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India’s power play in semiconductor business – a ticket to becoming global?

India has joined the race to become a chip-making hub, joining other countries that seek to build self-reliance in manufacturing the crucial electronics component.

September 26, 2022 / 07:06 PM IST
Representative image.

Representative image.

Mining mogul Anil Agarwal-led Vedanta’s entry into the semiconductor business marks yet another attempt by India to become a global chip maker after failed attempts over the past four decades.

India continues to aspire to become a semiconductor hub and attract electronics ecosystem players across the value chain including manufacturers of highly sophisticated and sensitive equipment, material (high purity gases, chemicals, wafers, photo-masks), and equipment service providers.

The Covid-19 pandemic triggered lockdowns and restrictions globally that resulted in a shortage of semiconductor chips and that spurred India’s ambitions to become a hub for chips, which are used in a range of consumer electronic products such as mobile phones, laptops and cars.

To accelerate its plans, India unveiled a $10 billion incentive programme for semiconductor and display manufacturers in December last year. The government also approved modifications in the programme for the development of semiconductors and display manufacturing ecosystems in India.

“This foray is just the starting point, which will see many players throwing their hat in the ring,” said Debdutta Ray, associate professor in the department of electrical engineering at the Indian Institute of Technology Madras. “Though experts would like to believe that India has missed the bus, it still could catch up with the rest of the globe by replicating the technology required for setting up the manufacturing hub and keeping up with technological advancements.”

The global semiconductor industry already has a connection with India, which designs most of the advanced chips. Once the designs are completed, they are shipped to countries including the US, China, South Korea, and Taiwan.

Still, there are many questions to be answered. What does India aim for? Why can’t India fabricate chips? What does the country need to have a successful semiconductor industry? Why did previous attempts to set up manufacturing hubs fail to take off? And which were the companies that earlier threw their hats in the ring?

What India Wants

India aims to emerge as a global hub for manufacturing and designing chips as it seeks to cut imports of electronics and become self-reliant.

The Indian semiconductor market was valued at $27.2 billion in 2021 and is expected to grow to $64 billion in 2026, according to Vedanta. The country’s semiconductor imports increased 65 percent in 2021-22 from 2019-20, as per data from the commerce and industry ministry.

It needs to be underscored that India lacks substantial semiconductor fabrication capacity and the country’s requirements for chips and logic memory all have to be imported.

The need to cut down reliance on imported electronics became all the more relevant in 2020, following the outbreak of Covid-19. India, like the rest of the world, became victim to a semiconductor shortage that disrupted a variety of critical businesses. India’s smartphone manufacturing industry, the world’s second-largest, was hit hard by the unavailability of chips.

The broad plans for semiconductor manufacturing in India were announced after the pandemic. The country vowed to spend $30 billion to overhaul its tech industry and build local chip supply chains to avoid being dependent on foreign producers.

The India Semiconductor Mission was set up in December 2021 with an outlay of Rs 76,000 crore to support companies investing in semiconductors, display manufacturing, and design ecosystems.

The story so far

India’s attempts at starting its chip manufacturing industry have been marred by factors such as lack of sufficient capital, political uncertainty, government’s changing policies to customise incentives, and even a fire incident. Five to six companies that attempted to pull off this task included SCL, SemiIndia, Nanotech Silicon India, JP Associates and HSMC, according to Moneycontrol’s Research.

In 1984, the Indian government set up Semiconductor Complex Ltd. (SCL), a state-owned company to design and manufacture circuits and electronics that was headquartered in Punjab. However, five years later, a fire broke out at the company premises, ending its dream to become a global chip manufacturer.

In 2006, Hyderabad was set to become the semiconductor manufacturing capital of India after SemiIndia, an integrated semiconductor company, decided to put up a $3 billion chip manufacturing facility (fab). But the plans were shelved due to funding issues.

