What the Chip Industry and the Petroleum Sector Have in Common
26-08-2023
11:38 AM
1 min read
Why in news?
- The article throws light upon the commonalities in the petroleum and semiconductor industry and the lessons that need to be drawn for India to undertake its chip manufacturing domestically.
Background
- India has recently embarked on a journey to develop domestic chip fabrication facilities.
- In this backdrop, it can draw useful lessons from her ‘failed’ experience in petroleum sector given the commonalities involved with electronics.
Common structural denominators in chip industry and petroleum sector
- Both industries are dominated by a handful of countries and corporates
- Both are capital intensive and cyclical
- Both sit at the nub of interdependent global relations
- Both are in the cross hairs of international geopolitics
- Both are characterised by technological dynamism
Overview of chip industry
- Extensive ecosystem: The global chip making ecosystem is so vast that each segment of the semiconductor manufacturing involves roughly 25 countries in the direct supply chain, and 23 countries in allied functions.
- Also a semiconductor based product could cross international borders about 70 times before finally making it to the end customer.
- Close-knit value chain: The semiconductor value chain is comparably close-knit and US being arguably the most powerful player in this. For instance, every chip produced in the world has a direct or indirect connection with USA. The software for chips, e.g. is provided by three US based companies, i.e. Cadence, Synopsys and Mentor.
- Hardware mechanics: A Dutch company is the sole producer of the equipment EUV (Extreme Ultraviolet Lithography), but it is dependent on its wholly-owned San Diego-based subsidiary Cymer for the manufacturing tools.
- Samsung and Hynix, which together produce 44 per cent of the world’s memory chips, and Taiwan Semiconductor Manufacturing Company Limited (TSMC), which fabricates 37 per cent of the world’s logic chips and 92 per cent of the most advanced chips, are Korean and Taiwanese respectively. Both are protected by the US military security blanket.
- Critical cogs in semiconductor life cycle: Apart from the US, there are other critical linkages in the semiconductor value chain. For instance, if TSMC’s fabrication facilities fell into an earthquake fault or destroyed by military action, one third of the worlds computing power would grind to a halt, the 5G network would collapse and, the economic loss would be trillions of dollars.
Convergence in geopolitical scenario
- Geopolitics is at the core of both petroleum and semiconductor industries as demonstrated below:
- Oil industry: Every oil import dependent country has beaten a path to the Middle East to secure access to petroleum and at times “weaponised” their efforts to safeguard this objective. The following three are examples of this phenomenon:
- The Saudi official ban of exports to the pro-Israeli Western world in 1973
- The US intervention in Iraq in 2003
- The current cutback of Russian gas to Europe
- Semiconductor industry: Comparably, semiconductors have also been part cause and consequence of the “technology Cold War” between the US and China.
- For instance, the US has imposed sanctions on the physical and intellectual export of chip technology to China and Chinese President has, in turn, called for a “full scale assault” to “rejuvenate” China.
- This indicates that the world is clearly fragmenting along the fault lines of chip geopolitics.
Economic dynamics
- Exhaustive footprint: Both petroleum and semiconductor chips have a global footprint.
- Macroeconomic dynamics in oil sector: Oil and gas prices are cyclical, reflecting the capital intensity and long lead times of the investment cycle. Crude oil being easy to store and ship is tradable while gas on the other hand has a narrower market and was earlier limited to the overland routes defined by the pipeline infrastructure.
- But in recent years with the commercialization of gas liquefaction, cryogenic shipping and re-gassification, this limitation has eased.
- This is depicted by the declined price of gas in Europe recently owing to many LNG carriers being destined for East Asia have been redirected to the terminals in Europe.
- Sweeping chip presence: The chip industry also mirrors the economic dynamics. The value chain, i.e. design, equipment, fabrication and testing and assembly extends across the globe.
- Investment to create part or all of this chain runs into billions and the returns depend on engineering precision and technical talent.
- New facilities : The US recently passed the Chips and Science Act and earmarked $52 billion for the creation of domestic chip fabrication. This indicates a technology Cold War.
- INTEL, world's largest semiconductor chip manufacturer has also laid the foundation stone for a $-20-billion fabrication plant.
- There are, however, economic constraints to how far this process can be sustained. For example, Goldman Sachs has estimated that the cost of building a high-end semiconductor fabrication facility in the US could be up to 44 per cent more expensive than locating it in Taiwan, Korea or Singapore.
Mechanized layout
- Atomistic grasp: Both petroleum and chip industries are marked by technological change. The theorists of “peak oil” assumed that oil exploration and production technology would be linear and incremental in progress.
- However, they did not anticipate the cutting-edge innovations that would open up the hydrocarbon resources in deep waters and within the pores of shale rock.
- Averting inaccuracies: A similar mistake could be made in electronics. Those countries that decide to copy, steal and subsidise technology are condemned to technological backwardness because this strategy will not allow them to keep pace with the speed of cutting-edge innovation.
Conclusion
- India has struggled for more than five decades to reduce its dependence on external sources of petroleum supply but has not been successful. India’s import dependence was around 20 per cent in the early 1980s which is now more than 80 per cent.
- India can exercise caution while developing domestic chip fabrication facilities in the following manner to avert the mistakes from our “failed” experience in petroleum as follows:
- The chip nationalism will be economically costly and could be technologically regressive and thus India should be cautious about decoupling from the international supply chain.
- The government support should be limited to financial support, quick cooperation, and the creation of an innovative ecosystem involving minimal bureaucratic intervention.