What do Joe Biden's harsh Chinese chip controls mean for India?
Plus, a Saddam throwback.
The meeting between US President Joe Biden and Chinese President Xi Jinping at Bali on the sidelines of the G20 summit this week seemed to suggest that there was still some space for warmth in a relationship that had become undeniably frosty over the last few years. Perhaps the spectre of Russia using nuclear weapons or the political space that emerged in the aftermath of Xi being confirmed for a third term gave impetus to the more cooperative signaling, including a nearly three-hour meeting.
(Side note: This other brief handshake was also noteworthy, though Prime Minister Narendra Modi chose not to publicise it himself).
Yet, as the New York Times reported, “none of that hid the deeply divergent views behind their disagreements, including over the future of Taiwan, military rivalry, technology restrictions and China’s mass detentions of its citizens.”
While relations between the world’s largest economies is of interest to observers in other countries around the globe, one of those elements in particular has been piquing the attention of many in India: America’s new semiconductor controls, imposed in early October.
Carnegie’s Matt Sheehan describes the new policies:
“The restrictions require a hard-to-get license for the sale of advanced semiconductors to entities within China, largely depriving the country of the computing power it needs to train artificial intelligence at scale. The rules also extend restrictions on chipmaking tools even further to industries that support the semiconductor supply chain, cutting off both the U.S. talent and the components that make up the tools that make the chips. Together, these restrictions amount to the single most substantial move by the U.S. government to date in its quest to undermine Chinese technology capabilities…
With the latest rules, the U.S. government is betting that it can so deeply undermine China’s semiconductor fabrication capabilities that it won’t matter how motivated or well-resourced China’s efforts are to create its own semiconductor industry—they simply won’t be able to catch up.”
There had been indications that the US might move in this direction. Efforts of this sort began with controls imposed on the Chinese company Huawei, essentially cutting off its access to advanced chips – which were then effectively internationalised because of the US’ deep involvement in the semiconductor supply chain.
These were then slowly expanded to include other Chinese entities, with the broad justification that, despite a ban on sale of advanced chips for military use, they were nevertheless ending up in the hands of the Chinese Army. The new restrictions go well beyond any of the restrictions that were in place before, effectively banning the sale of advanced chips to Chinese entities, preventing the use of US-made tools for the manufacture of these chips in or for China, restricting access to the components that might allow China to built its own indigenous supply chain, and banning US citizens and residents from providing their expertise to Chinese companies.
As Jon Bateman, over at Foreign Affairs, put it, “America’s restrictionists—zero-sum thinkers who urgently want to accelerate technological decoupling—have won the strategy debate inside the Biden administration… The pace and details are uncertain, but the strategic objective and political commitment are now clearer than ever. China’s technological rise will be slowed at any price.”
What does all of this mean for India?
Responses from observers and experts have broadly picked up on two themes.
One is opportunity. Although India is far from being a player on either the cutting-edge or even the trailing-edge sides of semiconductor manufacturing, it has made efforts over the past two years to establish a foothold in the space. And it could also seek to leverage its own advantages – in particular its human capital and its expertise in semiconductor design – to carve out a bigger role in the supply chain, as the US diversifies away from China.
The other is to see the American moves as a cautionary tale, one that India should take heed of even if it is currently expanding its ties with the US. Pratap Bhanu Mehta, for example, sees in the controls “the crudest kind of mercantile reordering of the world system possible… It is saying something like ‘our objective is to ensure that one-fifth of humanity (and the rest of the world) always stays at least a couple of generations behind.’” The fear is that, if the US can seek to see blatantly undercut the development of a rival power in this way, could it similarly turn on India too one day?
Last year, I spoke to Pranay Kotasthane, deputy director of the Takshashila Institution, on India’s role in the global semiconductor supply chain and what the QUAD ought to do to take on China. Kotasthane has long argued that India should more actively pursue a bigger role in the semiconductor supply chain, while also insisting that New Delhi resist the temptation to promise complete self-reliance – which would be needlessly expensive and incredibly complex.
In light of the US’ new controls, I wrote to Kotasthane once more for some quick reactions to the development. You can also read Kotasthane’s Op-Ed, along with Abhiram Manchi, in the Hindustan Times on the issue, and listen to his Puliyabaazi episode discussing the fallout.
Now that it's been a few weeks since the announcement of the policy, how do you see where things have landed? Initial reactions went from 'this is economic war' to 'this won't do much other than signaling, since there will be workarounds'. Where do you fall between those camps (or is there another)?
I'm in the “this is a high-tech war but Chinese companies will find workarounds at higher costs over time” camp. The two strands are not mutually exclusive.
Look at the high-tech war strand first. These export controls are an inflexion point from a technology geopolitics perspective. The new rules increase the breadth and scope of licensing requirements with the explicit aim of restricting the “PRC’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors”. In other words, the US will strive—unilaterally and multilaterally—to prevent Chinese companies from deploying a few foundational technologies.
According to the US National Security Advisor Jake Sullivan, three technologies are “foundational” to the US — Computing-related technologies, including microelectronics, quantum information systems, and artificial intelligence; Biotechnologies and biomanufacturing; and clean energy technologies. These technologies are foundational because they will disproportionately impact future national capabilities. In these three areas, the US-led and China-led ecosystems might likely decouple.
Hitherto, American companies investing in the Chinese market partly enabled China's progress in these domains. The US is signalling that this modus vivendi is unacceptable through these export controls. It is now willing to impose significant costs on its own deep tech companies with the explicit aim of arresting China’s technological progress.
