India-Taiwan Mega Chip Deal Can Disrupt Global Supply Chain, But Will Irk China

Here we explain everything about the semiconductor chips deal between India and Taiwan.

This agreement comes at a time when the world democracies are boosting economic and military ties to stand up against an increasingly assertive China.

(Photo Courtesy:Unsplash/Jonas Svidras)

From non-availability of the latest phones and consoles to delayed car deliveries, businesses across the globe are facing a critical shortage in the supply of semiconductor microchips.

To address this issue, India and Taiwan are in talks for an investment agreement to bring chip manufacturing to South Asia along with tariff reductions on components for producing semiconductors by the end of this year.

Interestingly, this agreement comes at a time when the world democracies are boosting economic and military ties to stand up against an increasingly assertive China. A China that itself is looking to aggressively amp up its own chip production and export.

Here is everything about the chip deal between India and Taiwan and its potential to disrupt the global semiconductor industry.

What is the Deal?

According to a report by Bloomberg, officials in New Delhi and Taipei met a few weeks ago to discuss a deal that would bring a chip plant worth an estimated $7.5 billion (Rs 55,000 crore) to India to supply chips for everything from 5G devices to electric cars.

The deal could see tariff cuts on components and other raw materials. A mega IT park with space for 100 Taiwanese companies is also planned as part of the project.

Meanwhile, India is searching for locations, water (manufacturing of chips requires huge quantities of fresh water) and manpower to setup the chip manufacturing plant.

Additionally, the deal would also provide financial support of 50 percent of the capital expenditure from 2023 as well as tax breaks and other incentives.

What This Means for Indian Industries?

The automobile industry has been hit badly because of the semiconductor shortage. The crisis has forced car manufacturers across the world, such as Motors Co, Ford Motor Co, Volkswagen AG, Subaru Corp, Toyota Motor Corp and Nissan Motors, to scale down production.

According to data firm IHS Markit, this shortage could have impacted 1.3 million units of global light vehicle production in the first quarter.

At home, Maruti Suzuki is expected to register a 60 percent cut in production in September due to a shortage in the supply of semiconductors.

Meanwhile, Mahindra and Mahindra (M&M) also cut output by 20 to 25 percent in September.

Not only the automobile sector, deliveries of iPhone 13 and Sony PS5 have also been affected owing to the global chip shortage.

However, experts suggest that India's partnership with Taiwan could potentially end the chip shortage, at least in the country at first.

Will India Pivot From Net Importer to Global Exporter?

India is a net importer of semiconductors. In fact, in 2020, India imported approximately 40 percent of the total electronics from China, despite serious tensions at the border in Ladakh in June.

Indian companies such as Tata and others have recently announced their aspirations to increase their lead in the design and ramp up manufacturing.

Tata Group Chairman N Chandrasekaran in August said that the global supply chain, which is currently heavily dependent on China, will see a major change in the post-pandemic world, with businesses shifting their dependencies to other countries.

Finance Minister Nirmala Sitharaman, on 12 August, during CII Annual Meeting, said that the industry needs to bring chip manufacturing to India in view of the global semiconductor shortage affecting manufacturing across the world.

Today, India’s semiconductor demand stands at around $24 billion and is expected to reach $100 billion by 2025. Presently, the country’s semiconductor demand is entirely met through import.

India lags in the establishment of semiconductor wafer fabrication (FAB) units – due to a weak ecosystem and shortage of resources as compared to more competitive bases like China and Vietnam.

The Taiwan Semiconductor Manufacturing Corporation's (TSMC), one of the world’s largest semiconductor manufacturer, integration with India would help the country harness its resources and capabilities to at least become self-sufficient, if not a net exporter. Though if things go well, India can grab a larger piece of the global chip supply pie in the long run.

An Affront to China?

India’s bilateral agreement with Taiwan could be disconcerting China, which claims that Taiwan is one of its ‘own provinces’.

India and Taiwan in 2018 signed a bilateral investment agreement to promote investment flows and expand economic ties between the two nations. Trade between them stood at $5.6 billion in the fiscal year ended March, according to India’s trade ministry.

As Bhim Subha, a teacher at the political science at the University of Hyderabad, rightly points out in an opinion piece on Moneycontrol, Taiwan is an emotional issue for China’s ruling Chinese Communist Party, and more so under President Xi Jinping, de-hyphenating economic and political engagements become difficult.

"New Delhi will be treading a thin line so as to not invite Beijing’s wrath," she writes.

(With inputs from Moneycontrol)