18 April, 2024

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Chips Are Everywhere: But Can Sri Lanka Ride The Wave?

By W A Wijewardena –

Dr. W.A Wijewardena

Microchips everywhere

In the last five decades, it was the access to oil or the possession of oil fields that generated prosperity and wealth for a nation. In the next five decades, it will be smart microchips that will do the job. That is because everything from buying a loaf of bread to settling on Mars, all equipment, and weapons that we use will be driven by microchips. Chips are needed by all industries for production, distribution, and consumption, the three main economic activities that we undertake. Take for example a very low level of economic activity like ordering a meal through a food delivery man. From ordering the meal to making payment to taking delivery of the meal on your side are all guided by microchips. From the caterer’s side, taking the order, receipt of payment, and handing the meal to the delivery man are all guided by microchips. From the side of the delivery man, finding the shortest route to accurate address of the recipient to the confirmation of the delivery are guided by microchips. Hence, without microchips, in the modern and emerging digitised world, we cannot think of surviving. It is all over there powering and energising all human activities.

Decade of microchips

According to a report published by the research thinktank, McKinsey Research, 2020s is the decade of semiconductors. In 2021, the total value of the semiconductor industry had been close to $ 600 billion, and they have been principally used for computing and data storage and wireless communication. It has been projected that the industry will grow to $ 1 trillion by 2030. In addition to the current users, the motor vehicle industry has been added as a main user of semiconductors. Further, industry, consumer electronics and wired communication have also been identified as users of this precious item.

During the decade, computing and data storage, wireless communication, and automotive electronics will contribute about 70% to the growth. In a fully self-driven car, it has been estimated that about $ 4,000 worth of semiconductors are being used making them an important component in the smart driving system. During 2015-9, the average annual economic profit of the semiconductor industry, namely, the actual profits adjusted for the opportunity cost of capital, has mainly been earned by North American companies ($ 37 billion) followed by Asia-Pacific companies (earning $ 23.4 billion). In comparison, the European companies earning an annual average economic profit of $ 2.4 billion are yet to make a firm foot stand in the industry.

Collaborative chip makers

Semiconductors are a promising industry and therefore the investors in the industry have high expectations about its growth. If they compete with each other, it will be a ‘lose-lose’ situation. Hence, the chip makers should learn from those who have been successful in creating economic profit. In this case, identifying the profitable segments of the industry and seeking to take leadership in those areas will be the secret to learn. The leading players so far have invested massive amounts in Research and Development or R&D enabling them to come up with improved products and enjoy leadership in the area. The newcomers cannot catch up with them easily. In this connection, McKinsey Research has made three specific recommendations to players in the industry.

Need for partnering

First, they should expand the customer base by partnering with other chip makers across the value chain of the industry. Users need applications that seek to offer solutions to specific problems they have. An example is the applications which banks seek to have for addressing the specific issues faced by customers. For instance, if the internet account of a customer with a bank has been deactivated, there must be safe and quick ways of reactivating the same on a 24 hour into a seven-day basis. Since banks or any other users do not develop their own chips, it is the duty of the chip makers to design such custom-oriented cutting-edge chips. By doing so, they can enter the value chain and capture specific high growth niches. They should also merge with small but well-functioning software developing companies to enhance scales of operations. For that, a specific merger and acquisition or M&A strategy should be developed and put into practice by chip makers.

High alertness

Second, acknowledging that supply chains are continuously evolving, the chip makers should stay alert to such volatilities in the industry. There is a constant diversification of global trade specifically in the case of sophisticated technologies. If they can diversify their own operations, they can count on more than one vendor or supplier at a time. Governments offer generous subsidy schemes, like the present subsidy scheme of $ 52.7 billion offered by the US government to promote the manufacture of advanced chips which have more secure markets in the globe. Diversification will help them to enter these selected markets. Further, when shortage of chips occurs as in the present shortage experienced by the automotive industry, prices tend to rise. Instead of taking advantage of such price increases, chip makers should fix fair prices on them to facilitate the industry to survive in a collaborative world.

