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Semiconductor Fabs: Why they are the talk of the town

Semiconductor fabs are to play a key role in putting an end to the ongoing semiconductor chip shortage and making India a manufacturing hub for electronic goods. Here’s what you need to know about them.

December 20, 2021 / 11:03 AM IST
Representative image (Shutterstock)

Representative image (Shutterstock)

With the Union Cabinet clearing a multi-billion-dollar capital support plan to push semiconductor manufacturing in India, the spotlight is once again on the elusive electronic component. The government is rolling out a package worth Rs 76,000 crore for localised manufacturing to boost the production of chips that has paralysed the consumer electronics and automotive industry.

Incentives are to be offered to companies over a period of six years and have been introduced to alleviate brands from production shortage woes and secure the country’s critical information infrastructure. The scheme is also expected to help establish India as a global hub for consumer electronics, create jobs and attract investments of Rs 1.7 lakh crore.

The ongoing chip shortage has once again highlighted the need to locally produce semiconductor chips, in order to meet increasing demand and reduce the country’s reliance on imported chips, presently being sourced primarily from China, Korea and Taiwan. Semiconductor chips, whose widespread usage in multiple electronic items, computers and cars has led to suspension of production of goods across industries, is expected to continue well into the second quarter of next year, and is likely to cause further losses, particularly for the automotive industry.

The scheme is expected to provide much-needed fiscal support, tariff reductions on chip components, and has plans to set up multiple fab units. If you are wondering what the fuss is about, here are answers to a set of important questions on the topic.

What is a semiconductor fab unit?

A semiconductor fab or fabrication plant, is essentially a factory that manufactures integrated chip circuits and silicon wafers. Semiconductor chips are essential components for all manner of electronic goods and serve a variety of functions such as powering displays, transferring data etc. Manufacturing these chips is a complex process that takes over three months and so, large-scale factories with the right temperature-controlled setup are needed.

Each fab is responsible for producing semiconductor wafers which can vary in size. These wafers consist of several semiconductor chips which are then used to serve a variety of industrial purposes. While 300mm wafer foundries cost more, smaller ones require lower levels of investment.

Given the rapid demand for consumer electronics, mixed with their reduced life-span, a lot of foundries prefer to manufacture smaller wafers (100mm), which can be produced relatively quickly. Regardless of the size of the fab unit, the costs always run into tens of thousands of crores. Although in the longer run, more chips per wafer means lower costs per chip for the chip maker.

What goes on inside one?

A fabrication unit is required to have a “clean room” where dust, vibration, temperature and humidity levels are closely monitored as the presence of any of those factors can ruin the entire product. According to an article in Forbes, the cleanest part of the fab unit allows no more than 10 particles of dust, size around 10 microns per cubic meter of air. Essentially, even microscopic specs of dust can lay waste to an entire wafer.

Semiconductor fabrication units are some of the most sophisticated manufacturing units out there, requiring thousands of ultra-high precision optics, lasers and advanced robotics to make hundreds of thousands of semiconductor wafers, each of which contains hundreds and thousands of semiconductor microchips. According to Semi, a global industry association representing the electronics manufacturing and design supply chain, the semiconductor manufacturing process can be broken down into five essential parts.

Beginning with a process called ‘Deposition'' where conductors and insulators are placed onto a silicon wafer. This is followed by pattern and etching, done, once again at a nanoscale where patterns of transistors are placed onto the wafer using a process called photolithography.

Materials broadly categorised between conductors and insulators are then placed on the silicon wafer following which each component is measured and inspected to ensure that the hundreds of millions of components are essentially defect-free. This is then followed by packaging which involves building protective structures on the semiconductor wafer’s microchips and connections. Different types of semiconductors serve different purposes and can be found in hard disk drives, smartphones, televisions and cars, the latter featuring up to 50 to 150 semiconductors per car.

How much do they cost?

Semiconductor manufacturing equipment is very expensive and a state-of-the-art fab unit is expected to cost roughly $15-20 billion. Even at the lower-end, setting-up a foundry requires a capital-intensive investment of $3-4 billion dollars or Rs 22,000 crore. The equipment required in a semiconductor fab unit also depreciates fairly quickly.

In fact, according to Forbes, capital depreciation accounts for 50-80 percent of manufacturing cost of this kind of plant. Therefore the right sort of tax subsidies are also necessary for the business to flourish. Manpower training is also a factor, as processing anything between 100mm to 300mm wafers requires high levels of skill, but it’s primarily the tools and equipment that take up 80 percent of the costs.

Semiconductor fabs also take notoriously long to become profitable, even though they have to address very immediate industrial needs, particularly to address the short lifespan of consumer electronic goods. This is largely because of the high levels of capital required and the fact that semiconductor chips can depreciate by upto 10 percent per year. For the types of chips carmakers need, the minimum capital required is over $4 billion, according to Bloomberg.

Where in India are they being built?

Presently, India has a pretty patchwork semiconductor chip manufacturing ecosystem and imports 100 percent of its semiconductors. However India is a strong base for semiconductor chip design. Chip design is a more software-heavy process, and according to the Ministry of Electronics and Information Technology, India has a “stronghold over chip design”.

Although semiconductor manufacturing has been in the pipeline for over two decades, the infrastructure required for the actual fabrication has been woefully inadequate. The creation of semiconductors involves design, components manufacturing and then fabrication. While semiconductor design houses have flourished in India, and continue to do so, fabrication requires heavy investment and tax subsidies the likes of which don’t exist in India at present.

A stark contrast to countries like the US, which offer $50 billion in investment subsidies. At present, India contributes to 20 percent of semiconductor chip design capabilities, according to Business Today. India’s IT capital of Bengaluru has several such design houses including ASM technologies, Tata Elxsi and Broadcom Inc, among others.

No single country has a monopoly over semiconductor manufacturing, although China, Taiwan, USA, Japan and South Korea along with a handful of European countries, have a firm foothold in the business. At present, some of the largest semiconductor foundries include The Taiwan Semiconductor Manufacturing Company, which has been the market leader for several years, Samsung which is a close second and America’s GlobalFoundries which has 10 fabrication plants across the world (three in the US).

In the past several such companies, including Intel have made proposals to the Indian government for the setting-up of fab units, but nothing really materialised. Even the state-owned Hindustan Semiconductor Manufacturing Corporation did not take off, not having submitted the requisite document as per the letter of intent, given by the government.

At present, the Tata Group has expressed interest in entering the semiconductor business in India. There’s no denying that our dependence on semiconductors is only going to increase. This is especially true of cars, which will go on to feature an even higher number of semiconductor chips post electrification. For EVs, 80 percent of functionality comes from software, including battery optimisation, heat management, performance etc. India has a long way to go, before becoming another Taiwan. For the moment however, cash incentives of $1 billion dollars seem like a good place to start.

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Parth Charan is a Mumbai-based writer who’s written extensively on cars for over seven years.
first published: Dec 20, 2021 11:03 am