Semiconductor: The new driver of geopolitical balance, economic growth

Traditionally, oil has played a key role as the driver of geopolitics, but in the long run, it may no longer retain the same prominence in the global economic and political race. First, the emergence of alternative energy options will likely reduce reliance on oil; second, semiconductors will play a much more significant role in driving economic and social growth. Like oil, semiconductors are also concentrated in certain geographical areas of the world largely due to material and talent availability. The race to gain competitive advantage and self-reliance through semiconductors has already begun and will become more intense in the future.

Semiconductors stand as the linchpin of a modern technological landscape, with their significance across a myriad of industries, from automobiles to aerospace, defence, and healthcare. They power innovations, paving the way for an advanced and interconnected world, impacting economic growth. The market size of semiconductors is expected to reach $1 trillion by 2030, due to their ubiquity in the development of emerging technologies such as artificial intelligence (AI), 5G, quantum computing, and industrial automation, among others.

Transforming the semiconductor supply chain landscape

Given the wide applicability of semiconductor chips, ensuring supply chain resilience has become a strategic priority. Japan, home to prominent tech companies and electronic giants, leads the world with 102 semiconductor fabrication plants. Taiwan follows closely with 77 plants, including the world’s largest independent semiconductor foundry, while the US has 76 plants. Recent events, such as cryptocurrency’s surging demand, trade barriers between the US and China, and geopolitical tensions have shown the complexity of the industry’s globalised supply chains, which resulted in production delays and shortages. Therefore, dependence on a limited number of players in the semiconductor supply chain poses a risk, as any disruption can have far-reaching consequences.

Drawing from lessons learned, nations are increasingly emphasising self-reliance and devising strategies to bolster domestic manufacturing. Many countries, including the US and China, are investing significantly in semiconductor research and development (R&D) and manufacturing. Through semiconductor manufacturing, countries can be in an advantageous position to control the supply chain and not only gain economic strength but also become investment magnets and creators of high-tech jobs. Emerging economies, including India, Indonesia, and Malaysia, are positioning themselves to seize the opportunities presented by evolving global landscapes.

India is positioned to become a major player in the global semiconductor industry, backed by its vast engineering talent, evolving technology ecosystem, and government support. The National Electronics Policy (NEP) aims to establish India as a hub for electronics system design and manufacturing (ESDM), including semiconductors. With an allocation of $363 million to the Indian Semiconductor Mission, India is poised to attract investments from global players.

At present, few countries hold dominance in relatable segments of semiconductor manufacturing - the US for chip design, Japan for materials, and Taiwan for manufacturing. Increasing geopolitical situations are key drivers motivating countries to diversify their sourcing capabilities. Additionally, companies are setting up manufacturing facilities in low-cost locations and hiring engineers from around the world. Also, the industry is increasingly moving towards a foundry model, where international manufacturers can produce chips for other companies. This shift has levelled the playing field for companies in developing and emerging economies, as they can now compete with companies in developed nations. These factors suggest that geopolitical, technological, and strategic considerations could influence the shift in semiconductor industry leadership.

Navigating complexities in establishing an ecosystem

The race for technological dominance faces obstacles that can disrupt industry growth. Establishing a robust semiconductor manufacturing landscape demands substantial capital investment in infrastructure, workforce training, and R&D. The cost of building a semiconductor fabrication plant alone can range from $15 to 20 billion. The talent shortage is another challenge. According to the 2023 KPMG Global Semiconductor Industry Outlook, 67 per cent of industry experts find talent development and retention as a top strategic priority. The industry would require over 1 million skilled professionals by 2025. Among the other challenges, semiconductor manufacturing involves the use of hazardous chemicals and high energy consumption, leading to environmental concerns. Further, compliance with various international and domestic regulations, including export control and intellectual property (IP) rights, adds complexities to operations.

Developing countries looking to enter the global market are prone to these risks and require a pacing up of government initiatives to keep up with global trends.

Reshaping the future

Semiconductors power modern electronics, but they depend on global cooperation and innovation. No single country can achieve self-sufficiency or dominance in all aspects of semiconductor production. For instance, the US leads in chip design, however, it relies on Taiwan and South Korea for manufacturing and Japan for materials and equipment. Therefore, we are likely to see increased cross-country collaborations even in the future. Additionally, there may be technological advancements, including the development of smaller and faster chips, as well as the exploration of new materials and architectures. As transistors reach the physical limits of miniaturisation, the industry is likely to shift to 3D stacked and heterogeneous architectures to continue improving performance and power efficiency.

Due to continued growth, concerns about climate change may grow, and the industry may focus on developing sustainable technologies. This could include energy-efficient chip designs, recycling initiatives, and reducing the use of hazardous materials. For instance, compound semiconductors such as silicon carbide and gallium nitride can enhance energy efficiency and reduce the carbon footprint across sectors such as automotive and consumer electronics. The semiconductor industry will continue facing challenges such as supply chain disruptions, IP thefts, cybersecurity threats, and skilled talent shortages. Addressing these challenges would be crucial for the industry's continued growth and stability. While many countries are developing strategies to get ahead in the semiconductor race, only time will tell which countries emerge as winners. In any case, in the long run, all industries and consumers will benefit from the speed of development and innovation.

Akhilesh Tuteja, Partner & National Leader, Technology, Media & Telecommunications (TMT), KPMG in India