Role of new technologies and innovations

Third, chip makers should adopt new technologies and innovations so that they are always floating above the water. Technology is changing and those who apply new advanced technologies will continue to succeed. This applies to semiconductors currently being produced. If there are faults in chips that are made, the chip maker will lose market confidence and trust. This can be corrected by speeding up the yield learning curve, a technique which involves correcting the existing faults progressively until a manufacturer reaches accuracy at near 100% level. The fault rate in normal manufacturing is six faults per million units produced. However, this is a luxury for chip makers. Imagine a chip fails when an operation is performed by a surgeon using advanced equipment driven by advanced chips. That cannot be tolerated. Hence, the norm for faults in critical chips is zero. This can be attained by chip makers by continuously inventing and innovating.

Division of the world into chip makers and chip users

Because of the importance of semiconductors in critical applications of modern technology and the profit opportunities available, all the leading manufacturing countries are on to the game of producing semiconductors. This has divided the world into two groups, chip makers and chip users In the case of chip making, there are a dozen of large chip makers. Of them, the five leading companies are Taiwan Semiconductor Manufacturing Company, Intel, Qualcomm, Broadcom, and Micron Technology. These five companies and a dozen of others spend a large sum of money on research and development to produce better and more efficient chips for the market. Hence, it is an industry which wholly driven by leading chip makers.

Entry of governments

It is only in recent years that the governments have entered the fray. Accordingly, the US government has offered a subsidy scheme of $ 52 billion to promote the semiconductor industry so that USA can become the market leader in the global semiconductor industry. Out of this, the lion’s share of $ 39 billion is earmarked for the startups. This money is to be used for semiconductor production, undertaking research on same, and developing the workers involved in the industry. It is reported that more than 460 companies have applied for receiving funds from the subsidy scheme. The numbers here are promising but like any subsidy scheme, it seems that the administrators of the scheme are worried only about the disbursement, known as the outlay goal, and not about the impact it will create in the US economy. That impact should show, if it is effective, a growing global share for US semiconductor industry, on one side, and invention and innovation of cutting-edge chip technologies, on the other.

India’s way of battling with chips

Sri Lanka’s neighbour to the north, India, which is also planning to increase its GDP from $ 3.7 trillion in 2023 to $ 10 trillion in 2035 has unveiled the $ 10 billion worth Semicon India Program in December 2021. The long title of the program is the development of semiconductors and display manufacturing ecosystem in India. It has a sub scheme aiming at linking the designs to industry proper dedicated for 100 domestic companies, startups and micro, small, and medium enterprises or MSMEs which will form the backbone of the semiconductor industry in the country.

Since the outcome was not that fast, in July 2023, the Ministry of Electronics and Information Technology of India or MeitY modified the original scheme to make it more attractive. Accordingly, a half of the project cost will be paid by the government for three specific categories of semiconductor industry: Setting up the fabrication of semiconductors, fabrication of displays or display fabs, and other components like compound semiconductors, silicon photonics, sensors, etc.

To make this a success, India is counting on some 300,000 odd design engineers available within the country as revealed in a panel discussion on the global semiconductor industry at the recently concluded World Economic Forum. In addition to these local companies, there are already a few top global players that include Micron Technology, Samsung, and Intel, that have set up production branches in India. The value of semiconductor industry in India in 2023 had been $ 7.76 billion. It is planned to increase this to $ 10.68 billion by 2027.

Sri Lanka’s low-performing traditional exports

Sri Lanka’s semiconductor industry is yet to make a presence. But it will be an immense market opportunity in the future. This is because Sri Lanka’s present export basket has sustainability issues in the changing global production systems. Its traditional three – tree product exports –tea, rubber, and coconut – have already reached the saturation point as unprocessed export materials. Any growth in these exports should, therefore, be in value additions to be made. Its flagship export in the last three decades – apparel industry – faces several bottlenecks today.

One is the rising labour costs that have shifted the manufacturing base from Sri Lanka to low-wage countries like Bangladesh, Myanmar, and Cambodia. Another is the tendency today for apparel importing North American and European countries to set up factories on their own lands, called onshoring, and in countries with proximity, called near shoring. This has been made possible by the ever-improving automation of apparel manufacturing processes, a beneficiary of the development of the advanced semiconductors. Hence, high labour costs are not an obstacle anymore for apparel consuming countries.

