed sanctions on the physical and intellectual export of chip technology to China, and the Chinese President has responded by calling for a “full scale assault” to “rejuvenate” China. o This shows that the world is clearly fragmenting along the fault lines of chip geopolitics.

Dynamic economics

  • Global footprint: Petroleum and semiconductor chips both have a global footprint.
  • Macroeconomic dynamics in the oil sector: Oil and gas prices are cyclical, reflecting the capital intensity and long investment cycle lead times. Crude oil is tradable because it is easy to store and ship, whereas gas has a smaller market and was previously limited to overland routes defined by pipeline infrastructure.
    • However, with the commercialization of gas liquefaction, cryogenic shipping, and re-gassification in recent years, this limitation has been lifted.
    • This is exemplified by the recent drop in gas prices in Europe as a result of many LNG carriers destined for East Asia being redirected to European terminals.
  • Vast chip presence: The chip industry reflects economic dynamics. The value chain, which includes design, equipment, fabrication, testing, and assembly, spans the globe.
    • The investment required to build a portion or all of this chain is in the billions of dollars, and the returns are dependent on engineering precision and technical talent.
  • New facilities: The United States recently passed the Chips and Science Act, which set aside $52 billion for the development of domestic chip fabrication. This points to a technological Cold War.
    • INTEL, the world’s largest semiconductor chip manufacturer, has also laid the groundwork for a $20 billion fabrication facility.
    • However, there are economic constraints that limit how far this process can be sustained. According to Goldman Sachs, the cost of constructing a high-end semiconductor fabrication facility in the United States could be up to 44% higher than in Taiwan, Korea, or Singapore.

Layout automation

  • Atomistic grasp: Technological change is prevalent in both the petroleum and chip industries. Theorists of “peak oil” assumed that advancements in oil exploration and production technology would be linear and incremental.
    • They did not, however, anticipate the cutting-edge innovations that would unlock hydrocarbon resources in deep waters and within shale rock pores.
  • Avoiding inaccuracies: A similar error could occur in electronics. Countries that choose to copy, steal, and subsidise technology are doomed to technological backwardness because this strategy will prevent them from keeping up with the speed of cutting-edge innovation.

Conclusion

  • India has tried unsuccessfully for more than five decades to reduce its reliance on external sources of petroleum supply. In the early 1980s, India’s import dependence was around 20%; it is now more than 80%.
  • India can be cautious when developing domestic chip fabrication facilities in the following ways to avoid the mistakes made by our “failed” experience in petroleum:
    • Because chip nationalism will be economically costly and potentially technologically regressive, India should be cautious about decoupling from the global supply chain.
  • Government assistance should be limited to financial assistance, prompt cooperation, and the development of an innovative ecosystem with minimal bureaucratic intervention.

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