India’s relentless pursuit of becoming a semiconductor hub
India wants to leave no stone unturned to share the stage with the top leaders in the global semiconductor industry. However, it currently lacks the kind of critical talent, resources and investments needed to match international benchmarks, while encountering the typical challenges of building an industry from scratch. IBT takes a look at macro industry dynamics and key strategic moves that India may have to deploy to emerge a serious contender.
- Semiconductors worldwide sales reached US$ 80 billion in 2022, registering a 4% YoY growth.
- With a current market of US$ 24 billion, India is expected to have consumption of US$ 80 billion by 2026 and US$ 110 billion by 2030.
- India’s Semiconductor Mission is attracting foreign investments to the country but the country still registered total imports of around US$ 18 billion in 2022-23 (Apr-Feb).
- Market based, targeted, practical, geographically concentrated and non-discriminatory policy framework is recommended to help India boost the domestic chip sector.
Image Credit: Pixabay
From the past few years, one industry that has leapfrogged into the spotlight across borders is semiconductors. In scientific parlance, these are essentially elements or compounds that conduct electricity under some conditions but not others. This unique property, which puts them between conductors and insulators, makes them useful in controlling electric current.
The semiconductor silicon is the base material for the microchip, also known as an integrated circuit or monolithic integrated circuit, which is used in almost every modern electronic device. Modern life’s high reliance on this nanometer chip is forcing nations to take part in the endless pursuit of converting themselves into its manufacturing hub, and India is tirelessly working towards becoming a key player in the industry’s supply chains.
As it is said that, semiconductors are the foundation of everything digital in today’s world. Worldwide market sales of semiconductors reached US$ 580 billion in 2022, with a 4% YoY growth. These devices are essential to almost all sectors of the economy including aerospace, automobiles, communications, clean energy IT and medical devices.
Smartphones had the highest utilization of semiconductors in 2022 as compared to a prediction of the highest consumption by servers and data storage in 2030, as shown in the graph below.
What does the Global supply chain look like?
Among numerous types of semiconductors, seven broad categories are memory, logic, micro, analog, optoelectronics, discrete and sensors. Out of these the first four memory, logic, micro and analog semiconductors are the so-called integrated circuits (ICs) or chips. The production process for semiconductors or in particular ICs, consists of three distinct steps: design, fabrication and assembly and test. Whether the company provides all three production steps or focuses solely on a single production step depends on the firm’s business model.
Integrated device manufacturers (IDMs), such as Intel or Samsung, perform all three steps in-house but due to increasing complexity, companies which only design chips and rely on contract chip makers for fabrication are called fabless. Fabless companies, such as Qualcomm (US), Nvidia (US) and HiSilicon (China), therefore, closely collaborate with foundries that manufacture chips in their fabrication plants (fabs). The last step of testing, assembling and packaging to protect the chip from damage is either done by the foundry itself or by the outsourced semiconductor assembly and test (OSAT) companies.
The global leaders
Countries having the maximum production of semiconductors in the world are Taiwan, South Korea, Japan, United States and China. Taiwan is the world’s undisputed leader in raw semiconductor manufacturing, due to a single company Taiwan Semiconductor Manufacturing Co. (TSMC), which singlehandedly manufactures roughly 50% of the world’s semiconductors. It works in the foundry model of business. South Korea’s multinational Samsung Electronics Corporation is one of the largest single semiconductor-producing companies, working both as IDM and foundry.
Source: World population review rankings
Trade analysis of Semiconductors
Semiconductor trade is captured in two HS Codes – 8541 and 8542. The world recorded total exports of US$ 147.17 billion of Diodes, Transistors and similar conductor devices (HS 8541) in 2021. China, Hong Kong, Singapore, Japan and Malaysia were the top exporters of these devices over the same period. Countries which topped the importers’ list for these devices were China, Hong Kong, US, Germany and South Korea.
Source: ITC Trade Map
With total exports of US$ 1 trillion in 2021, global exports of Electronic integrated circuits (HS 8542) recorded a 7% CAGR from 2017-21. Countries like Hong Kong, Taiwan, China, Singapore and South Korea were the top exporters in 2021. China, Hong Kong, Singapore, Taiwan and South Korea were also among the top importers of integrated circuits.
Source: ITC Trade Map
Where is India in the race?
India’s semiconductor journey started with Punjab in 1974 when the Department of Electronics realized that the country needed to build capacity in semiconductors design and fabrication. Mohali got India’s first semiconductor fab in 1978, which started manufacturing chips with technology obtained from American Microsystems Inc. Around this same time, semiconductor design activity began in India and within a decades time, 17 out of 25 top semiconductor design firms, including Intel, had opened centers in the country. However, the country lagged over the years due to sub-par investments in a highly technology intensive and fast-paced industry.