Jumping on to Indian bandwagon

What this means is that Sri Lanka should necessarily add new products to its export basket. One such product is semiconductors. Since the country does not possess technology to manufacture it on its own, it should join with another country or a group of countries to produce the same as a partner. In this global production sharing network era, that is not a difficult task. In this connection, the best country for Sri Lanka to join with is India. In this context, Sri Lanka should not treat India as a threat but as a collaborative partner that offers it opportunities. Such an arrangement provides a ‘win-win’ situation to both countries. Sri Lanka can provide microchip wafers or undertake a part of the manufacturing process with its educated labour force. This is called working with production sharing networks.

Semiconductor solution

At this hour of severe economic crisis, Sri Lanka has no choice. With respect to domestic prices and exchange rate, it seems to be in an equilibrium. But that equilibrium which might change for the worse at any time is at a low level of output characterised by slow economic growth. The foreign exchange gap as projected by IMF while making the review of the extended fund facility in December 2023 is principally to be met by getting a generous foreign debt write-off amounting to $ 14 billion by both the bilateral lenders and commercial creditors. Since the total foreign debt to be restructured under the Government program is about $ 33 billion, the amount to be written off for providing relief to the gap is about 42% of the total. As it is, this is a highly challenging goal to attain. In these circumstances, the way out for Sri Lanka is to increase the earnings from the export of goods and services by a mega amount. The semiconductor industry provides an easy avenue for Sri Lanka in this regard. Hence, it is in the interest of the country to take early action to ride this wave by being a collaborative partner of India which is moving fast to make itself a semiconductor country soon.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 4
    0

    In its quest for what is called semiconductor independence, the US has got TSMC or Taiwan Semiconductor Manufacturing Company to open a manufacturing plant on US soil, but had run into challenges due to unavailability of suitable human resource in the local labour force. I don’t know much about wafers particularly the kind of talent required for manufacturing them, but chip making in general is highly specialized, therefore how feasible is the author’s suggestion needs evaluation. But in principle it’s a good suggestion. Provided that one could find collaborators, the required talent locally and the know how to establish manufacturing facilities locally for the same. While it is good to be ambitious one must also note that between making chips and stitching jungees there are plenty of other things a country could do. Moving up in the value chain is a gradual process and could take time.

    • 3
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      Ruchira is right about TSMC’s plants in the US having challenges with HR.

      TMSC is the major global supplier of chips. There are many world-class chip designers like Nvida in the US but US is not big in manufacturing of chips at present. Intel produces some of their own chips. However, the US with the Chips and Science Act of 2023 and a massive multi-billion funding program behind it, they can overcome the HR challenges in a short period of time with the collaboration of the industries and universities. How do we move forward with our legislators and administrators whose focus are next elections and % commissions?

      • 0
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        Thanks Balanced View for the info on Chips and Science Act 2023. I’m sure with efforts the US would soon overcome the challenges.
        .
        What is interesting is the US motive behind seeking semiconductor independence, that has also resulted in imposition of restrictions that prevent manufacturers from exporting certain types of high end chips to China, causing substantial revenue loss, as China is one big importer of semiconductors.
        .
        It is part of the overall strategy of containing and countering China with a possible conflict anticipated in Taiwan in the event things turned sour, that may potentially disrupt the US semiconductor supply chain.
        .
        Given this conflict it may be more easier to partner with China in efforts to manufacture chips locally. Because it is thought that China evwntually would also seek to producr their own microchips to insulate itself from disruptive US initiatives.
        .
        But before jumping into the sophisticated bandwagon advanced chip manufacturing there are much easier things that could be done.
        .
        But you are right – myopia that our legislators suffer from isn’t going to help us much… probably the biggest hindrance in partnering with anyone for anything.

