Biden’s order to restrict US investments in China’s tech sector opens new opportunities for India
By a Special Correspondent
In a significant move aimed at safeguarding national security and curtailing the potential advancement of China’s military capabilities, US President Joe Biden has taken action by signing an executive order that imposes limitations on new US investments in China. The order targets specific sectors, most notably sensitive technologies like computer chips, and mandates government notification for other technology sectors.
The much-anticipated order grants authority to the US Treasury Secretary to potentially restrict or prevent US investments in Chinese entities operating in three specific sectors: semiconductors and microelectronics, quantum information technologies, and specific artificial intelligence systems.
The administration has clarified that these restrictions will be applicable to specific subsets within the aforementioned sectors, but detailed specifics have not been provided. The proposed order is currently open for public feedback.
The primary objective of this order is to curb American capital and expertise from aiding China in the development of technologies that could potentially bolster its military modernization efforts and undermine the security of the United States. The scope of the order extends to various investment avenues, including private equity, venture capital, joint ventures, and new investments.
President Biden, a member of the Democratic Party, conveyed to Congress through a letter that he is declaring a national emergency to address the threat posed by countries like China in critical technologies and products that have implications for military, intelligence, surveillance and cyber capabilities.
China, in response, expressed significant concern regarding the executive order, stating that it reserves the right to take countermeasures. The order’s implications on the operations and decision-making of enterprises, as well as its potential to disrupt the international economic and trade order, were highlighted in a statement issued by the Chinese Commerce Ministry.
Meanwhile, in an escalating trade dispute, particularly involving the West and notably the United States, the Chinese government imposed export restrictions on two metals, namely germanium and gallium, which are crucial components in the production of semiconductors and solar panels. This action doesn’t amount to a complete ban; instead, purchasers are required to obtain an export permit before engaging in trade involving these metals. However, over time, this move is expected to reduce China’s metal exports.
This action by China seems to be a response to export limitations imposed by the United States and its allies, such as the Netherlands, on equipment necessary for semiconductor manufacturing. This reciprocal trade tension is likely to have eventual repercussions on China’s trade activities.
Interestingly, recent media reports have grouped germanium and gallium, along with another set of 17 elements known as Rare Earth elements (REE), even though germanium and gallium do not belong to this group. This association is due to China’s historical practice of employing trade as a strategic tool. Back in 2010, China placed export restrictions on certain elements crucial for semiconductor production, impacting Japan’s semiconductor industry and prompting Japan to seek alternative supply chains.
Gallium is primarily obtained as a byproduct of bauxite processing, while germanium is a semiconductor material derived mainly from zinc and coal mining. However, the recoverable amounts of these metals from their sources are limited.
China holds significant dominance in global trade for both Rare Earth elements and these two metals, germanium and gallium. This situation has raised concerns globally, as Rare Earth elements are vital components across various industries, including electronics, automotive, telecommunications, aerospace, defense, renewable energy, medical technology, and industrial automation.
China’s trade actions have spurred global attention due to its substantial influence on Rare Earth element supplies, germanium, and gallium. Comparing global production data, China stands out as the leading producer of these metals. For instance, in 2022, China’s output of Rare Earth elements was over four times that of the United States.
Given the geopolitical dynamics and India’s ambition to bolster its semiconductor and electronics sectors, it might be prudent for India to incentivize investments in domestic extraction of critical metals and Rare Earth elements. Collaborating with countries like Australia, which has strained economic ties with China, could offer India a strategic advantage by securing alternative supply sources.
India possesses significant Rare Earth reserves along its extensive coastline. While the country’s current production of these elements is relatively low, there is potential for growth through technological partnerships, such as those with Australia. These collaborations could enhance India’s capacity to source and process essential materials for its semiconductor and electronics industries, safeguarding against potential disruptions in global supply chains.
In the 20th century, oil played a pivotal role, while in the 21st century, it’s chips – also known as semiconductors – that have taken center stage. These semiconductors are omnipresent in our lives, integrated into our phones, cars, appliances, and even weaponry. Our modern way of life heavily relies on these chips. However, not all countries are active players in chip production.
In 2021, India made an attempt to enter this market by introducing a 10 billion-dollar incentive program to attract investors. The initial attempt had a constraint: companies had only 45 days to apply, and if they missed the deadline, they wouldn’t be eligible. This led to limited success. To rectify this, the government has relaunched the program without the 45-day restriction. Companies can now apply until the 10 billion dollars are utilized.
This move signifies India’s strong interest in the chip industry, aiming to integrate the country into the global chip supply chain. The chip market is divided into three main segments: design, manufacturing, and assembly. Chip design largely occurs in the United States, while manufacturing is concentrated in countries like Taiwan, South Korea, and Japan. Assembling chips into devices is mainly done in China due to its numerous factories.
The economic potential of the chip market is immense, with its worth at around 570 billion dollars and projected to reach around one trillion dollars by the end of the decade. This prospect has led various countries to strive for a piece of the pie, sparking a “new Gold Rush.”
India’s position in this race is interesting. Despite initial ambitions to establish several chip factories by 2024, progress has been slower than anticipated. Yet, a significant deal was struck between Taiwan’s Foxconn and Vedanta to establish a plant in Gujarat worth 19.5 billion dollars. While this is a positive start, the focus remains on building further momentum.
Several factors play in India’s favor. The nation boasts abundant skilled and affordable labor, a critical asset for chip design and assembly. The geopolitical landscape also benefits India, as countries seek to diversify chip production to reduce reliance on Taiwan. The US has already expressed support for India’s chip industry through a memorandum of understanding, emphasizing supply chains and partnerships.
Moreover, India’s substantial local demand, driven by its status as the world’s most populous economy, can contribute to the growth of its chip market.
The U.S. and China are engaged in a unique war over semiconductors, the tiny silicon fragments that power various aspects of modern life. Rather than traditional military conflict, this battle revolves around technological dominance. China has labeled American company Micron as a national security risk, escalating the “Chip War.” This conflict holds significance due to the crucial role semiconductors play in various devices, making it a $500 billion industry projected to grow to trillions by 2030.
The semiconductor industry’s evolution began with the invention of the chip in the U.S. in the 1950s. However, the industry’s complex supply chain involves three stages: design, manufacturing, and assembly. While the U.S. historically dominated all three aspects, manufacturing shifted to East Asia, particularly Taiwan and South Korea, while China became a key player in assembly.
The stakes are high as countries vie for advanced chips, equating to increased computing power and potentially greater military capabilities. The U.S. leads in chip design and seeks to maintain its edge through initiatives like the Chips and Science Act, a $280 billion fund aimed at boosting chip production and restricting China’s progress in the field. China, newer to the industry, aims to catch up by acquiring technology and talent, something the U.S. is trying to hinder.
In retaliation, China banned Micron, a major U.S. chip company, in a significant move that alters the dynamics of the Chip War. This conflict presents an opportunity for India, positioning itself as an alternative to China. Despite lacking native semiconductor firms, India offers incentives to attract foreign giants. It is making progress in semiconductor manufacturing, with plants established in Gujarat and Karnataka. India also possesses a substantial talent pool for semiconductor design and plans to launch a Chip Design Center to foster its semiconductor design ecosystem.
As semiconductors are the “21st-century oil” determining global control, India aims to leverage its strengths to reduce dependence on China and establish itself as a leader in both manufacturing and design within the chip industry.
