Semiconductor manufacturing in India: significance and challenges – Explained, pointwise

Introduction

 Recently, two important events happened in the context of India’s semiconductor programme. First was the withdrawal of Foxconn from the $19.5 billion chip-making joint venture with Vedanta. While Foxconn has given no reason, it is a general belief that the inability of Vedanta to pay for acquiring the necessary technology for chipmaking played a key role in this exit. The second event was Micron’s recent announcement to invest $825 million in a chip testing and packaging facility in India. These developments showcase the opportunities and challenges facing India’s semiconductor programme.  

What are the other developments in semiconductor industry of India? 

Both Foxconn and Vedanta can set up a fabrication facility independently.  

Also, ISMC, backed by Abu Dhabi-based Next Orbit and Israel’s Tower Semiconductor, has submitted a proposal to set up fabrication facility in Karnataka. But it has asked the government not to consider its proposal due to a pending merger between Intel and Tower Semiconductor.  

The other proposal is by Singapore-based IGSS Venture to set up fabrication facility in Tamil Nadu, is on hold. 

Why is the government encouraging semiconductor manufacturing in India? 

India relies heavily on imports for its domestic requirements of semiconductors. This makes the country vulnerable to coercions and supply chain disruptions- especially as China dominates the global semiconductor space. Setting up domestic manufacturing units would help to insulate India against future supply disruptions and achieve self-reliance. 

The inclusion of embedded instructions in semiconductor chips presents a potential security risk, as they can contain malware that is challenging to identify. Given the extensive utilization of semiconductor chips in vital sectors like defense and telecommunications, domestic chip manufacturing becomes strategically significant, offering an enhanced level of security. 

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

As of now, chip manufacturing is concentrated in a few countries. For example, Taiwan produces over 60% of the world’s semiconductors, and along with South Korea makes 100% of the most advanced chips (below 10 nanometers).  

Also, the semiconductor industry experienced significant supply shortages during the pandemic due to disruptions in China’s production.  

Additionally, the ongoing Russia-Ukraine conflict resulted in another round of shortages, as Ukraine plays a critical role as a key supplier of neon, an essential input in semiconductor manufacturing. 

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. 

Therefore, many countries are looking to diversify their supply chain. 

What are the government initiatives for making India a semiconductor manufacturing hub? 

The government has approved the Semicon India programme with a total outlay of INR 76,000 crore for the development of semiconductor and display manufacturing ecosystem in the country.  

The programme has further been modified due to two reasons: a) the aggressive incentives offered by countries that already have established a semiconductor ecosystem b) limited number of companies owning the advanced technologies.  

The modified programme aims to provide financial support to companies investing in semiconductors, display manufacturing and design ecosystem. This will pave the way for India’s growing presence in the global electronics value chains. 

Following schemes have also been introduced under the program: 

‘Modified Scheme for setting up of Semiconductor Fabs in India’ for attracting large investments for setting up semiconductor wafer fabrication facilities in the country. The Scheme extends a fiscal support of 50% of the project cost on an equal footing basis for setting up of Silicon complementary metal-oxide semiconductor (CMOS) based Semiconductor fabrication in India. 

‘Modified Scheme for setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab / Discrete Semiconductors Fab and Semiconductor Assembly, Testing, Marking and Packaging (ATMP) / OSAT facilities in India’ extends a fiscal support of 50% of the Capital Expenditure on an equal footing basis for setting up of production facilities in India. It covers production of semiconductor types other than CMOS based semiconductors and includes assembly, testing and packaging facilities. 

‘Semicon India Future Design: Design Linked Incentive (DLI) Scheme’ offers financial incentives, design infrastructure support across various stages of development and deployment of semiconductor design. The scheme provides “Product Design Linked Incentive” and “Deployment Linked Incentive”. 

What are the opportunities of setting up semiconductor manufacturing facilities in India? 

A large portion of semiconductor design engineers globally are either Indian or Indian Origin. India is already an R&D hub for the semiconductor industry with nearly 2,000 chips being designed per year and more than 20, 000 engineers working in various aspects of chip design and verification. These factors are expected to foster the growth of semiconductor manufacturing. 

