Commonality between Chip industry and the Petroleum Sector

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    Recently ,It has been highlighted that  the two external obstacles to India achieving its economic potential are its vulnerability to the geopolitical and supply chain vicissitudes of the petroleum and electronics industries.

    Common link b/w Petroleum and electronics industries. 

    • Both industries are dominated by a handful of countries and corporates, both are capital intensive and cyclical.
    • Both sit at the nub of interdependent global relations, both are in the cross hairs of international geopolitics, and both are characterised by technological dynamism.
    • Both petroleum and semiconductor chips have a global footprint. Crude oil is tradable because it is easy to store and ship. Gas on the other hand has a narrower market.
      • It was earlier limited to the overland routes defined by the pipeline infrastructure but in recent years with the commercialisation of gas liquefaction, cryogenic shipping and regasification, this limitation has eased.
    • Oil and gas prices are cyclical, reflecting the capital intensity and long lead times of the investment cycle.
    • The chip industry mirrors these economic dynamics. 
      • The value chain (design, equipment, fabrication and testing and assembly) straddles the globe. Investment to create part or all of this chain runs into billions and the returns depend on engineering precision and technical talent. 
        • Currently, efforts are underway to drive a wedge into this supply chain and to “reshore” fabrication facilities. This is because of the technology of the Cold War. 
    • Both industries are marked by technological change. The mistake made by the theorists of “peak oil” was the assumption that oil exploration and production technology would be linear and incremental in progress. 
      • They did not anticipate the cutting-edge innovations that would open up the hydrocarbon resources in deep waters and within the pores of shale rock. A similar mistake could be made in electronics. 

    Major Players 

    • The supply of petroleum is dominated by the “cartel” OPEC and mega-sized public and private multinational companies, often referred to as the “super majors”
    • The semiconductor value chain is comparably close-knit. 
      • The US is arguably the most powerful player. Every chip produced in the world has a direct or indirect connection with the country. 
      • ASML, the sole producer of the equipment EUV (Extreme Ultraviolet Lithography), is a Dutch company but dependent on its wholly-owned San Diego-based subsidiary Cymer for the manufacturing tools.
      • Samsung and Hynix, which together produce 44 per cent of the world’s memory chips, and TSMC, which fabricates 37 per cent of the world’s logic chips and 92 per cent of the most advanced chips, are Korean and Taiwanese respectively. 
        • Both are protected by the US military security blanket.

    Impact of Geopolitics 

    • Geopolitics is at the core of both industries. Every oil import dependent country has beaten a path to the Middle East to secure access to petroleum and at times “weaponised” their efforts to safeguard this objective. 
      • The Saudi embargo of exports to the pro-Israeli Western world in 1973; the US intervention in Iraq in 2003 and the current cutback of Russian gas to Europe are three examples of this phenomena.
    • Comparably, semiconductors have also been part cause and consequence of the “technology Cold War” between the US and China. 
      • The US has imposed sanctions on the physical and intellectual export of chip technology to China and President Xi has, in turn, called for a “full scale assault” to “rejuvenate” China. 
      • The full consequences of these actions have yet to play out but the world is clearly fragmenting along the fault lines of chip geopolitics.

    Challenges for India 

    • India has struggled for more than five decades to reduce its dependence on external sources of petroleum supply. It has not been successful. India’s import dependence was around 20 per cent in the early Eighties.
    •  It is now more than 80 per cent. India has recently embarked on a journey to develop domestic chip fabrication facilities. 

    Conclusion and Way Ahead 

    • Even though the two industries are different in nature and profile, they share common structural denominators. And that an elaboration of these commonalities might be useful to those who have embarked on the journey to develop domestic semiconductor chip  capacity.
    • There are two lessons they should internalise. 
      • Chip nationalism will be economically costly and could be technologically regressive. 
        • They should be cautious about decoupling from the international supply chain.
      • Government support should be limited to financial support, nimble cooperation, and the creation of an innovative ecosystem. 
        • Bureaucratic intervention should be minimal.

    Mains Practice Question 

    [Q] Elaborate  the commonalities between the chip industry and the petroleum sector .Suggest measures to be taken to handle challenges faced by India in these sectors .