Today, has a decent chip design talent but it never built up chip fab capacity. The ISRO and the DRDO have their respective fab foundries but they are primarily for their own requirements. With rising demand and frequent supply chain disruptions recently caused by the pandemic and geopolitical tensions exposing its vulnerability, there is no choice left for India but to become self-reliant.
Now India wants to leave no stone unturned to share the stage with the top leaders in this game. Its consumption of semiconductors is expected to cross US$ 80 billion by 2026 and US$ 110 billion by 2030. India is currently an importer of all chips, with an estimated market of US$ 100 billion by 2025 from US$ 24 billion in 2023. Its semiconductor market is structured into four different segments, Discrete semiconductors (used in basic electronic functions); Integrated circuits, Optoelectronics (related to light) and Sensors and Actuators (for sensing real-world factors). With a 0.7% YoY growth in revenue earned by different sectors, the total revenue is projected to be US$ 8.5 billion in 2023.
According to a Deloitte report, 2023, India has strong design and engineering talent but lacks domestic chip manufacturing capabilities. The country accounts for 1% of global trade in semiconductors and 0.5% of global semiconductor sales according to The Semiconductor Industry Association (SIA).
India imported US$ 3.26 billion worth of Semiconductor divisions (HS 8541) majorly from China (US$ 1.65 billion), Singapore (US$ 328.2 million), Thailand (US$ 229.9 million) and Vietnam (US$ 219.93 million) in 2023 (Apr-Feb). It imported US$ 14.47 billion worth of Integrated circuits, majorly from China (US$ 4.27 billion), Hong Kong (US$ 3.20 billion), South Korea (US$ 1.97 billion), Singapore (US$ 1.39 billion) and Taiwan (US$ 1.17 billion) over the same period. Integrated circuits import registered a 19.64% YoY growth as well.
What major policies are there for the sector?
The vision of National Policy on Electronics 2019 (NPE 2019), is to position India as a global hub for Electronics System Design and Manufacturing (ESDM). The government of India thus, is determined to build a foundation for developing core components, including chipsets and creating an enabling environment for the industry to face global competition.
Scheme for Promotion of Manufacturing of Electric Components and Semiconductors (SPECS), 2020
The scheme aims to offset the disability for domestic manufacturing of electronic components and semiconductors in order to strengthen the electronic manufacturing ecosystem in the country.
Modified Program for Semiconductors and Display Fab Ecosystem, 2021
The government provides incentives worth Rs. 76,000 crores (> US$ 10 billion) for the development of semiconductors and display manufacturing ecosystems. Under this Program, the following major schemes are being offered:
- Design Linked Incentive (DLI) Scheme
Financial incentives and design infrastructure support will be extended to domestic companies, startups and MSMEs. These incentives will be provided across various stages of development and deployment of semiconductor design for ICs Chipsets, Systems on Chips, etc. over a period of 5 years.
- India Semiconductor Mission (ISM)
In order to drive the long-term strategies for developing sustainable semiconductors and display ecosystems, a specialized and independent “India Semiconductor Mission” has been set up.
Source: Ministry of Electronics and Information Technology
Building a fab is a multi-billion dollar investment that requires an extensive supply chain for components, machinery, equipment and expertise. India is thus seeking foreign investments for its indigenous semiconductor industry for the development of fabs and ATMP (Assembly, Testing, Marking and Packaging).
Establishing semiconductor and display production requires a manufacturer of license-grade semiconductor technology with apt expertise in chip fabrication in order for the project to be approved and be eligible for the semiconductor incentive scheme of Rs. 76,000 crores. Under this, Indian conglomerate Vedanta and Taiwanese manufacturer Foxconn (technology partner) are setting up a semiconductor and display manufacturing facility in Dholera Special Investment Region near Ahmedabad, Gujarat.
In January 2023, US Semiconductor Industry Association (SIA) and India Electronics and Semiconductor Association (IESA) decided to form a private sector task force to strengthen bilateral collaboration in the semiconductor ecosystem. The US presently has a ‘Chip 4’ alliance with the world’s top semiconductors makers – Taiwan, Japan & South Korea. In September 2021, India, Japan and Australia announced plans to establish a semiconductor supply chain initiative.
Gujarat Semiconductor Policy 2022-27
The Government of Gujarat is desirous of becoming the pioneer state in realizing the mission to make India a global hub for the ESDM sector with robust infrastructure, wide network connectivity and multiple specialized industrial zones in place.
