Manish Tewari | China' looming legacy chip and some ideas for India

The China Challenge is real and it is not confined to the four-year-long stand-off on the Line of Actual Control (LAC). Its omnipresence goes across the board and is not limited to the land, maritime and cyber domains alone. Its real salience is in the realm of both legacy and cutting edge science.

In the high-stakes world of advanced technology, it's easy to become fixated on the cutting edge — the latest breakthroughs in artificial intelligence, quantum computing, and 5G networks. But as the US and China engage in a fierce battle for technological supremacy, a critical front in this conflict is going largely unnoticed — legacy semiconductors.

Legacy chips, also known as mature node semiconductors, are the unsung workhorses of the modern world. Plenty of computer chips are not leading-edge. They are “legacy”, “trailing-edge”, or “foundational” chips. With transistors measuring 14 nanometres or larger, these chips power everything from automobiles and home appliances to factory equipment, medical devices, and even military systems. As the Rhodium group notes, “They are pervasive therefore they are essential.” They may lack the buzz and glamor of their bleeding-edge counterparts, but legacy chips are absolutely vital to the global economy and national security.

The importance of these chips was starkly illustrated in Ukraine, where captured Russian military equipment was found to be filled with semiconductors scavenged from dishwashers and refrigerators. It’s a stark reminder that even the most advanced militaries rely on a steady supply of legacy chips.

Which is why the world should be deeply concerned about China’s aggressive push to dominate this crucial sector. Over the past few years, China has been pouring staggering sums into legacy chip production, with the goal of achieving self-sufficiency and global preeminence. In 2022, Chinese foundries grabbed 10 per cent global market share for the first time. By 2027, China is projected to control a staggering 39 per cent of the legacy chip market.

This breakneck expansion is being fuelled by enormous government subsidies, which have allowed Chinese firms to rapidly scale up and undercut foreign competitors. The playbook is eerily similar to how China came to dominate solar panels and 5G infrastructure — flood the market with cheap, subsidised products and drive everyone else out of business. Industry experts warn Chinese legacy chip makers could do the same, making the rest of the world precariously dependent on China for these essential components.

At the forefront of this effort is Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker. SMIC has benefited from billions in state support and is using this financial muscle to undercut rivals and expand its market share. Even more worrying are SMIC’s deep ties to the Chinese military, as documented in a report by defense expert James Mulvenon. This raises the spectre of the People’s Liberation Army gaining control over a vital slice of the global semiconductor supply chain.

For India, China’s legacy chip ambitions pose an especially thorny challenge as it races to build up its own semiconductor industry. The Indian government has earmarked $15 billion to construct new chip fabrication plants, or fabs. But these fabs will be entering a market that is already oversupplied, thanks to the deluge of cheap Chinese chips. The 15 billion dollar fund is paltry compared to China’s state backed fund of 40 billion dollars. With utilisation rates for legacy fabs falling and margins being squeezed, it will be exceedingly difficult for India’s new facilities to compete, even with government support. Additionally China’s current and projected production capacity for legacy chips is significantly larger than India’s with major facilities expected to start production by 2025-2026. If you look at the numbers it is surprising, China's integrated circuit (IC) output surged by 40 per cent, reaching a record-breaking 98.1 billion units.

There are also troubling security implications to consider. Investigations have found that over a dozen Indian firms have been selling the government Chinese-made microchips in critical systems, in violation of procurement rules. The spectre of hidden Chinese chips in cars, laptops, and infrastructure is a serious vulnerability that could be exploited for surveillance or sabotage. India’s 2020 Mumbai blackout, for instance, was linked to a breach in the power grid’s Chinese-built components.

To be sure, India does have some key advantages it can leverage in the legacy chip race. The country boasts a robust chip design ecosystem that could be harnessed to develop specialised semiconductors that China struggles to make, like analog chips and microcontrollers. Chinese firms have doubled their share of the analog chip market since 2019, but have struggled to make further inroads due to the complexity of these designs.

This is where India should be focusing its efforts, not on large-scale manufacturing of commodity chips. Unfortunately, the current approach appears to be misguided. The $11 billion fab being built by the Tata Group, for instance, will focus on assembly, testing, and packaging rather than the high-value design work that could differentiate India from China.

Ultimately, India will need a much more comprehensive and proactive strategy to secure its semiconductor supply chain and mitigate the risks of Chinese dominance. This should include: Strict prohibitions on Chinese-made chips in critical infrastructure and government systems. Contractors must be held to this standard as well. A robust monitoring regime to track the origin of every chip entering the country, down to the product and company level. Customs authorities need visibility into where chips were made, who owns the fab, and who did the design, in order to enforce restrictions. Currently, the government has little idea where the chips in imported goods are coming from, a dangerous blind spot. Targeted export controls on chip design software and manufacturing equipment to slow China's progress. This will require close coordination with the US and EU. Increased government support for domestic chip design and specialised manufacturing, rather than large-scale production of commodity chips. The focus should be on areas where India has an edge and China has struggled, like analog chips and microcontrollers. A long-term plan to build up local suppliers for semiconductor-grade materials, equipment, and components. These upstream chokepoints are just as essential as the fabs themselves.

The stakes could not be higher. Legacy chips may be older technology, but they are the irreplaceable foundation of the modern world. Ceding this market to China would be a disaster for both economic competitiveness and national security. If India plays its cards right, it may have a legacy of its own making.