Pelosi's Taiwan visit risks another semiconductor crisis; what should be India's policy?

Already under pressure due to the surging demand for semiconductors amid the COVID-19 pandemic followed by the Russia-Ukraine war and now inflation, the chip industry is now witnessing signs of stress following US House Speaker Nancy Pelosi’s visit to Taiwan.

During her visit to Taiwan, Pelosi met Mark Liu, chairman of the Taiwan Semiconductor Manufacturing Company (TSMC), which is the world’s biggest semiconductor manufacturer. The two discussed the recently-passed US’ 'CHIPS & Science Act' for supporting chip manufacturing in India.

Last year TSMC commenced construction of the computer chip factory site in Arizona where it is spending $12 billion. “Pelosi’s visit has come at a strategic time with unveiling of the CHIPS & Science Act by the Biden Administration to help the American semiconductor manufacturing landscape,” Priya Joseph, Research Analyst at Counterpoint told Business Today.

With Pelosi’s visit fuelling tension between China and Taiwan, shares of semiconductor companies have already come under pressure. TSMC’s shares closed down 2.4 per cent, and United Microelectronics Corp's (UMC) share fell 3 per cent. “Some semiconductor companies have been under pressure due to demand and shares falling for the last month or two with inflation, recession and global conflicts. Pelosi's visit seems to have worsened it in the short term and the effect could be seen in stocks plunging further with the uncertainty glooming on how China will react and further consequences,” a semiconductor veteran and analyst Arun Mampazhy told Business today.

China has already halted some of the trade with Taiwan, starting with suspending fish and fruit imports citing excessive pesticide residue detection. Trade of frozen fish has also been halted on the excuse of the packaging being tested positive for coronavirus. Meanwhile, TSMC Chairman Mark Liu in an interview with CNN said that if China invaded Taiwan, its plant would not be able to operate as it relies on global supply chains.

Semiconductor manufacturing is an advanced, sophisticated and continuous process which heavily depends upon raw materials and spare parts from different parts of the world. “If this is with reference to the ongoing clash caused by Pelosi’s visit then the stakes could be much higher along with the probability of yet another chip shortage. Taiwan being an important pivot in the global chip supply chain manufacturing 80-90% of the world’s advance semiconductor needs would be impacted. So, any turmoil against Taiwan as a retaliation to the US action (like Pelosi’s visit) could result in a global crisis affecting the supply chain,” explains Joseph.

Impact on India:

The long-term effects of how this visit will impact the semiconductor industry are too early to judge. But Joseph believes if the ongoing tensions continue to brew between China-US over Taiwan, then any Cross-Strait conflict is bound to have an impact on India. She adds,  “India at the moment seems to carefully monitor the developments and has not issued any diplomatic or official statement on the same. The fact is, India currently does not share any formal diplomatic ties with Taiwan yet and is only in the process to establish one through bilateral, diplomatic or economic relations. Last year Ministry of External Affairs in the parliamentary sessions addressed a question answering how the government intends to augment this relationship further in areas of trade, investment and tourism.”

These developments only confirm the sensitivity of the semiconductor industry which is vulnerable to global geopolitics. The Union government of India has approved a financial outlay of Rs 76,000 crore in December 2021 for setting up semiconductor fabs and display fabs in the country. However, even after receiving applications in February this year, the Ministry of IT & Electronics formed India Semiconductor Mission (ISM) is yet to approve the applications. “ISM should quickly make yes or no decisions on the 3 proposals (it is) sitting (on) for nearly 6 months now. They should reopen the incentive scheme for new applications and parallelly also utilize the existing production line at SCL Mohali to its maximum capacity,” added Mampazhy. A reason why India should have high volume commercial silicon fabs which are the backbone of the semiconductor industry that further feeds many other sectors.