The state will be providing support for its industrial infrastructure along with utility support for power, water, gas and inland container depots and container freight stations.
Along with providing an industrial ecosystem with connectivity through 48 ports and 17 operational airports, the state will develop Dholera SIR, GIDC (Gujarat Industrial Development Corporation) estates and Electronics Manufacturing cluster at Mudra etc. as Special investment regions.
What are the key challenges?
With an emphasis to diversify semiconductor supply chains and reducing reliance on a single country, China, the world turns its gaze towards India to lead the highly acclaimed ‘China plus one strategy’.
However, Indian companies needs a push to invest more in semiconductor manufacturing R&D. Incentives provided by the government to private industries for R&D may have to be boosted. Various global semiconductor design companies have established R&D centers due to the abundance of skilled semiconductor design engineers, constituting 20% of the global total. World’s major semiconductor and Wafer Fabrication Equipment (WEF) manufacturers have established significant research and development operations in India but there is dearth of investments from the Indian private sector. Moreover, India lacks semiconductor engineers with the requisite skills to manufacture and fabricate chips.
The chip-making industry is a capital-intensive industry due to which only a few companies are able to compete effectively in the field. The high cost of entry and sustenance indicates a small number of companies without incentives from Government. As semiconductor veteran Vinod Dham, also known as the Father of Pentium and a member of the advisory committee of India Semiconductor Mission, points out, there are critical challenges in India’s path to become a semiconductor hub, compounded by the daunting task of setting up such a technology intensive industry from scratch.
The industry is highly ultra-pure water-intensive, and manufacturing a single chip consumes nearly 10 gallons of water. It also requires a stable power supply and a lot of land. Building chips with very fine geometrics requires glitch-free power, and a location secure from natural disasters.
Fabrication also requires a variety of high-purity gases and wafers, for which India is imported dependent. The central part of a fabrication unit, is a clean room, with a controlled environment to eliminate all dust. The room must be dampened against vibration and kept within narrow bands of temperature and humidity. It is not surprising that the industry considers semiconductors a high risk investment with a long gestation period.
What can be the way ahead?
The global semiconductor ecosystem is undergoing a major revamp, countries like India, the US, the EU, Saudi Arabia, and Canada are constantly strategizing over building semiconductor value chains. The Covid-19 pandemic, the Ukraine war, and overdependence on a few countries forced governments to become self-reliant. Not only this but the high-tech competition US-China (restrictions imposed on China by the US) has gone beyond and is affecting global supply chains. European Commission, in order to strengthen the continent’s competitiveness, even introduced Chips Act, 2022.
Semiconductor Industry Association (SIA) together with the in-country partner APCO Worldwide has put together a white paper for the Government of India, giving detailed macro principal recommendations for India’s approach to the semiconductor ecosystem. The paper recommends market-based incentive programs aimed at advancing R&D, design and production capabilities, and at the same time encouraging competition. It also states that public investments can be leveraged to improve on existing strengths.
Building cluster-based ecosystems is critical to success of the sector, since it is not feasible to have standalone chip manufacturing units with scattered suppliers. These clusters should also function as trade or development zones, integrated with the global semiconductor value chain with zero import or export tariffs and best-in-class customs and trade clearance facilitation processes. They could be closer to end-use industries or even existing or newly developed higher education institutions to enable continuous training of talent and engineers, according to SIA. An example of such a successful cluster is Oregon’s Silicon Forest. India is also attempting a similar ecosystem at Dholera in Gujarat, aiming to make it the National Hub for Semiconductor Industries.
While India has a logical stake in enhancing chip manufacturing, SIA believes the country can strengthen its existing capabilities in chip design as well. The Design Linked Incentive (DLI) scheme can be utilised to incentivize global design players to expand investments and presence in the country. Expanding the scope of science and engineering education will help bring in highly skilled talent in the semiconductor industry over the years.
The report also recommends incentivising segments with lower barriers to entry that are relatively cost-effective. One such segment is Outsourced Semiconductor Assembly and Test (OSATs), where capital expenditure typically runs at less than half that level, at approximately 15% of revenue. These players provide assembly, packaging, and test services under contract to both integrated device manufacturers (IDMs) and fabless companies. Over 60% of the world’s back-end semiconductor OSAT capacity is in China and Taiwan, and India is in a good position to provide an alternative.
India should focus on developing policies that facilitate deeper integration into global value chains. The nation, already welcoming partnerships with foreign established players, will have investing companies seeking the lowest tariffs, competitive prices, market efficiency and great access to products, technologies and resources.