Indian semiconductors, rising from now on?

Latest update time：2024-11-02

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Source: Content from business-standard, thank you.

In September 2024, India and Singapore signed a memorandum of understanding to cooperate in the semiconductor sector. Within weeks, India reached an agreement with the United States to build a joint semiconductor manufacturing plant in India, further strengthening India's ambitions in semiconductor chip manufacturing.

Many countries are racing to build a resilient semiconductor supply chain amid rising chip import prices. Prime Minister Modi has long positioned India as an alternative semiconductor hub. He reiterated this in a speech to chipmakers at the recent SEMICON India 2024 conference.

The Indian Semiconductor Mission (ISM) is a major government intervention to attract investments and incentivize local production. Launched in December 2021 with an investment of Rs 76,000 crore, the ISM provides production and design-related incentives to companies that set up semiconductor manufacturing plants, test facilities and design centers in India. The program has already attracted investments of Rs 1.5 trillion from major companies such as Micron, Tata Electronics, CG Power and Kaynes Technology.

However, the question remains: Can India, with this Rs 76,000 crore chip bet and global partnerships, increase its semiconductor self-sufficiency and become a key player in the global semiconductor value chain?

Competitive Advantage in Chip Design

The semiconductor value chain consists of four key stages – design, manufacturing, ATP (assembly, test and packaging), and distribution. The chip design stage is perhaps the area where India has built capabilities, as talent requirements are more important than capital. India has 20% of the world’s chip design talent pool, mainly employed by multinational subsidiaries in India. Global chipmaker AMD recently opened its largest global design center in Bangalore.

India's domestic design capabilities will also be enhanced, thanks to ISM's design-related incentives specifically for domestic design companies. To meet the growing demand for design talent, the government is equipping more than 100 universities with electronic design automation tools from Siemens, Synopsys and Cadence.

Technological nationalism: From fabless to foundry

While India’s current capabilities tend to focus on “fabless” chip design companies, a series of recent government approvals suggest that India is working to build domestic chip manufacturing plants, or “fabs.” The Dholera plant, which was launched in March 2024 by Taiwan’s PSMC and Tata Electronics, is India’s first semiconductor fab in 30 years. The government is funding 70% of the investment, with the Tata Group covering the rest, and PSMC overseeing technology transfer and employee training.

As the 2023 WTO report notes, despite being a “latecomer” to the semiconductor manufacturing frenzy, India is trying to use the recent supply chain restructuring to its advantage. During the 2018-2023 period, 80% of semiconductor manufacturing stages were concentrated in Taiwan, South Korea, the People’s Republic of China, Japan, and Singapore. According to the 2023 WTO report, the COVID-19 pandemic and rising geopolitical tensions have made East Asian centralization a weakness for many countries—and India is eager to become a viable alternative.

Establishing a fab ecosystem is not without its challenges. The first challenge is more obvious – the cost of building a new fab is huge. In 1983, the cost of building a cutting-edge semiconductor fab was about $200 million. By the early 2020s, this price tag had soared to over $20 billion, with operating expenses over the next decade matching the huge initial investment. For India, the huge investments required for the “fab model” appear to be a risky bet, as the prospect of achieving technological sovereignty in semiconductor fabs is not guaranteed.

Another obstacle is that the manufacturing process is extremely resource-intensive, requiring a steady supply of electricity and large quantities of “ultrapure water” to clean silicon wafers. Today, a typical factory can consume up to 10 million gallons of ultrapure water per day. Water-hungry fabs could put more pressure on India’s already strained water systems, while power supply demands could hamper the country’s pursuit of net-zero goals.

As the fab model expands, there are concerns about talent and skills gaps. A 2022 National Skill Development Corporation (NSDC) report found that the skilled workers required to operate semiconductor manufacturing plants are in short supply. Another report by TeamLease Degree Apprenticeship predicts that India will face a shortage of 250,000 to 300,000 semiconductor industry professionals by 2027.

A more critical and fundamental bottleneck India faces in chip manufacturing is its excessive dependence on imports of key minerals essential to chip manufacturing, including rare earth elements, especially from China. Although India has 6% of the world's rare earth element reserves, it has not mined them since the 1950s, and the utilization rate of key minerals is only 10-20%.

A quick win through assembly capabilities?

India can adopt a faster and more feasible semiconductor strategy by focusing on the back-end manufacturing phase of ATP. This phase transforms silicon wafers produced by front-end fabs into finished chips that can be used in electronic devices. Specialized companies are responsible for tasks such as slicing, packaging and testing, and then shipping the chips to manufacturers. Since ATP is less capital-intensive but more labor-intensive than front-end production, it is relatively easy for India to enter the ATP field.

Multinational companies are setting up ATP facilities to a greater extent in developing countries. As Chris Miller, author of Chip Wars, points out, South Korea, Taiwan, and Singapore initially entered the chip industry through assembly, testing, and packaging before moving on to manufacturing. Therefore, the near-term focus of India’s semiconductor industry strategy may be on developing ATP capabilities.

India has recognized the potential in the ATP sector. Following the approval of the Micron assembly plant, the Indian government recently approved Tata to invest 27,000 crore rupees to build a new plant in Assam, which will focus on the assembly and testing of semiconductor chips. Suchi Semicon also recently announced an investment of $100 million to build the first outsourced semiconductor assembly and testing plant in Gujarat, which will start rolling out semiconductor products in November this year.

Electronics manufacturers that have already moved production to India have taken advantage of the ATP. For example, Apple is in talks with Micron, Tata Group and other chipmakers to build factories in India to source $12 billion worth of components for its devices.

Value chain self-reliance is still a distant dream

India’s ambition to master every link of the semiconductor value chain is neither easy nor credible. The semiconductor value chain is extremely complex and goes far beyond what the advocates of the “self-sufficiency” policy expect. A practical path forward involves localizing India’s strengths in fabless design and expanding ATP facilities, while also venturing into semiconductor manufacturing to reduce dependence on imports and meet India’s huge demand for electronics. Chips pass through about 70 countries before reaching the end user, and India cannot make this journey alone. Strategic global partnerships, like those established with Singapore and the United States, are essential for India to become a powerhouse in the semiconductor value chain.

Reference Links

https://www.business-standard.com/industry/news/how-india-is-pursuing-self-sufficiency-in-the-semicon-chip-value-chain-124110200076_1.html

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