The Indian Government is reportedly working on a plan to offer around $1 billion in cash to every company that sets up a chip manufacturing unit in India. It may sound like an incentive enough, but semiconductor firms are not so easily swayed.

The world is experiencing a massive shortage of semiconductors that are the foundation of our modern-day life. It seems to be a perfect time for India to attract global semiconductor firms to set up business here.

The Indian Government is reportedly working on a plan to offer around $1 billion in cash to every company that sets up a chip manufacturing unit in India. It may sound like an incentive enough, but semiconductor firms are not so easily swayed.

A case in point is the Government’s efforts to attract semiconductor firms in 2013 by offering zero customs duty on importing parts and machinery required for semiconductor facilities. Unfortunately, this didn’t appeal to the chip makers.

In December last year, the Government of India invited Expression of Interest from companies and consortium looking to set up new semiconductor units. Clearly, the country wants to build on the success of the Production-Linked Incentive scheme, which has led to a significant increase in device manufacturing. The chip-making capability will help India in climbing the value chain and also lead to the creation of jobs. The deadline for EOI was April 30, 2021, but there is no news whether the Government has received any interest from chipmakers.

Why is there a global shortage?

The global shortage, resulting from a surge in demand for electronic items after the outbreak of the COVID-19 pandemic last year, is pushing several countries to have their own chip-making facilities to bring down their dependency on the global supply chain. Pandemic led to an increase in worldwide chip sales from $412.2 billion in 2019 to $439 in 2020. Just the semiconductor sales in December 2020 were up by 8% when compared with December 2019. The COVID-19 pandemic also broke the supply chain and led several firms to hoard the raw material required to manufacture chips.

The global semiconductor industry is dominated by the US, South Korea, Japan, and Taiwan. The US leads the market with a 47% share, followed by South Korea at 19%. On the other hand, Japan and the European Union boast of a 10% market share each, and Taiwan and China have 6% and 5%, respectively, as per the recent Semiconductor Industry Association data.

Right from our mobile devices, gaming consoles, cars, televisions to consumer goods are powered by the semiconductor. This, coupled with the fact the global semiconductor supply chain was severely disrupted last year after the outbreak of the COVID-19 pandemic, means that a country must have its own chip-making facilities.

The demand for semiconductors is booming in India. To begin with, India is the second-largest smartphone manufacturer in the world after China, and chips are at the center of these devices. Further, several new-age technologies, like 5G, Internet of Things (IoT), and artificial intelligence (AI), are likely to drive the demand for chips in the years to come. In this context, it makes absolute sense to become Atmanirbhar (self-reliant) in this segment.

India consumed around $21 billion worth of semiconductors in 2019, according to India Electronics and Semiconductor Association (IESA). The consumption was growing at the rate of 15.1%.

What further works in India’s favor is that a lot of chip designing is already happening here. While several firms, including Texas Instruments, NXP Semiconductors, MediaTek, AMD, have been designing chips in India, they don’t manufacture in the country.

So, why does India lag in chip-making?

As of now, India is dependent on imports to meet the demand for chips. Over the last few years, India has been making efforts to emerge as a destination for semiconductor firms.

Chip making is a highly complex process, which is why only a few countries have the expertise and skills required to gain a leadership position for this segment. For this reason, it is not easy to ramp up production in the wake of the shortage. Almost 50% of the global chip supply is supported by Taiwan Semiconductor Manufacturing Company (TSMC). It is the world’s biggest chip manufacturer, and it also makes chips for several companies, including Qualcomm, MediaTek, and AMD, among others.

Apart from that, the US and South Korea are the dominant players in this segment. The geopolitical tensions between the two superpowers, the US and China, are now pushing the latter to develop competencies in the semiconductor sector. Over the last few years, it has greatly enhanced its capability in chip making. Last year, the country announced plans to invest $1.4 trillion over six years to develop the semiconductor industry by 2025.

Further, China’s Dual Circulation strategy intends to make significant investments in this segment has helped the country reach key milestones. China has also made semiconductors its priority in its 14th five-year plan declared last year. China is using a combination of subsidization, private equity, and lowering of barriers to entry for foreign participants. The country hopes to meet at least 70% of its target by 2025…this is significant because China is the biggest consumer of chips and accounts for 40% of the world’s chipset consumption.

It is not easy to develop competencies in chip manufacturing. It is an extremely capital-intensive and complex process where the success depends on how small the transistor can be. Setting up a semiconductor unit demands a massive investment of around INR50,000 to INR75,000 crore over two-to-three years. This kind of investment is challenging even for big players and needs several companies to come together or the Government’s backing to set up a semiconductor ecosystem.

The manufacturing units of chips, also known as fabs, require high precision and use cutting-edge technology. The smaller a transistor means more it can do more without getting too hot. The efficiency of a processor depends on each transistor’s size, which is measured in nanometers (nm). Just to put this is in perspective, in spite of China’s efforts of the last several years, it has only now started to produce 28-nanometer and 14nm chip wafers. This is seen as a sign of the country’s growing capabilities as a chipmaker.

A key requirement for semiconductor firms is the availability of a qualified workforce, and it is here that the country is found lacking. Another challenge faced by India is that the chip manufacturing units require a massive quantity of water and an uninterrupted power supply, which can be a problem in India.

India should remember that if intent doesn’t translate into action in time, it will lose the opportunity. A case in point is Intel’s plant in 2007. A delay in coming out with semiconductor policy pushed the chip giant Intel to opt for Vietnam over India as its destination for semiconductor facility. Intel has the largest non-manufacturing presence outside the US in India, and setting up a fab unit would have been a natural progression.

Another project that didn’t take off was Hindustan Semiconductor Manufacturing Corporation. Several international investors, including STMicroelectronics and Malaysia’s SilTerra, came together with the intention to set up a fab unit in Gujarat with an investment of Rs 30,000 crore. However, the project never really took off, and the Letter of Intent (LoI) was canceled in 2019.

The ongoing chip shortage is likely to last till next year and is impacting several sectors, including electronics and automobiles, among others. The time is perfect for the country to attract semiconductor firms to India, but it has to proactively address the concerns of the chipmakers.

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