    • 3
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      You need expensive equipment from Applied Material in Santa Clara California to establish a foundry. A foundry is a Clean room where expensive air purification systems and temperature/Humidity controls need to be established. This requires mega bucks and yes qualified personnel. There are many Sir Lankans who posses the experience and qualifications but they all work abroad some work in Applied Materials itself. Expensive modelling software is required the produce chips. Expensive test equipment is also required. All the countries of the world who have chip manufacturing capability invested in these technologies ages ago. Mega bucks have to be pumped into research via dedicated government owned and funded and operated research labs and also the Universities. Did the voters of Sir Lanka ever give a chance for anyone with the brains capable of thinking out these complex issues? The answer is a resounding NO. This is a stupid country with the most dumb idiots who love to vote for like minded idiots. Therefore Mr W don’t waste your time.

      • 0
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        Quote:
        “Did the voters of Sir Lanka ever give a chance for anyone with the brains capable of thinking out these complex issues? The answer is a resounding NO.”
        Unquote
        .
        Who in your opinion that had the brains capable of thinking these complex issues, that voters didn’t give a chance – would you like to specify?

  • 4
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    RW’s Hydrogen economy, Climate Change university and renewable energy and WAW’s microchips fabs are pipe dreams devoid of reality. SL STEM universities are not necessarily research oriented, geared to produce world’s labour to bring in foreign remittances. Chip fabrication is heavily dominated by Taiwan. Fabrication requires tooling engineers. Second, the SL nation is built on Indian hate among other hates. How do you expect to turn the hate you and your brethren inculcated into love (partnership) overnight?

    • 3
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      Why do Sri Lankans hate India so much?

      • 1
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        Ruchira,
        “Why do Sri Lankans hate India so much?”
        Because the Buddha wasn’t born here?
        Because they send us cheap buses?
        Because they send free parippu?
        Because they don’t need visas to come here?
        Because we need visas to go there?

        • 1
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          OC – Worth doing a survey and find out…

    • 4
      1

      “In this global production sharing network era, that is not a difficult task. In this connection, the best country for Sri Lanka to join with is India. In this context, Sri Lanka should not treat India as a threat but as a collaborative partner that offers it opportunities.”
      All true, but who will deal with the howling chauvinists who see everything Indian as life-threatening? It is simply a rational decision, which would be valid even if our closest neighbour was China or Pakistan. Even Taiwan has invested heavily in China.
      But I have doubts about chip fabrication with India. Processor fabrication is highly complex, and dominated by Taiwan and the Netherlands among others. Even China struggles. India has been trying since the 80’s. It seems it’s easier to land on Mars than make
      a chip. We would be better advised to find out how they produce onion and electricity at a quarter of our rates.

    • 1
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      One must read the report detailing India’s MeitY initiative to manufacture semiconductors and related products, that Dr. Wijewardena has linked in his essay, titled “What is the Semicon India Program and How Does it Work?”, to understand the scale and the complexity of the effort involved, with a particular attention to the report’s concluding section: “Archive: Key foreign players India is talking to”, to see how realistic the below description he provides on the possibility of Sri Lanka partnering with India to start a parallel microchip wafer manufacturing in Sri Lanka:
      .
      “…Since the country does not possess technology to manufacture it on its own, it should join with another country or a group of countries to produce the same as a partner. In this global production sharing network era, that is not a difficult task.”
      .
      Even India seems to be finding it challenging. Not sure how Sri Lanka could initiate the kind of negotiatations involved and whether Sri Lanka could infact be a viable location to support India’s initiative at a required scale to seek a partnership with them.

      • 1
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        Continued…
        .
        You can access the report on MeitY initiative by clicking the below link:
        .
        https://www.india-briefing.com/news/semicon-india-program-investment-incentives-manufacturing-design-semiconductors-industry-23860.html/
        .
        Here’s an exceprt that may shed some light: “… these companies use components from hundreds of other firms. Setting up a hub in India would thus require convincing all those other firms to also set up a facility in India to smoothen supply of components.”
        .
        I don’t think it’d be as simple as setting up a garment factory!

        • 2
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          Ruchira,
          You seem to have grasped it better than the author. Also, these are not just “chips” but processors with <10 nm density. There is a big difference.

          • 0
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            OC – Yes. We may one day get there or we may not, but I don’t think we have the necessary conditions at the moment to embark upon such an endeavour, as a solution to the current crisis we are in. There more easier things that are within our reach. But must congratulate the author for being bold.

