Fab-ulous India: Why it's time New Delhi gets cracking on making chips

India is the world’s second-largest smartphone maker after China and semiconductors are at the heart of these devices. The ICEA expects India's smartphone industry to export phones and components worth $100 billion by 2025.

Indian automakers imported electronics and related systems worth nearly Rs 30,000 crore in 2020, according to EY India.

With a large part of the population still to get on to the internet, India is expected to see a huge demand for net -enabling equipment as well. As the country enters the 5G era, demand for chips is only going to go up. Data centres, too, will need top-of-the-line facilities.

The coronavirus pandemic has stressed semiconductor supply across the globe. While demand is a huge factor but skewed manufacturing is also playing a role. Taiwan is the world’s biggest maker of semiconductors, accounting for more than 50 percent of the world’s supplies, and it is feeling the pressure of rising demand.

Also read: Semiconductor shortage may choke laptop supply ahead of new academic session

Why is chip-making so hard to crack?

A microprocessor is what powers a gadget. Smartphone or a car, a chip is an essential component. It consists of millions of transistors and resistors that make computing possible.

The integrated circuit or microprocessor is made from semiconducting materials like silicon, quartz, and gallium.

The measure of a manufacturer’s skill is how small the transistors can be. Transistors are like switches that turn a signal on or off. A smaller transistor means more efficiency since it can do more calculations without getting too hot. It also allows for smaller dye sizes that reduce costs and translates into more cores per chip.

A microchip can have multiple processing units that can work simultaneously. Each processing unit is called a “core”.

While the fundamentals behind the working of a semiconductor haven't changed, chipmaking has become more complex as the world gets smarter.

The production process requires precision and the top-end technology. Chips are made at cutting-edge facilities known as semiconductor fabrication units or simply fabs. These fabs have to be retooled every couple of years to stay competitive and it costs big money.

The efficiency or speed of a processor depends on each transistor's size, which is measured in nanometers (nm).

In 1947, considered its birth year, a single transistor measured 1cm, today the iPhone 12 series runs on a 5nm design. Even an affordable phone like the Redmi Note 10 has an 11nm chip. A human hair is 40,000-60,000nm thick.

A microprocessor can do more work in less time by squeezing more transistors into a smaller space. It also allows a chip to perform more functions—that is why a smartphone processor is often called SoC (system on chip), as all the circuits are soldered into one chip, including the wireless modem.

Also read: Why India can’t be ‘Atma Nirbhar’ when it comes to smartphones

Which are the world’s biggest chip suppliers?

According to Counterpoint Research, the foundry industry brought $82 billion in revenues in 2020, a year-on-year growth of 23 percent. The forecast for 2021 is $92 billion and Apple is expected to dominate the 5nm segment with a 53 percent market share. Apple only designs its chips, while Taiwan Semiconductor Manufacturing Company (TSMC) manufactures them.

TSMC is the world's top chip-maker and a national asset. It makes up a third of the Taiwan Stock Market benchmark Taiex. It also makes chips for AMD, Nvidia, MediaTek, Qualcomm, and many more.

In the fourth quarter, TSMC had a market share of 55.6 percent, according to industry tracker TrendForce. What started as a collaboration between the Taiwanese government and Dutch conglomerate Philips is now the world leader by a mile in the semiconductor space.

In January, TSMC said it planned to pump in $28 billion in 2021 and recently announced another investment of $100 billion over the next three years.

These big investments pay off in the long run. TSMC reported revenue of $47.78 billion in 2020, posting a profit of $18.5 billion.

The strides made by TSMC have left the original chip-maker Intel Corp way behind. Credited with pioneering the chip, the Santa Clara-headquartered company lost out when it failed to roll out 10nm and 7nm chips due to production issues. It made too many chips that had to be thrown away, which means the fabrication process was low-yield—a big no in this highly capital-intensive industry.

After years of trying, Intel recently said it would spend $20 billion on two new plants in the US, starting 2024. A move it hopes will help it reclaim the ground it lost to TSMC and the Korean giant Samsung Electronics Co.

Samsung plans to invest about $116 billion by 2030 to diversify its semiconductor production, a Wall Street Journal report has said.

There are other players in the market as well—Texas Instruments, Global Foundries, Broadcom, NXP Semiconductors and more. Their focus, however, is on larger chips—14nm to 200nm that are used in WiFi routers, wearables, smart TVs and home solutions.

Where does India stand?

India has been dabbling in semiconductors for decades but without much success. India has emerged as one the favourite destinations for companies to design chips but manufacturing has proved elusive.

