Indian Council of World Affairs

Introduction 

In July 2023, a Memorandum of Cooperation was signed between the Ministry of Electronics and Information Technology (MeitY), India and the Ministry of Economy, Trade and Industry (METI) of Japan on the India-Japan Semiconductor Supply Chain Partnership.[i] This partnership is built upon ongoing initiatives between the two countries, like the India-Japan Digital Partnership (IJDP) and India-Japan Industrial Competitiveness Partnership (IJICP), which are designed to drive digital transformation, encourage startup collaborations, enhance business and industrial cooperation and identify cutting-edge areas for future collaborations. The MoC is the first step in the field of semiconductors between India and Japan and is aimed at fostering government-to-government and industry-to-industry collaboration. The partnership is said to focus on five key areas: semiconductor design, manufacturing, equipment research, talent development and establishing resilience in the supply chain.[ii]

The Global Semiconductor Landscape 

The semiconductor production process can be divided into five stages: research, design, manufacturing, assembly, testing, packaging (ATP), and distribution.[iii] Different stages in the production process have different technical, human and financial resource requirements.[iv] Given the complexity of the multi-stage production process, no country is entirely self-sufficient in production. However, the production process is largely concentrated in East Asia. The most prominent players in the industry are the United States, South Korea, Taiwan, China and Japan, and the current model of the supply chain is based on comparative advantage, wherein each country specialises in specific stages of production in the semiconductor global supply chain.[v] The US, Taiwan and Japan hold large shares in manufacturing and design. Some of the world’s largest semiconductor companies, like Qualcomm and TSMC, are headquartered in Taiwan. 

China and other Asian countries are ideal locations for assembly, testing and packaging since these are labour-intensive stages. Countries can move up the value chain to higher-value activities as the country’s economy and the skills of its workforce grow.[vi]

The Role of Geopolitics 

Considering the size of the semiconductor industry (worldwide industry sales totalled $574.1 billion in 2022), its wide and crucial usage in everyday consumer electronics, communications and computing devices, in the aerospace, automotive, medical and defence sectors, and the range of employment, innovation and economic growth opportunities it produces, any disruption in the supply chain would result in a worldwide economic slowdown.[vii] The geographic concentration of semiconductor production in the context of the COVID-19 pandemic and rising geopolitical tensions in the Indo-Pacific, which have allowed countries to leverage their comparative advantage for political reasons, have exposed the vulnerabilities of the supply chain. Due to these reasons, the semiconductor industry has acquired strategic importance. This realisation has resulted in the need for diversification of the supply chain. 

India-Japan Partnership 

The MoC signed during a meeting between Indian government officials and a Japanese delegation led by Nishimura Yasutoshi, the Minister of Economy, Trade and Industry of Japan, is one such attempt to diversify the semiconductor supply chains.[viii] This MoC follows a series of other such efforts, as Japan is the second Quad partner after the US to sign a deal with India on semiconductor supply chain and innovation. 

Japan is focused on revitalising its semiconductor industry as its share of the global semiconductor market declined from 80% in the 1980s to around 10% in recent years.[ix] However, Japanese firms still play a major role as suppliers of chemicals, materials and equipment, which are critical for semiconductor development.[x] Rapidus, a Japanese government-backed semiconductor company, which is engaged in a range of activities from R&D, manufacturing and sales as well as training and development of human resources, is said to play a major role in the partnership between India and Japan.[xi] India will benefit from this partnership by sharing and transferring experience and knowledge, specifically from companies engaged in the stages mentioned above. This will be facilitated by the several initiatives launched by the Indian government to develop a semiconductor ecosystem. 

These initiatives include incentives for setting up business in India, such as access to skilled manpower, R&D infrastructure, tax incentives and proposed funding of 50% of the total project cost. Moreover, even though India is heavily reliant on imports for its domestic market for semiconductors, it has a vibrant design ecosystem. The world’s top eight semiconductor companies have design centres in India, which makes India a favourable partner for Japan.[xii] Moreover, it is important to note that due to the nature of geopolitical tensions in the region, states want to collaborate with like-minded countries. India and Japan’s special strategic partnership would place additional value on facilitating the semiconductor supply chain cooperation for the best interest of the region as the two countries emphasise shared values of freedom, openness, transparency and a rules-based international order. 