            • 1
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              Ruchira,
              Yes indeed there are much easier things in the same field, like for example making LEDs or assembling WiFi routers . But again one needs a willing workforce.

              • 0
                0

                OC – True….

        • 2
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          Hello Ruchira,
          As you said “I don’t think it’d be as simple as setting up a garment factory!”. My wife’s son is an Export Manager in a textile company. They too suffer from some of the problems highlighted e.g. lack of Technical Staff, inadequate Electricity Supply, inability to source spare parts etc.
          If Sri Lanka cannot provide enough well trained Technical Staff with a very good command of English for the Garment Industry what hope is there for Semiconductors? IC Fabrication requires huge amounts of pure water and an extremely reliable power source. Read this article (2021) on India’s shortcomings and compare with Sri Lanka’s huge infrastructure problems – https://telecom.economictimes.indiatimes.com/news/big-steps-needed-to-create-basic-infra-for-semiconductor-manufacturing-difficult-to-compete-with-neighbouring-nations-nxp/82903662
          Sri Lanka desperately needs manufacturing, however any plans to enter the IC Fabrication field is like sending an untested submarine design 3,800 metres down to the Titanic – maybe we should call it the Titan Project?

          Best regards

          • 0
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            Thanks LankaScot for the article shared. It looks like India itself is struggling to get wafer fabrication going that the author suggests we do.
            .
            I am no engineer but chip manufacturing I believe is one of the most advanced manufacturing in the world. There are much simpler things we could attempt before going there even in the manufacturing space.
            .
            But like you have pointed out we can’t even support the most basics of manufacturing like garments. Then how are we going to move up along the value chain?
            .
            There are sectors like IT, software development, we could make significant breakthroughs, especially since they don’t require the infrastructure that manufacturing may require.
            .
            We do have few success stories like MIT to our credit that was partly absorbed by LSEG as a result of having developed their software but are far from being able to compete with the Indian giants like TATA or InfoSys.
            .
            It is well known we never fully capitalised on the BPO boom even, compared to our regional counterparts. A sector that doesn’t require highly skilled talent.
            .
            Whatever the case we need long term planning, a wholistic approach to economic development, that encompass all sectors.
            .
            But for some reason like Balanced View have already pointed out our leaders seem to be incapable of doing generation after generation.

            • 0
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              LankaScot – It was 20 years ago that I attended a workshop organised by Sri Lanka Export Development Board (EDB) on developing AI based software for the export market. This was done by a Sri Lankan Professor that has specialised on AI who at the time was attached to Open University, Colombo. I have forgotten his name. But after 20 years when the world has made significant breakthroughs in generative AI we are still struggling to make any significant strides in the field and now only speaking on introducing AI to school curricula to develop AI products to the global market, something that the above good professor was advocating some 20 years ago. Too little too late. The above example I brought to show that its not that we dont lack individuals with good ideas and capabilities or the foresight. But for some reason the leaders don’t seem to be capable of letting them materialise these ideas in the real world in terms of tangible products and projects.

            • 2
              0

              Ruchira,
              ” our leaders seem to be incapable of doing generation after generation.”
              Because not a single one of our leaders was an engineer or a scientist?
              Lawyers will be Lawyers.

              • 0
                1

                OC – True. Don’t even talk to me about lawyers….

          • 1
            0

            Yes, it may seem unrealistic given the typical Lankan mindset. But we’ve got to admire Dr Wijewardene for saying all these things.
            .
            He is a seeker for information on a variety of topics, and he seeks out people. He visited me because he felt that guys like me ought to be encouraged. He was not born into wealth and comfort, but he has achieved much, and he shares what he knows.
            .
            There are some who blame him for not being a fire-brand; in actual fact his attitudes are those that we must emulate.

    • 2
      1

      Typical Sri Lankan response to a smart man’s vision. I rest my case. Hopeless stupid country.