Texas Instruments was the first foreign company to open a design bureau in Bengaluru in 1985. Since then, companies like NXP Semiconductors, MediaTek, AMD, ARM and more recently Google have opened design centres.

However, these investments are limited to designing and VLSI (very large-scale integration). It's the process of creating an integrated circuit by combining thousands of transistors into a single chip. This includes the RAM, ROM, models as well as CPU.

In 2008, Videocon Group's Venugopal Dhoot had unveiled plans for a fab in India. The now-beleaguered electronics company intended to invest Rs 18,000 crore to Rs 25,000 crore but wanted protection from imports and subsidies to protect its investment. The plan was ill-timed as the world was hit by an unprecedented financial crisis and later the company ran into trouble.

In 2013, the government offered zero customs duty on the import of parts and machinery for semiconductor facilities but found no takers. At that time, India was heavily reliant on imports for smartphones and had negligible assembling prowess.

International investors created a consortium that included European chipmaker STMicroelectronics and Malaysian fab operator SilTerra. The project was to be called Hindustan Semiconductor Manufacturing Corporation. A facility was to start in Gujarat with an investment of Rs 30,000 crore but nothing came of it and the letter of intent was cancelled in 2019.

There have been many such failed attempts and India is completely dependent on imports to meet its demand for chips.

Lack of facilities is also hobbling academic institutions as technical know-how is abundantly available but there is no facility to implement the ideas.

In 2018, the RISE group at the Indian Institute of Technology-Madras created a 64-bit microprocessor from scratch and named it Shakti. It was made with open-source technology and became India's first indigenous semiconductor that could boot Linux and match global peers.

The Indian Space Research Organisation (Isro), too, tried its hand and even made a semi-conductor but a 180nm chip was too big to find everyday use.

The China worry 

China is stepping on the gas, well aware that semiconductors will play a vital role in the country's economy. According to Bloomberg, it relies heavily on Taiwan and the US, importing chips worth $380 billion in 2020.

The biggest blow perhaps came when Huawei was added to a US blacklist by President Donald Trump in May 2019 and barred from transacting with American firms. The world's top smartphone maker had to stockpile chips to avoid supply-chain issues due to the ban.

In 2020, Chinese businesses purchased almost $32 billion worth of equipment from Korea, Taiwan, Japan and others to make chips. The government recognises the need for self-sufficiency and has made semiconductors a top priority in the 14th Five-Year Plan released in 2020.

Semiconductor Manufacturing International Corporation (SMIC) is a partially state-owned foundry that makes chips ranging from 350nm to 14nm. China has invested billions over two decades but now intends to quadruple its stake in the game in which it has been a laggard.

According to SEMI, an industry association of chip-making companies, Chinese companies imported wafer-processing equipment worth $18.72 billion in 2020, a year-on-year rise of 39 percent.

India has firewalled its telecom industry from Chinese equipment and is also looking to reduce Chinese investment in Indian companies in its Atma Nirbhar (self-reliance) push.

And semiconductors are central to not just self-reliance but also to the government’s flagship Make in India plan. India can’t afford to be completely reliant on imports in a world where China’s increased belligerence is threatening the global order.

How can India be fab-ulous? 

Until 2010, India wasn't a phone-making country but as digitisation gained pace there was a huge shift.

The government offered incentives to manufacturers to make in India and also increased import duty on the finished product, nudging phone makers to set up units in India.

Incentives offered by the government encouraged Indian companies to stop importing components and make them locally. In no time, companies like Dixon Technologies were making display panels in the country, kickstarting a medium-scale ecosystem of component providers.

In five years, Samsung, Xiaomi, OPPO, Vivo, Apple, OnePlus, Micromax were making in India. While these companies grew, newer players like Pegatron, Wistron, and Optiemus expanded. iPhone manufacturer Foxconn, too, came to India.

The Sri City region of Andhra Pradesh is often dubbed as India's answer to Shenzhen, China’s tech hub. It's far from it but it’s a start.

The global semiconductor industry is set to see a boom with emerging technologies such as autonomous driving, artificial intelligence, 5G and the Internet of Things.

Conglomerates like Reliance Industries have already made big investments in wireless technology. Even lesser-known names like Hiranandani Group, through Yotto, have entered the technology space via data0centre infrastructure. Telecom, infrastructure, and aviation are already expensive industries and semiconductors take it to the next level.

That is why the government’s offer of incentives sounds like a good plan. It will be interesting to see who will give India its first fab.

(The author writes on technology, aviation, and mobility.)

Disclosure: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.