With the US-China trade war playing out in the background, Finance Minister's incentivised corporate tax is a much-needed boost for the semiconductor and chip manufacturing ecosystem in India, said experts.
On September 20, Sitharaman announced tax of 15 percent for newer domestic manufacturing units incorporated on or after October 1, 2019 to give a leg-up to the 'Make-in-India' initiative.
According to NASSCOM, it has the potential to spur investments in the semiconductor and chip manufacturing space, especially at the time of US-China trade war, where both US and Chinese businesses are looking for potential business partners.
US-China trade war
Major chip manufacturers in the US such as Intel have chip fab labs and also assembling facilities in China. Qualcomm, one of the largest chip makers, develops advanced technology for 3G and 4G LTE devices in China. Majority of Apple's phones are assembled in China with select parts manufactured from firms having presence in China.
There are many advantages to manufacturing in China such as low labour cost. In addition most of the Chinese manufacturing units are designed for large scale production and thus has robust supply chain including raw materials, supplier, distribution and large local market.
In fact, China is the largest exporter with the US, accounting for about 18 percent. However, high tariffs have now been imposed on Chinese goods by US.
The Trump administration also blacklisted Chinese handset manufacturer Huawei, which sources chips and semiconductors from the US.
If China were to retaliate, it would impact players like Apple, Qualcomm and Intel.
According to reports, Apple is exploring to move some of its manufacturing out of China. It has already started manufacturing iPhones in Foxconn plant in Chennai.
How does India come into the picture?
India is a massive market for smartphones. Close to 35 percent of India’s population were internet users in 2017 and this number will reach close to 50 percent by end of this year. This means that demand for smartphones and thereby its components such as semiconductors will only increase going forward.
That is why, experts point out, that India could be an alternative. According to a report, 18 of the top 25 chip companies have set up chip design centres in India.
But India lacks a large scale manufacturing ecosystem.
What can be done?
"The tax rate of 17 percent is definitely attractive enough to set up units. But it will only help in a small way. There is a lot more that needs to be done before the ecosystem is developed and begin to attract global players. Major challenge in the segment is the investment," said Pareekh Jain, founder, Pareekh Consulting, a technology consultancy firm.
Semiconductor and chip manufacturing is capital intensive. According to reports, it requires a minimum investment of $2 billion to set up a manufacturing unit. This means you need enough land, labour and local market to make the ecosystem work.
While the labour and local market is possible, land procurement is still a pain point for firms.
Another challenge is uninterrupted power supply. Many agree that except for Maharashtra, power supply is an issue in other states.
Some experts have pointed out that by increasing import duty on certain components and incentivising the local players could also give the necessary impetus. "However you need to maintain a balance since most of the players are dependent on the imports, at least until the supply chain develops," added another expert.