      • 0
        0

        Hello Mr. Smarty Pants – Not sure if your comment is directed at mine. If it is, I think I have acknowledged that it’s good and ambitious thinking but the ground reality and the practicality may not feasible, giving the enormity of the task, and what happened as per my knowledge even in places like the US. It is clear the comolexity and magnitude of the Indian effort too. It’s a view that many others here have resonated with, including the ones who have some exposure to the industry. May be because as you say its a hopeless stupid country?Given that you seem to have some knowledge on the subject what’s preventing you from taking any initiative with the help of the smart and the visionary you seem to be capable of identifying? Looking down on the others I believe wouldn’t take anyone anywhere – an equally stupid thing to do except if one’s aim is self-aggrandizement!

  • 1
    1

    Good deal to partner up with India on this. Doesn’t mean we need the Land Bridge. In fact, the taxpayer money Ranil has set aside for Land Bridge can be used to develop the chips industry. Only computer industry that took off is the slave-trade exporting of our young cyber- security experts to terroristic Myanmar. Bring the offshore money back to the Motherland and all will be possible.

    • 0
      0

      Ramona,
      They weren’t “cyber-security experts”. They were call-centre types employed to scam old ladies in the US.

      • 0
        0

        Old codger,

        Still they are tech-savy and the government could have easily trained them up, instead of forcing them outside for lack of employment the country to fall into the hands of criminals.

        • 0
          0

          Ramona,
          In case you don’t know, all you need to have for that sort of employment is an American/UK accent. Cyber-security experts can make 3000 USD even in Colombo. They don’t need to go work in jungles.
          https://youtu.be/r1Q_P__aqAk?si=t-TXLlP7McR6zTbv

          • 0
            0

            OC – Are there any good cyber security experts in Colombo? If so from where can I find them?

            • 1
              0

              Ruchira,
              Try Gapstars
              https://gapstars.net/
              There are other places too, usually not big outfits like MIT or Virtusa.

              • 1
                0

                OC – Thanks. Gapstars look good. Not a fan of MIT or Virtusa. I personally know the MIT guy who is into Cybersecurity. People like him is why we need cybersecurity in the first place. Makes one wonder if that’s how MIT finds its business.

          • 0
            0

            Old Codger,

            Thanks for the link.

            Our people are not given adequate job training to create upward mobility based on current job trends in spite of their intelligence. This is because our government keeps the profits of our struggling workers in offshore accounts for their own use and according to their whims and hold on power.

            Same in India. Only top jobs like doctoring or engineering are given credence, but nothing more creative to spread to the masses.

            This is where our countries fail whilst other more agile nations who don’t have caste and class mania, rise above far more easily.

            Join India too much and we will be perpetually bogged down with them. Finally, we have the privilege of getting the long-awaited, brand new NPP-JVP government with egalitarian ideals in line with these agile nations, and in line with Lankan Buddhist beliefs. We mustn’t miss this golden opportunity!

            • 0
              0

              Ramona,
              “Our people are not given adequate job training to create upward mobility based on current job trends “
              Proper training costs money.
              Do you know that the JVP/ FLSP unions forced the closure of SAITM and are still calling for the closure of SLIIT and NSBM?
              You think the JVP is a solution?

  • 1
    0

    As some other people here have pointed out this is putting the cart before the horse. Forget about manufacturing chips or wafers Sri Lanka is not even capable of manufacturing devices that use chips.
    The Average revenue of some of these companies is twice to five times that of Sri Lanka. And also the industry is very capital-intensive. only a few countries in the world have the money to support such companies. and never mind the stories all these major manufacturers are government-supported. Billions of dollars poured into making these Fabs. Can Sri Lanka afford this?

    India can easily do they have the resources and engineering skills. It would not be an exaggeration to say the best chip design engineers are in India.

    This whole nonsense on getting down in geometry is a fantasy created by the Western media. other than for some of the AI-intensive applications these chips serve no purpose as the cost no longer has a benefit unless millions or billions of these chips are used. in the automotive industry that I work in the best State of the Art is near 25 nm . as the lower geometries cannot be qualified.

    But I agree with the spirit of the article. if not the content. Sri Lanka does need to find a niche.

    • 2
      0

      “It would not be an exaggeration to say the best chip design engineers are in India.”
      Then, why is Taiwan considered the the Asian leader in chip manufacture?

      • 0
        0

        SJ,
        It’s analogous to architects drawing plans for builders. The architects are good in India but Taiwan has the best fabricators. Software and hardware.

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