As AI Invades Manufacturing & Services, Global & Indian Chip Makers Enter A Battle For Market Shares

Limited choice and even more limited production made private cars high-end luxuries for Indian consumers. The launch of the Maruti 800 in 1983 as a "people's car" and the subsequent introduction of other players in the late '80s introduced a pivotal change in the auto industry. Cars were no longer a luxury item and the waiting period to get final delivery came down drastically.

The 1991 economic liberalisation completely changed the scenario, and by the time the new millennium arrived, more Indians were buying affordable cars off-the-shelf than ever.

Jump to the peak pandemic years of 2021 and 2022. Once again, waiting periods of three to six months became common for many car models, with some popular ones having unprecedented waiting times of one to two years.

The reason was simple – a global semiconductor chip shortage.

The automotive industry was not the only one affected. Consumer electronics suffered due to the chip shortage. Supply chain disruptions hit products like personal computers (PCs), smartphones, gaming consoles, and household appliances, as demand surged for PCs and other electronic devices since more people worked and studied from the confines of their homes.

A Flurry Of Semiconductor Investment Across The World

To be sure, even before the pandemic, advanced economies were getting increasingly worried about China’s rapid advances in key electronics sectors, including semiconductor chips. 

In 2019, China’s share of the global semiconductor market was around 5 per cent, but the country increased its share to 7 per cent by 2022. In the same year, the US led the global market with a 48 per cent market share.

However, the dynamics of the global manufacturing chain were such that bypassing Beijing for chip manufacturing seemed difficult though China is way behind other major chip producers like the US, South Korea, and Taiwan in market share.

As semiconductor chips hold the key to global AI-driven manufacturing supremacy in the future, new investments in this area by existing market leaders have grabbed headlines. The pandemic supply chain disruptions only played the role of a catalyst in the process.

By May 2024, the big economic powers led by the US and the EU pumped in around US$ 81 billion into the next-generation semiconductors setting the stage for a showdown with China while racing to acquire dominance in this area.

This involves, however, just the first tranche of approximately US$ 380 billion planned investments by governments worldwide for companies like Intel and Taiwan Semiconductor Manufacturing Company (TSMC). The result of this semiconductor rivalry between China and the rest of the world will shape the tech industry's future, impacting the global economy as a whole.

The Biden government, earlier, opened this floodgate by allocating US$ 39 billion in grants for chipmakers through the 2022 Chips and Science Act, bolstered by loans and guarantees worth an additional US$ 75 billion, padded up by further tax credits up to 25 per cent (see graphic below).

Not to be left behind, South Korea – the other chip giant – lined up a massive US$ 55 billion investment (including tax incentives) in semiconductors, followed by the EU with US$ 46.3 billion in the pipeline (including US$ 21.5 billion by Germany), US$ 25.3 billion by Japan, and planned investment and tax incentives worth US$ 16 billion by Taiwan.

India, the new kid in the block, has already made its intention clear as well, with a US$ 10 billion planned investment (of which US$ 7.1 billion is allocated through schemes like production-linked incentives).

A combative China has also joined the tech war with a whopping investment plan of US$ 142 billion, which surpasses most nations' investment war chest.

As artificial intelligence (AI) and quantum computing rapidly invade global manufacturing and services, the battlelines for capturing the prospective future markets are now clearly drawn.

There, of course, is a possibility of a global oversupply of chips in the near future, but at present the race for AI supremacy trumps all such concerns.

USA Projected To Gain In Global AI-Based Chip Production

With AI likely to drive the next industrial and services revolution, well-established American chipmakers like Nvidia, Qualcomm, and Broadcom have a clear-cut edge over China in advanced logic chip production.

Advanced logic chips offer much higher computing power and speed than basic chips. These can deal with more complex calculations and execute instructions faster. Advanced logic chips are manufactured using cutting-edge process nodes (currently 5 nanometres (nm) and below), while basic chips use older, more mature process nodes (28nm and above).

The advanced nodes allow for higher transistor density and performance. The size of the components on a chip is called the node size. As technology advances rapidly, node sizes continue to shrink faster. 

A recent report noted that China is approximately five years behind global leaders in commercial manufacturing of advanced logic chips. To narrow this gap, China is investing heavily in semiconductors, focusing on mature-node production, and informally increasing domestic equipment usage in chip production.

Global advanced logic chip production, going by 2022 actual figures, is dominated by Taiwan and South Korea. While the former has a 69 per cent market share, the latter has the rest 31 per cent (see graphic below). TSMC (Taiwan Semiconductor Manufacturing Company) and Samsung produce the bulk of these chips’ global supply.

However, with massive actual and planned investments by all big global players, this market composition is about to change in another decade or so.

By 2032, these two countries are projected to lose their market shares. Taiwan’s share is likely to fall to 47 per cent, but South Korea’s loss will be much more drastic. South Korea’s share is projected to drop to 9 per cent. The United States will be the biggest gainer, cornering 28 per cent of the global advanced logic chip market.

Europe is likely to wrest 6 per cent of global market share, Japan 5 per cent, China 3 per cent, and others will have 2 per cent of global advanced logic chip production market share.

India Enters The Race But Road Ahead Is Bumpy

Policymakers in India correctly identified the semiconductor space as the future pivot towards economic growth. With that policy intent, the India Semiconductor Mission was launched in December 2022. The focal point of the announcement was a Rs 76,000 crore (US$ 10 billion) incentive package to encourage semiconductor and display fab establishment.

The government also approved modifications to the Programme for Development of Semiconductors and Display Manufacturing Ecosystem in India, offering 50 per cent fiscal support for projects across all technology nodes.

In March 2024, Prime Minister Narendra Modi laid the foundation of three semiconductor projects with an estimated cost of Rs 1.25 lakh crore (US$ 15.1 billion). A new Rs 91,000 crore chip fabrication unit by a consortium of Tata Electronics and Taiwan’s Powerchip Semiconductor and two OSAT (Outsourced Semiconductor Assembly and Test) facilities in Gujarat and Assam were unveiled.

Meanwhile, American chip giant AMD inaugurated its largest global design centre in Bengaluru, with a proposed investment of US$ 400 million in the next five years.

However, the road toward a silicon semiconductor highway for India has its share of roadblocks and challenges. High costs and longer timeframes in setting up semiconductor manufacturing units, by itself, are a huge challenge. The slightest delay in fund flow or implementation can push these investments away to some other global destinations.

While lack of experience may pose another difficulty level, there exists a shortage of skilled engineers locally. Fierce global competition will make the margins of error very thin for Indian producers.

India is making significant strides in attracting semiconductor investments. But culminating those into a successful semiconductor production ecosystem will be an arduous task. Only time can tell whether or not India manages to steer to that goal.