The export controls are just the beginning. The US will likely convert these unilateral export controls into a stronger multilateral export control regime. It might try to enlist the support of other semiconductor powerhouses such as Japan, South Korea, and Taiwan to reduce China’s options further. Tighter investment screening mechanisms are also expected to prevent companies in these areas from contributing to China’s technological power.
While the battle lines between the US and China in science & technology are being drawn, assessments that suggest China's semiconductor industry will be decimated due to these export controls are overreacting. The export potential of China’s semiconductor ecosystem has indeed been hit severely. Semiconductor production operates as a hyper-globalised supply chain. Being cut off from this engine will mean that Chinese companies must “reinvent the wheel” domestically. This will come at a much higher monetary and opportunity cost because of the sanctions.
However, we should expect China to build alternatives to meet its domestic requirements over a decade or so. China will seek to recover lost ground through industrial espionage, forced technology transfer, and targeted poaching of key executives. China might also focus on non-linear technological breakthroughs to get around these controls.
Is there an 'Indian view' (from industry + government + experts) on the controls, based on what you're hearing since they were announced? Do those constituencies broadly agree, or do you find differing reactions?
The constituents broadly agree that these export controls re-emphasise the need for semiconductor manufacturing within India.
For the industry reaction, this CNBC-TV18 interview by Vivek Tyagi, the Chairperson of the India Electronics & Semiconductor Association (IESA), is helpful. IESA is an industry body representing the interests of global and local semiconductor firms with operations in India. Tyagi regards this move as a long-term opportunity for India as global chip makers manufacturing in China might look for other options outside due to the risks posed by the US-China confrontation.
I have not come across statements by the relevant ministers on this issue. However, the government would likely want to double down on efforts to start chip manufacturing in India. Dr Arogyaswami Paulraj, a renowned Indian-American electrical engineer, entrepreneur and advisor to the Ministry of Electronics and Information Technology (MeitY), had this to say in an interview with Sheela Bhatt for ThePrint.in
“Number one lesson for India is that we may be in the same position as China tomorrow… In the most critical matter of semiconductors, India must have its own stamping. America is a good friend. But there are no permanent friends. No permanent enemies. So it’s fundamental national security interest now that India builds internal capability to set up its own semiconductors industry. As far as India is concerned, my thinking is, forget China, forget the United States, we build it on our own. It will take us another 30-40 years of enormous investment and dedication. But let’s start on the journey.”
Aside from the geopolitical and economic opportunity this may open up from India, are you worried – or have you heard of worries – about these *tools* being used by the West to prevent the growth of another country? I'm recalling the reaction to the Trump Twitter Ban and the sense that India needed to insulate itself from such actions being taken elsewhere...
The bitter experience with discriminatory international technology-denial regimes in the nuclear and space sectors casts a long shadow on India’s foreign policy. As a result, the first reaction to these controls, quite naturally, is, “what if it were to happen to us?”
The holy grail is to develop indigenous capabilities in all segments of the semiconductor supply chain, especially chip manufacturing.
However, this desire needs to be balanced with some hard realities. No country is self-sufficient in producing semiconductors, not even the US. Given the costs and complexities involved, companies only specialise in specific parts of the global supply chain. Secondly, every country with a robust semiconductor ecosystem today (including China) did so by utilising its close ties with the US. Thirdly, manufacturing chips proficiently at an India-scale is an immensely costly, multi-decadal exercise.
Given these realities, a plausible strategy is to deepen ties with the US and other semiconductor powers while reducing one-way dependence on them. For India to develop its indigenous capabilities, multilateral cooperation is necessary. As long as we have some levers of power, interdependence is not a cause of immediate worry. For instance, a significant percentage of chip design by American companies happens out of their design centres in India. If Indian talent becomes a dominant driver of the global semiconductor supply chain, interdependence can be managed.
In a Mint article, my colleague Nitin Pai makes a case for manpower development:
“India must double down on the basic source of its strength in the technology industry: the quality and quantity of its skilled manpower. The economics of semiconductor manufacturing mean that the hundreds of billions of dollars required to set up fast-depreciating state-of-the-art plants are beyond the reach of most governments. While India should welcome private investors to build the most advanced plants in the country, public funds are better invested in manpower development. India’s goal should be to use human resources to dominate the semiconductor industry, just as it does the IT services industry today. It will be a good idea to set up half a dozen industry institutes that create professionals in design, production and management of the silicon industry.”
It is important to realise that we’re in a fundamentally different techno-strategic environment now. India would have preferred a world where flows of capital, labour, goods and services for foundational technologies are divorced of geopolitical concerns. But that seems anachronistic today. Going ahead, a common understanding—if not complete alignment—on geopolitics will be a precondition for deepening technology engagement. India’s foreign policy choices will directly affect its technology outcomes.
When we last spoke about this subject, about a year ago, there were positive hopes about a Quad initiative on semiconductor supply chains. What has happened since? Have the moves lived up to your hopes?
No, there has been very little visible movement on that front.
We know conversations on the Quad Semiconductor Supply Chain Initiative have taken place, but there are no concrete outcomes yet. This is not unexpected, as multilateral cooperation arrangements require complex negotiations. There’s still an opportunity for the four members to build a Quad prototyping semiconductor foundry that can help their design start-ups test new cutting-edge designs before starting high-volume production.
Any recommended links on the subject?
Freeze-in-Place: The Impact of US Tech Controls on China - A Rhodium Group Note by Reva Goujon, Lauren Dudley, Jan-Peter Kleinhans, and Agatha Kratz - analyses the impact of the export controls on the US and Chinese semiconductor ecosystems.
For reactions from China and possible countermeasures, these two articles(1,2) in ChinaTalk by Jordan Schneider and Irene Zhang are useful.
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