Synopsis–India has negligible manufacturing presence in the most vital cog of the digital world.
From your gaming console to your cars. From your mobile phones to your Wi-Fi, a tiny component powers much of our world today. Chips are at the heart of any electronic product and their ubiquitous nature makes it one of the most sought-after electronic items. But, thanks to an unusual fallout of the ongoing Covid-induced crisis, electronic manufacturers — both within and outside of the country, are presently reeling under an unprecedented shortage of semiconductors.
According to The Semiconductor Industry Association (SIA), global semiconductor industry sales were $39.6 billion for the month of February 2021, an increase of 14.7% over the February 2020. This strong demand has a fallout- assembly lines churning out various key electronic items have come to a halt or seen suspensions.
Subsequently, the production of several home electronic items such as televisions, refrigerators, laptops to items as basic as internet routers, has been severely hampered. For Indian electronic manufacturers, which traditionally depended on supplying nations for meeting their chips requirement, the crunch dealt a body blow to their operations already hit hard by the pandemic’s fallouts.
Indian manufacturers, much like their global counterparts, are now struggling to find chips to power their products. What makes it worse is that India completely depends on imports to meet their demand.
Industry observers say the current crisis has been brewing for quite some time now. In fact, it has had its roots in the initial days of the pandemic. According to India Electronics and Semiconductor Association (IESA), the current crunch in chips’ supply is mainly because of the way the industry miscalculated the demand-supply dynamics of semiconductors. According to Satya Gupta, the industry body’s former chairman, the recovery of the industry from the pandemic downturn has been swifter than expected. “Manufacturers thought it would take a couple of quarters before things would get back to normal. But, the consumer demand for semiconductor-based items rose sharply,” Gupta explains.
Throughout the lockdown period, there was a surge in demand for consumer electronics items that made use of these chips. From smartphones to laptops and from gaming consoles to Wi-Fi routers, consumers increasingly scrambled over various chips-based products. Also, with social distancing the new normal, people shunned public transports and bought more cars. Interestingly, the inbuilt memory functions of these cars are enabled via such microchips.
However, besides the surge in demand for electronic products during the pandemic, there’s certainly more to this than meets the eye. Several worldwide events have also played a role in crippling chips’ global supply chain that Indian manufacturers extensively depended upon. This includes a major incident of fire at an electronics company in Japan, a labour strike in France involving three of the biggest French unions with significant members in the semiconductor industry. Another issue that George Paul, CEO of Manufacturers’ Association for Information Technology (MAIT) highlights is how manufacturers wary of China-US trade war fallout resorted to “hoarding of chips” before the trade embargo was put in.
Chips are down
The semiconductor shortage is having a cascading effect on a range of key industries. For instance, one sector that’s said to be impacted adversely by the chip shortage is the country’s auto sector. Even before the Covid derailed the Indian economy, this sector was in the doldrums. The current chip shortage has only aggravated the situation for the sector, resulting in delayed deliveries of vehicles.
Rajesh Menon, Director General, Society of Indian Automobile Manufacturers (SIAM) contends that the automobile industry has been facing an acute shortage of semiconductors for vehicle production. “The severity of the shortage is growing with every passing day. As a result, it has impacted the production schedules of several vehicle manufacturers as tier-1 and tier-2 auto component suppliers are not getting supplies of semiconductors. Some suppliers have expressed their inability to supply critical components such as ECU, ABS systems, infotainment, in requisite numbers,” Menon highlights. The impact on the sector is clear from the fact that Bosch Group, one of the sector’s leading suppliers, announced that its profit for the third quarter of the last fiscal was down 4.58% because of the very shortage in chip supply.
Just like the country’s automobile industry, several key Indian sectors with huge dependence on electronic wafers today stand on shaky grounds. Thus, industry observers are increasingly pitching for setting up semiconductor manufacturing units to reduce reliance on imports. But, while this looks more like a long-term goal, India simultaneously needs to fast address the immediate concerns of the industry too.
In the quest for Atmanibharta
The shortage in the supply of critical semiconductors is having acute ramifications for several industries, as there is no alternative for these components. That Indian players have traditionally remained dependent on few select supplying nations for sourcing chips is also compounding the issue at hand. This begs the question — can India really turn self-reliant in this category? As things stand, it’s easier said than done. At the moment it’s neither viable nor cost-effective for Indian players to launch their own fab facility.
