Semiconductor Industry in India- Significance and Challenges- Explained Pointwise

Recently, the Union Cabinet, led by Prime Minister Shri Narendra Modi, has approved the establishment of a new semiconductor unit in India. The new semiconductor unit will be set up by Kaynes Semicon Pvt Ltd in Sanand, Gujarat, with an investment of Rs 3,300 crore, and it will have a production capacity of 60 lakh chips per day. The announcement is a continuation of the series of establishment of semiconductor plants in India. The semiconductor plants have been announced in Sanand, Gujarat (two units by Kaynes Semicon Pvt Ltd and CG Power), Dholera, Gujarat (one unit by Tata Electronics), and Morigaon, Assam (one unit by Tata Electronics).

In this article, we will focus on the semiconductor Industry in India. We will look at the significance of the industry and the challenges it faces. We will also look at the government efforts towards the development of this sector. We will also look at the possible way ahead and the future course of action.

What are semiconductors? What is their importance? 

Semiconductors- Semiconductors are materials which have a conductivity between conductors and insulators. They can either be pure elements, like silicon or germanium or compounds, like gallium, arsenide, or cadmium selenide.

Properties- Semiconductors have less resistivity than insulators and more than conductors. The resistance of the semiconductor decreases with an increase in temperature and vice versa.

Importance of Semiconductor chips

1. Heart and brain of modern technology products- Semiconductor chips are the heart and brain of all modern electronics and communications technology products, contemporary automobiles, household gadgets such as refrigerators, and essential medical devices such as ECG machines.

2. Propeller of emerging technologies- The development of emerging technologies like AI, 5G, or driverless cars is dependent upon a fast and cheap semiconductor industry.

3. Most traded products after petroleum- Semiconductors are globally the most-traded products after petroleum and cars, with an annual turnover of $500 billion.

4. Aiding the further development of electronic devices- Semiconductors make the devices more compact, less expensive, and more powerful. For ex- Semiconductor chips have enhanced the features of smartphones with powerful processing.

5. Transformative potential- Semiconductors continue to enable the world’s greatest breakthroughs and transformation in industries, ranging from aerospace and consumer electronics to energy and medicine.

What are the defining features of Semiconductor manufacturing?

Semiconductor manufacturing has the following defining features-

1. Front-end manufacturing and back-end assembly- Semiconductor manufacturing comprises the front-end fab manufacturing and the back-end assembly, including packaging and testing. However, the front-end fab manufacturing is a complex process, with only a handful of companies involved in large scale fab-manufacturing.

2. Complexity in manufacturing- The semiconductor manufacturing is a complex process requiring at least 300 different high-technology inputs.

3. Highly concentrated global supply chain- Globally, the entire semiconductor value chain has seeped in the interdependence between a handful of countries like the USA, Taiwan, Japan, China, and some European nations. Within this chain, there’s an extraordinary degree of specialisation that makes it vulnerable to shocks. For ex-100% of the world’s most advanced (below 10 nanometres) semiconductor manufacturing facilities are located in just two countries, Taiwan and South Korea.

4. Large investment- The semiconductor product development requires the largest investment on both R&D and manufacturing. It is estimated that over the next decade about $3 trillion in investment will be needed.

5. Revenue sharing b/w few companies- The top three companies in each stage of the semiconductor supply chain take in about 80-90% of the revenue.

Semiconductor manufacturing status in India

1. Semiconductor R&D footprint in India- India has an existing base for design and verification for the semiconductor industry. Most of the global semiconductor companies having an R&D footprint in India.

2. Fabrication facilities limited to strategic semiconductor development- India has two fabs — SITAR, a unit of the Defence Research and Development Organisation (DRDO) in Bengaluru, and a semiconductor laboratory in Chandigarh. These build silicon chips for strategic purposes like defence and space, and not for commercial use.

However, 100% of our semiconductor chips, memory, and display cards are imported into the country. In 2020, India spent $15bn on electronic imports, with 37% coming from China.

Why is there a global race to diversify semiconductor supply chains?

1. Over concentration of manufacturing units- Semiconductor chip manufacturing is concentrated in a few countries. For ex- Taiwan produces over 60% of the world’s semiconductors, and along with South Korea makes 100% of the most advanced chips (below 10 nanometers).

2. Supply chain disruption due to epidemic- The semiconductor industry experienced significant supply shortages during the pandemic due to disruptions in China’s production.

3. Geo-political conflicts- The ongoing Russia-Ukraine conflict has resulted in shortages of raw materials for domestic industries. For ex- Ukraine plays a critical role as a key supplier of neon, which is an essential input in semiconductor manufacturing.

4. Potential of another round of shortages due to emerging geo-political contestations- The European Union and the United States has refused to sell advanced manufacturing equipment to China. In retaliation, China imposed export controls on crucial inputs such as gallium and germanium. This may lead to another potential round of shortages in the semiconductor industry. For ex- US has restricted its firms and its allies from assisting the Chinese production of 16 nanometers or smaller chips.