Nanotech Silicon India, the first consortium to announce the setting up of a fab in the city, shelved its plan as the government semiconductor policy announced by the government failed to satisfy the chip maker since this made the project globally incompetitive.

In 2014, India approved proposals from two investor groups to build fabs in India. The first consortium consisted of Jaypee Associates, IBM and Israel’s TowerJazz. The second consortium was led by Hindustan Semiconductor Manufacturing Corporation (HSMC). However, both initiatives fizzled out.

Jaypee and its group pulled out due to high debt issues and in 2019, the government cancelled HSMCs two year letter of intent as the consortium could not submit the requisite documents as per the letter of intent, despite being provided extension of time on multiple occasions.

What India can do differently now  

The playbook for emerging as a leading semiconductor business is well established and India doesn’t need to reinvent the wheel. There is a combination of four requirements – financial capital, skilled labour, the government’s push, and manufacturing technology or technology transfer since the industry is still evolving and is closely guarded.

In India, the sheer amount of capital needed to build competitive productive fabrication plans (fabs) has been cited as the single most significant obstacle in establishing a viable semiconductor manufacturing industry. But there’s more.
According to Shamsher Dewan, senior vice president at ICRA Ratings, “The most critical success factor for India ​to become a global manufacturing hub for semiconductors is having technological collaboration and a customer base. The two factors are closely linked, given that the industry is highly capital intensive in nature and needs high capacity utilisation to break even. Having customers on board while setting up the business and scaling up the facility would provide the required impetus for the industry.”

Ray of IIT Madras added that the ease of doing business is another factor needed for successful semiconductor businesses. Swift approvals by the government, especially easy environmental clearances, should ensure prompt implementation by private players, which are known for their efficiency.

The industry needs certainty in the form of interest subsidy and tax holiday. It requires top-notch infrastructure, including uninterrupted power and abundant pure water, he added.

The global map

While the India Semiconductor Mission envisages government subsidies worth $10 billion for chip and display fabs, the incentives are lower than what other governments have planned.

In July, the US passed a bill that sets aside $52 billion in subsidies and tax credits for companies that make chips in the US.

The European Union announced a $48 billion plan to become a major semiconductor producer and curb dependency on Asia.

In South Korea, Samsung Electronics and SK Hynix are leading planned investments of $451 billion on domestic semiconductor production over the next decade.

Road ahead

Still, India has an abundance of talent needed for the chip industry. The country has top technical universities including the Indian Institutes of Technology and the Indian Institute of Science in Bangalore to keep up with technological advances. These institutes have strong links with the west and have trained a very strong pool of skilled engineers.

“The country just doesn’t need to replicate the technology required for manufacturing chips but also keep up with it like Taiwan,” said Ray. “With the pool of engineers that the country has, this should be easily done.”

Also, for smoother execution, India should collaborate with research groups and centres across the world that could cater to the technological changes in the industry, he said.

The key to successfully becoming a global semiconductor hub lies in government backing for the industry in terms of providing support in the form of subsidies, cutting-edge technology, and ease of doing business, among other things.

Another critical factor is the timely completion of such projects to cater to demand emerging from the global shortage of semiconductors. Indian chip manufacturing must start before the shortage eases and other countries grab the opportunity.

Anil Agarwal, the billionaire chairman of Vedanta Resources, said in an interview to CNBC-TV18 that he expects the semiconductor facility to start operations in two years since the company has all the approvals in place.

Tata Motors suggested in its annual report that it expects semiconductor supplies to improve gradually throughout FY2023-24.​

Nickey Mirchandani
Nickey Mirchandani Assistant Editor at Moneycontrol covering Materials and Industrials space which includes Metals, Cement and Infrastructure sector. She’s a presenter and a stock market enthusiast with over 12 years of experience who loves reading between the lines and scanning through numbers. Before joining Moneycontrol, she was an Associate Research Head at Bloomberg Quint/ BQ Prime, where she wrote analytical pieces, anchored multiple interviews and a show called “ Market Wrap”.