Huawei’s success shows the error in India’s chipmaking strategy

The Chinese telecom maker invested heavily to develop the technologies it was denied, did not squander resources on subsidy

Huawei's success shows the error in India's semiconductor strategy

The government of India has offered $10 billion as capital subsidy to investors, Indian and foreign, setting up semiconductor plants in India, and assorted state governments are chipping in with their own subsidies. Some projects have been announced, some have progressed, others have stumbled, but none promises to deliver the real goal of autonomous chip making capability, translated into production capacity.

The starting point is clarity on why India needs a chipmaking industry of its own in the first place. Why not simply rely on international trade to source chips from the established chipmaking companies, Intel, Nvidia, Broadcom, Qualcomm, AMD, Infineon, Samsung, SK Hynix? Why reinvent something round and ready to roll at either end of an axle when the wheel has already been invented and vendors are competing to sell it to you in as large quantities as you like?

There is only one justifiable reason: strategic autonomy. India is not part of any military alliance. No godfather will rush to India’s defence, committing his own men and materiel to protect us, as the US is treaty-bound to protect Japan, South Korea, the Philippines and fellow members of NATO. India has to rely on itself, its ability to manoeuvre in the geopolitical space available to it, and on the arms it produces and sources from countries ready to supply sophisticated arms to India.

Under normal circumstances, India should have no problem securing parts and components for its strategic arsenal and vital civilian infrastructure. But circumstances could arise in which such access is cut off.

Huawei, China’s premier maker of telecom equipment – network gear and handsets – was riding high in the late 2010s, before the US decided to restrict the company’s access to hardware and software incorporating American technology. The company was accused of violating sanctions imposed on Iran, of installing backdoors in its networks deployed in the West to enable the Chinese government to snoop on the telecom traffic of these countries, of undermining venerable telecom giants of the West, such as Ericsson and Nokia-Siemens, with state-subsidised, artificially low-priced kit aggressively peddled in developing countries.

The US also persuaded its allies to stop deploying Huawei equipment in their own telecom networks. Denial of the Android operating system and of advanced chips hurt the company. The founder, Ren Zhengfei’s daughter, also the company’s Chief Financial Officer, was detained in Canada, pending litigation to extradite her to the US, for 30 months.

The company fought back by increasing its own R&D efforts and, more significantly, by setting up a fund to invest in other companies developing technologies and producing equipment vital to production in China of all the gear that US sanctions had withheld from Huawei and other Chinese companies.

The sanctions still deprive Huawei of the latest generation of chips with 3 or 5 nanometre circuits, but Huawei has been able to deploy 7 nanometre chips in its increasingly successful smartphones, which are gaining marketshare in China. Huawei has developed its own operating system, to replace the withheld Android operating system, its own Enterprise Resource Planning (ERP) software to make up for the withdrawal of Oracle’s support, expanded into cloud storage and electric vehicle and charging infrastructure storage, and has been infusing capital into Chinese companies that produce assorted parts of the ecosystem that together make possible the advanced chips that enable massive-scale computing, including to produce artificial intelligence.

The Economist, no fan of China or capitalism with Chinese characteristics, accepts that Huawei’s strategy is shaped by market compulsions, rather than by Chinese state policy. Those market compulsions, however, have been shaped by the policy of a state that has identified China as its strategic rival, and has directed its own companies to deny products and technologies to Huawei on national security grounds. It notes that Huawei has successfully overcome the US effort to kill it and is now stronger than ever, with new offerings beyond its traditional forte in telecom. It is spreading its wings once again in developing Asia and Africa, besides inside China, still a growing economy, one percentage of whose growth adds $180 billion of value to its own and global output/demand.

What Huawei’s successful comeback after the setback received from US sanctions shows is the viability of indigenously producing all that is required to create the most advanced computing capability, marshalling human resources and capital for research and development. Huawei has 114,000 people in R&D, half its manpower, according to the Ecnomist and spends $20 plus billion on own R&D.

Can India replicate such a strategy? When Sam Pitroda set up C-DoT, its young engineers worked with awe-inspiring zeal and commitment, to open an Indian chapter in telecom technology. That spirit was later killed by imposing an unwanted foreign collaboration on the outfit, after Rajiv Gandhi was voted out.

Instead of funnelling India’s scarce resources to foreign companies to produce chips here, the government should use the money to set up a venture fund to enable thousands of Indian companies to build the individual pieces of the chip-making ecosystem spanning materials, lasers, lithographic machines and the servicing of equipment.

Why bother, why not just keep buying all the chips we need from existing suppliers?

Right now, India has a port in Iran, oil purchases from Russia and anti-missile system purchases from Russia that violate US sanctions. The current US administration has chosen to not subject India to the sanctions such breach should trigger. A different US administration might either not feel so inclined, or might be constrained by a partisan Congress to let Indian entities feel the full might of Uncle Sam’s displeasure. In that scenario, the very same companies that have set up shop in India, utilising Indian subsidy, would be constrained to deny their advanced semiconductors to India. That could mean a shortage of chips or components for Brahmos or any of the Agni variants of missiles, possibly at a critical juncture.

Remember that old rhyme? For want of a nail, the shoe was lost / For want of the shoe, the horse was lost / For want of a horse, the rider was lost / For want of a rider, the battle was lost / For want of the battle, the kingdom was lost / And all for the want of a horseshoe nail.

In the modern world, that nail is the microchip, and the king would be shouting, “A microchip! A Microdhip! My kingdom for a microchip!”

Strategic autonomy is not achieved by handing out subsidy to foreigners. It calls for developing India’s own R&D and production capability. Huawei’s example shows that it can be done. C-DoT’s history shows that it can be done in India. What are we waiting for?