The semiconductor partnership between India and Japan can be expected to further support other initiatives in the region, such as the Indo-Pacific Oceans Initiative (IPOI), which was announced by India in November 2019 during the 14th East Asia Summit (EAS) held in Bangkok, Thailand. The IPOI aims to establish an open, inclusive, non-treaty-based global initiative through practical cooperation. Seven pillars have been formulated for this cooperation in areas of security, safety, resource development, science and technology, resilient infrastructure and marine environment ecology.[xiii] The MoC between India and Japan can deepen engagement in maritime connectivity and trade as digitalisation and new developments in AI and automation can facilitate better efficiency in port and shipping services and overall maritime transport to stimulate economic growth in the Indo-Pacific. Overall, the MoC on semiconductor supply chain partnership would eventually bolster India’s policy of Security and Growth for All in the Region (SAGAR) by strengthening economic and security cooperation with its maritime neighbours. 

Conclusion 

The MoC signed between India and Japan depicts how the semiconductor industry, a technologically and economically advancing and important industry, has gained geopolitical importance. The geopolitical tensions in the Indo-Pacific have resulted in the need for diversification in the supply chains to avoid disproportionate dependence. International collaborations are based on the logic of mutual benefit and comparative advantage but also on shared values and interests. This partnership particularly brings together two countries that share the same values and vision for the Indo-Pacific. Moreover, it allows India to tap into the knowledge and expertise of Japan, having been at the top of the semiconductor industry for decades, and Japan to tap into the robust design sector and incentives offered by the Indian government to set up facilities. Considering this, the MoC brings in the opportunity for India to fulfil its potential in the semiconductor industry and for Japan to work on revitalising its position and value while working towards creating resilient supply chains.

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*Ms Gayatri Singh, Research Intern, Indian Council of World Affairs (ICWA)
Disclaimer: The views expressed are personal.

Endnotes

[i] “Cabinet Approves Memorandum of Cooperation between India and Japan on Japan-India Semiconductor Supply Chain Partnership.” Pib.gov.in, pib.gov.in/PressReleaseIframePage.aspx?PRID=1970784.

[ii] “India-Japan Script an Expanding Partnership for a Shared Future.” The Economic Times, July 26, 2023, economictimes.indiatimes.com/tech/startups/india-japan-script-an-expanding-partnership-for-a-shared-future/articleshow/102139039.cms?from=mdr.

[iii] Nathan Associates and Semiconductor Industry Association. “Beyond Borders: The Global Semiconductor Value Chain.” May 2016.

[iv] Kotasthane, Pranay, and Arjun Gargeyas. "Harnessing trade policy to build India’s semiconductor industry." Hinrich Foundation report (2022).

[v] “Takshashila Discussion SlideDoc - India’s Semiconductor Ecosystem: A SWOT Analysis.” The Takshashila Institution, takshashila.org.in/research/takshashila-discussion-slidedoc-indias-semiconductor-ecosystem-a-swot-analysis.

[vi] Nathan Associates and Semiconductor Industry Association. “Beyond Borders: The Global Semiconductor Value Chain.” May 2016.

[vii] Ravi, Sarah. “Global Semiconductor Sales Increase 3.2% in 2022 despite Second-Half Slowdown.” Semiconductor Industry Association, February 3, 2023, www.semiconductors.org/global-semiconductor-sales-increase-3-2-in-2022-despite-second-half-slowdown/.

[viii] “India and Japan to Sign Agreement for Development of Semiconductor Ecosystem.” Www.asiabusinessoutlook.com, www.asiabusinessoutlook.com/news/india-and-japan-to-sign-agreement-for-development-of-semiconductor-ecosystem-nwid-4165.html.

[ix] Kaur, Dashveenjit. “The Many Ways Japan Is Trying to Invigorate Its Chip Industry.” TechHQ, 5 Apr. 2023, techhq.com/2023/04/the-many-ways-japan-is-trying-to-invigorate-its-chip-industry/. ‌

[x] “Rebuilding Japan’s Chip Industry.” Orfonline.org, www.orfonline.org/expert-speak/rebuilding-japan-s-chip-industry#:~:text=Key%20strengths&text=Japanese%20firms%20control%20a%20significant.

[xi] “India, Japan Sign Pact for Semiconductor Development.” Financialexpress, July 21, 2023, www.financialexpress.com/business/industry-india-japan-sign-pact-for-semiconductor-development-3180403/.

[xii] Kotasthane, Pranay, and Arjun Gargeyas. "Harnessing trade policy to build India’s semiconductor industry." Hinrich Foundation report (2022)

[xiii] Towards a Sustainable and Prosperous Indo-Pacific Region IPOI INDO-PACIFIC OCEANS INITIATIVE Indian Council of World Affairs.