Biden wants US edge in tech tussle with China

On February 24, US President Joe Biden signed an executive order asking for a broad review of the American supply chains in four critical areas, i.e. semiconductors, pharmaceuticals, electric batteries and rare earth elements. The President directed increasing the domestic manufacture and shifting the supply chains of these items among trusted friends and partners of the US.

Currently, the US, India and many other countries have been facing critical shortages of microchips required by the auto, consumer electricals, mobile phones and other industries forcing many companies to suspend a part of their production. Immediate reasons for the chip shortage include supply chain disruptions due to Covid-19 in several countries including China, Japan, South Korea and others, winter storms in Texas in the US where several chip manufacturing plants are located, a pre-pandemic trend towards lower inventory and the impact of US sanctions on the Chinese companies for supply of chips.

A microchip is a very small piece of silicon embedded in semiconductors, with electrical circuits, that can hold large quantities of information, perform mathematical and other logical operations. The US, Japan, South Korea and Taiwan have the world’s leading semiconductor-manufacturing facilities.

Semiconductor manufacturing is highly skilled and capital-intensive. It spends 15% or more of its annual revenues on research and development (R&D); each generation of technology typically has a life span of two to four years; manufacturers work in tandem with foundries and chip designers across the international borders to adopt new techniques.

The global technological leadership of the US rested from 1940s to 1960s on its advanced nuclear weapons. In the 1970s, its lead shifted to smart weapons based on new technologies like microchips. These chips are now used in a wide range of military equipment like advanced fighter and stealth aircraft, artificial intelligence-based (AI) weapons like drones, autonomous vehicles, radars, missiles, aircraft carriers, informationised war besides consumer electronics, robots, mobile phones and many others.

China has been making huge investments in the last 40 years to develop indigenous capabilities in newly emerging technologies like semiconductors and microchips, 5G, AI, quantum computing, new materials, electric batteries, financial technologies and others. China has decided to provide financial support to 100 leading tech companies and 1,000 firms in upstream and downstream industrial chains. It is setting up 18 fabrication units with support from South Korean and Taiwanese experts to make a wide range of semiconductors and microchips.

While China has been successful in developing systems or solution applications of technologies, it only had limited success in mastering core technologies like semiconductors and microchips (it can make chips of 7 nanometre and more but not smaller ones which are more powerful and efficient and needed in strategic applications, like aircraft or space vehicles).

Some of the reasons for its failure include lack of protection of intellectual property, inability to build a highly skilled workforce and lack of global R&D networks. In 2020, China spent about $300 billion, more than its defence budget, on imports of semiconductors and microchips from the US-led transatlantic group (purchasing about 80% of its requirement).

The US is determined to deny the advanced semiconductor and microchip manufacturing capabilities to China to stay ahead in the global competition. President Biden is considering a dual-track approach. First, the US and its allies would increase their spending on R&D in these technologies and vastly outspend China. The US is presently spending 0.6% (of its GDP) on federal support for R&D against 1.2% under President Reagan (it went down after the end of the Cold War in 1991). China is increasing it to 2.5% of its GDP till 2025.

Second, the Biden administration is considering to organise different alliances with its allies and partners in the areas of exports control, technical standards, AI, biotechnology, 5G, and surveillance technologies to establish common strategies and rules for blocking the export of these technologies to China.

China has warned that such alliances would violate the principles of fair competition and market economy and that it would punish the countries concerned through curbs on supply of rare earths (minerals indispensable for manufacturing mobile phones, electronics and military equipment) and other measures. China took such steps against Japan in 2010, South Korea in 2013 and Australia and India recently whenever it felt they had taken measures against its strategic interests. Whether the allies and partners of the US would join in enforcing these sanctions remains to be seen.

The semiconductor industry has asked the Biden administration to remove the sanctions applied by the Trump administration, except on a few critical technologies and assist their R&D efforts through more federal funds. They fear that their manufacturing may become unviable if they are denied access to the Chinese market.

Though many global semiconductor companies have their R&D centres in India, where cutting-edge research work takes place, most semiconductors and chips used in India, are presently imported from China, Taiwan and South Korea. Some attempts were made in the past to set up a wafer (semiconductor) manufacturing facility in Andhra Pradesh, but the project could not take off due to the inability to tie up funding and work out a viable business model including availability of assured demand.

India’s Ministry of Electronics and Information Technology had on December 15, 2020, invited expressions of interest from well-established Indian and foreign manufacturers of semiconductors, foundries and consortia for setting up manufacturing facilities or their acquisition from abroad. The Indian Electronics and Semiconductors Association (IESA) is setting up 1,000 start-ups in these technologies.

The government has recognised that an ‘Atmanirbhar Bharat’ can’t depend on imports of these vital materials on foreign countries and India has to be self-reliant in this strategic field. It will have to play a lead role in the beginning to help in arranging necessary investments, provision of essential facilities and assurance of demand to this industry like South Korea, China and other countries until it becomes self-sustaining.