There is a huge domestic market for semiconductors which could exceed $60 billion by 2026. Growth of the semiconductor industry in India is expected to be driven by the increasing semiconductor content across consumer electronics and automobiles including EVs and, increasing demand for smartphones. The number of smartphones in India is projected to reach a billion by 2026.  

Many companies may still be interested in setting up semiconductor fab in India due to the government’s $10 billion incentive package for semiconductor manufacturing. 

Moreover, many global players are supporting India’s efforts in this area because they are looking to diversify their semiconductor supply chains. As the US has restricted its firms and its allies from assisting the Chinese production of 16 nanometers or smaller chips, advanced smartphones could not be produced in China anymore. This provides opportunities for India. 

What are the challenges for India? 

Semiconductors manufacturing is a very complex and technology-intensive sector with huge capital investments, high risk, long gestation and payback periods, and rapid changes in technology. These require significant and sustained investments. Also, chip manufacturers require a huge scale to be cost effective. This means large investments, often in the $20 billion range.  

Additionally, developing an ecosystem for chip manufacturing in a greenfield location is a major challenge. It requires suitable infrastructure like availability of uninterrupted power, huge quantities of clean water and requires setting up expensive water purification facilities. Hundreds of chemicals and gases are also required for chip fabrication. 

Semiconductors have a small freight-to-price ratio and a zero-custom duty regime under the Information Technology Agreement, 1996. Therefore, the location of raw material or sales market is meaningless due to low transportation cost. This facilitates concentration of production in a few countries where ecosystem for semiconductor manufacturing is already well established.  

High-end chip manufacturing requires sophisticated technology, which very few corporations possess. Moreover, since such chips are considered dual-use technology (can be used for civilian and military purposes), countries can place curbs on their export as the US and the Netherlands have done. Recently, the Netherlands restricted export of advanced semiconductor equipment.  

What are the different stages of chip making and how can India succeed at each stage? 

Chip design: It accounts for 15-20% of supply chain value. The US is the leader, followed by Japan, China, and the UK. Based on its electronics, computer-aided design and simulation design expertise, India can enter this space in collaboration with lead firms like Mentor Graphics, Cadence Design etc. 

Chip fabrication: It accounts for 35-40% of supply chain value. Chip making is a complex and multi-step process involving etching, doping, and assembling silicon wafers. India must not manufacture low nanometer (nm) chips. This is because the investment required to produce them may exceed $20 billion with no guarantee of outcome. Also, the US has committed over $50 billion in subsidies for local fabricators producing high-end chips, which will result in surplus capacity in low nm chip manufacturing. Therefore, India should focus on low-end fabs (more than 100 nm chips) that account for most volume and require lesser investment.  

Assembly testing and packaging: The segment accounts for 15-20% of supply chain value. China, Taiwan, South Korea, and Singapore are key competitors. India can offer better prices due to its already existing cheaper expertise.  

Distribution: This segment accounts for 5-10% of supply chain value. The US, Canada, China, and Taiwan are key players. Micron collaboration may help India to participate in this segment as it is the logical next step to the ATP segment. 

End use: This accounts for 15-20% of supply chain value. India, a large manufacturer of smartphones, automobiles, laptops etc., can incentivize local manufacturers to use chips assembled in India. This is a ready and waiting segment. 

What should be done? 

India should persevere on this path despite the challenges. It took Taiwan decades to become a semiconductor giant, starting with the transfer of American technology in the 1970s and gradually building its expertise and infrastructure.  

The Indian government should address domestic gaps in nurturing a semiconductor ecosystem to attract investors and technology providers. It should focus on assembly, packaging, and testing of semiconductors to develop the necessary expertise and systems for chip manufacturing. India should also prioritize the development of its expertise in chip design.  

The chip industry is highly competitive, and companies are hesitant to share their intellectual properties (IPs) with new entrants. Hence, partnering with an established technology partner that holds the necessary IPs is necessary. Incentives should be specifically directed towards fostering collaborations with established value chain partners. 

India should remain focused on semiconductor manufacturing due to its strategic importance, which will significantly impact future geoeconomics and geopolitics. But it may have to reset the timelines and review its policy to attract another round of proposals. 

Sources: Times of India (Article 1 and Article 2) and Business Standard