Date: 08/11/2022

Relevance: GS-3: Energy Security, Economic challenges and issues relating to planning, mobilization, of resources, growth, development and employment; effects of liberalization on the economy.

Key Phrases: Importance of Petroleum and Electronics industry, Geopolitical issues in strategic sectors, Energy Security, Supply chain constraints, OPEC, Key Players in Electronics industry, Economic Consequences.

Context:

• Over the years 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.

What is the commonality?

• Although the two industries are different in nature and profile, they share common structural denominators.
• Both industries are dominated by a handful of countries and corporates
• Both the industries are capital intensive and cyclical in nature.
• These industries sit at the nub of interdependent global relations, both are in the cross hairs of international geopolitics.
• Both are characterized by technological dynamism.

Who are the important players in the two sectors?

• Petroleum Sector
  • The supply of petroleum is dominated by
    • The “OPEC'' countries and this cartel controls about 80% of the world’s known petroleum reserves.
    • Mega-sized public and private multinational companies, often referred to as the “super majors”.
• Semiconductor Industry
  • The semiconductor value chain is comparably close-knit and very few players are there, the US is the most powerful player.
  • Every chip produced in the world has a direct or indirect connection with the US.
    • For Instance: The software for chips is provided by three US based companies — Cadence, Synopsys and Mentor.
  • Similarly ASML, the sole producer of the equipment EUV (Extreme Ultraviolet Lithography), is a Dutch company which is fully dependent on its San Diego-based subsidiary company.
  • Also, 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.
    • These countries depend on the USA for their security.
  • Other critical cogs of semiconductor life cycle such as an earthquake fault or destroyed by military action.
    • For instance: if TSMC’s fabrication facilities fail due to these, one third of the world's computing power would grind to a halt, the 5G network would collapse and the economic loss would be trillions of dollars.

Extensive geopolitics is at the core

• In Oil industry:
  • 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.
  • Historically there have been instances of weaponizing energy sector-
    • The Saudi official ban of exports to the pro-Israeli Western world in 1973
    • The US intervention in Iraq in 2003
    • The current cutback of Russian gas to Europe
• Semiconductor industry:
  • Semiconductors have also been part cause and consequence of the “technology Cold War” between the US and China.
  • For instance, the US has imposed sanctions on the physical and intellectual export of chip technology to China and Chinese President has, in turn, called for a “full scale assault” to “rejuvenate” China.
  • This indicates that the world is clearly fragmenting along the fault lines of chip geopolitics.

The Economic consequences are many

• Global footprint
  • Both petroleum and semiconductor chips have a global footprint.
• Supply dynamics of oil sector is a constraint
  • Oil and gas prices are cyclical, reflecting the capital intensity and long lead times of the investment cycle.
  • Crude oil being easy to store and ship is tradable while gas on the other hand has a narrower market and was earlier limited to the overland routes defined by the pipeline infrastructure.
  • The recent commercialization of gas liquefaction, cryogenic shipping and re-gassification, has eased this constraint.
  • This is depicted by the declined price of gas in Europe recently owing to many LNG carriers being destined for East Asia have been redirected to the terminals in Europe.
• Chip industry is also on the same track
  • The chip industry also mirrors the economic dynamics.
  • The value chain, i.e. design, equipment, fabrication and testing and assembly extends across the globe.
  • Investment to create part or all of this chain runs into billions and the returns depend on engineering precision and technical talent.
  • The US recently passed the Chips and Science Act and earmarked $52 billion for the creation of domestic chip fabrication, this indicates a technology Cold War.
  • INTEL, world's largest semiconductor chip manufacturer has also laid the foundation stone for a $-20-billion fabrication plant.
  • There are, however, economic constraints to how far this process can be sustained.

Technological change is inevitable

• Both petroleum and chip industries are marked by technological change.
• The theorists of “peak oil” assumed 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 and the countries that decide to copy, steal and subsidise technology will lead to technological backwardness.
• Because this strategy of reverse engineering will not allow them to keep pace with the speed of cutting-edge innovation.

Way forward

• India has struggled for more than five decades to reduce its dependence on external sources of petroleum supply but has not been successful.
• India’s import dependence was around 20 per cent in the early 1980s which is now more than 80 per cent.
• There is a need to learn lessons and accept the fact that “we failed in our petroleum experience” and we can avert the same mistake while developing domestic chip fabrication facilities.
• We can use the following two lessons to avoid a failure
  • The chip nationalism will be economically costly and could be technologically regressive and thus India should be cautious about decoupling from the international supply chain.
  • The government support should be limited to financial support, quick cooperation, and the creation of an innovative ecosystem involving minimal bureaucratic intervention.

Source: Indian Express

Mains Question:

Q. “The chip industry mirrors the petroleum sector in its sensitivity to geopolitical developments.” In light of the statement, discuss the commonality between the Chip industry and the Petroleum sector. How can India overcome the prevailing challenges in these sectors? (250 words).