Therefore, many countries are looking to diversify their supply chain. India seeks to take advantage of countries eyeing for diversification of supply chains.

What is the significance of development of indigenous semiconductor industry in India?

1. Tackling supply shocks- The pandemic and the subsequent lockdowns impacted the supply of chips to India. For ex- Automobile manufacturers like Mahindra & Mahindra and Tata group were compelled to reduce their production due to the shortage.

2. Meeting the rising demand- Experts estimate that around 50 crore people will join the internet in the next decade, which will increase the demand of more phones and laptops.
Similarly, the post-pandemic world is showing a greater inclination towards work from home culture. This warrants an enhanced demand for servers, internet connectivity, and cloud usage.
Hence, indigenous semiconductor industry is needed to meet the rising demands. There is a huge domestic market for semiconductors which could exceed $60 billion by 2026.

3. Employment Creation- Indigenous manufacturing of chips will build its smartphone assembly industry and strengthen its electronics supply chain. This will create numerous employment opportunities for the Indian youth.

4. Revenue boost- Indigenous capacity would attract local taxes and boost the export potential. Further, India would be required to import fewer semiconductor chips, which would decrease the import bill. For ex- India imports almost all semiconductors to meet its demand, which is estimated to reach around $100 billion by 2025.

5. Enhanced Security- Chips made locally will be designated as “trusted sources” and can be used in products ranging from CCTV cameras to 5G equipment. This would improve the national cybersecurity profile.

6. Geopolitical Benefits- Countries having a sufficient supply of chips would be in a better position to mould the future course of geopolitics, driven by data and the digital revolution. Further self-sufficiency will decrease reliance on Chinese chip imports, especially during hard times like the recent Galwan Valley border clash.

7. Increased competitiveness- Indian manufacturers globally competitive to attract investment in the areas of core competency and cutting-edge technology.

What have been the government efforts towards development of semiconductor industry in India?

What are the challenges in the semiconductor industry in India?

1. High Cost of establishment- As per a government estimate, it would cost roughly $5-$7 billion to set up a chip fabrication unit in India.

2. Bureaucratic inefficiencies- The process of establishing an indigenous semiconductor facility requires clearances and approvals from multiple government departments. Further, there exists a considerable degree of bureaucratic delays at each stage that discourages the establishment of manufacturing units.

3. Unstable power supply- The smooth production of semiconductors requires the availability of an uninterrupted 24*7 power supply. However, this requirement is not fulfilled by many regions in the country. This restricts production to very few locations.

4. Technological Constraint- The indigenous manufacturing of semiconductors requires the use of high-end technologies. These technologies are licensed from patent holders at a very high price.

5. Structural Flaws- FDI in electronics is less than 1% of the total FDI inflow because of the dearth of skilled labor, delays in land acquisition, and the uncertain tax regime.

What should be the focus area for Indian Semiconductor Industry?

What Should be the Way Forward?

1. Provision of adequate funding- Adequate funding must be provided to augment the research and development potential of technical institutes. For ex- IIT Madras developed a microprocessor named ‘Moushik’ with funding support from the Ministry of Electronics and Information Technology.

2. Expeditious execution of Sovereign Patent Fund (SPF)-  The Sovereign Patent Fund (SPF) under National Policy on electronics should be established expeditiously. It is a wholly or partly Government-backed entity that aims to bolster domestic businesses through the acquisition and licensing of patented technology.

3. Domestic procurement assurances- The manufacturers need to be given an assurance of minimum domestic procurement by the government and the private sector. The focus should be on manufacturing economical and technically viable options like 28nm chips.

4. Support of businesses- The government should also support businesses in the acquisition of semiconductor manufacturing units in other countries. This is easier than setting up a domestic facility and can be done swiftly for ensuring a continuous supply of chips. Hand-holding startups of entrepreneurial engineers can also produce large payoffs.

5. Intial Focus on back-end of manufacturing- Semiconductor foundries are the world’s most expensive factories, accounting for 65% of industry capital expenditure but only 25% of the value addition. Therefore, to lower the risks of investment, India should especially look at back-end of manufacturing such as assembly, packaging and testing. Once it stabilises and an ecosystem develops, front-end of manufacturing will follow.

6. Proactive cooperation of states- Areas like stable power, large quantities of pure water and land, are state subjects, and the state governments should also create the right climate for easy implementation of semiconductor projects.

Conclusion

The 21st century will be an era of Digital revolution signifying an increased use of mobile phones and computer devices. This enhanced usage can be met only with a robust availability of semiconductor chips that sustains their functioning. Therefore India needs to focus on the indigenous development of semiconductors in order to realize its digital potential and emerge as a strong power in the present era.