“Microprocessor chips are produced in high-tech semiconductor fabs. And India has followed a misguided policy till date as we have been aspiring to set up multibillion dollar fabs which we are not geared up to establish or operate,” opines Rajoo Goel, Secretary-General at Electronic Industries Association Of India (ELCINA). Goel further highlights that more than just the financial investment, a large high tech fab requires a seamless supply chain and critical infrastructure which is still not available in the country.
Pankaj Gulati, Executive VP/ COO of Continental Device India Ltd. (CDIL) is of the view that India already has a good base in design capabilities, and the next logical step needs to be hardware manufacturing capability. But for that to happen, the ecosystem for manufacturing semiconductors needs major support.
“Semiconductor manufacturing is a heavy capital-intensive industry. Semiconductor assembly needs critical raw material which is currently being imported from China, Taiwan or Korea etc. Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) and the Production Linked Incentive (PLI) do support a kick-start in this segment. Yet, unless incentives and support are given to the raw material manufacturers, the ecosystem will not develop and the manufacturing of semiconductors in India will not be economical,” argues Gulati.
Nevertheless, because of chips’ strategic nature, India should aspire to build fab capacity within the country. But that ambitious goal entails addressing the elephant in the room first, i.e., lack of investments.
“If we look at how other countries-built semiconductor manufacturing capabilities-all of them, be it Taiwan, Korea, Japan or the US, their governments have seen this as a strategic investment and provided Viability Gap Funding (VGF) or risk funding to the industry,” underscores MAIT’s Paul. He further flags that the journey of attaining self-reliance in semiconductor fab capacity will not happen overnight as it’s a very high investment domain, requiring over 90% capacity utilisation on a 24/7 basis for the industry to be profitable.
As the country embarks on the journey of building semiconductor fab in the country as a strategic initiative, IESA’s Gupta suggests taking baby steps first. Achieving self-reliance is certainly needed, but there is no shortcut to it, he asserts. “Indian manufacturers can start with smart utility meters, set up boxes, etc. These are the equipment that are largely imported. To gain self-reliance, if we focus on electronics and semiconductors simultaneously, while results might come sooner for electronics, perhaps in 3-5 years; for semiconductor, it may take a bit longer, around 7-10 years.”
Crisis, a litmus test for national policies
For all the types of semiconductor put together, India imports around $20-22 billion per annum. It’s quite difficult to ascertain the size of the semiconductor market in India, but we can go by the consumption figures. There is a whole host of items falling under the broader domain. We import some as chips as a raw material whereas some enter India as a finished product, for example, gaming consoles, Wi-Fi Routers, etc. There is currently no fab facility In India and the sector is almost entirely import-dependent.
Even if we have to start today, it will not be easy. Semiconductor manufacturing is high precision and high tech, something that Indian manufacturers currently lack. Add to that is the fact that the global semiconductor market is extremely price-sensitive and very competitive. This makes it very difficult for an Indian player to make inroads.
The semiconductor industry is also one of the most globalised. According to a report by the Global Semiconductor Alliance (GSA) and Accenture, components for a chip could travel over 25,000 miles by the time it finds its way into a television set, mobile phone, automobile, computer, or any of the millions of products that now rely on chips to operate.
According to its research, each segment of the semiconductor value chain has, on average, 25 countries involved in the direct supply chain and 23 countries involved in supporting market functions. In fact, a semiconductor product could cross international borders approximately 70 or more times before finally making it to the end customer. At the moment, India is completely missing from the global manufacturing value chain.
James Daly in a blog for IBM stated that the, “US still dominates microprocessor research and development but it lacks firms in certain key subsectors, especially photolithography tools (the most expensive and complex form of semiconductor manufacturing equipment) and the most advanced chip factories (especially foundries, which manufacture chips for third parties).”
Daly says Taiwan is the leader in advanced manufacturing while South Korea also produces significant amounts of materials and some manufacturing equipment. With a strong state backing, China is catching up in both semiconductor design and manufacturing.
In recent times, there has been a concrete push by the government to address the loopholes on the ground. The Ministry of Electronics & Information Technology (MeitY) is also systematically taking steps in line with the National Policy on Electronics (NPE 2019). The government’s sector-specific schemes such as SPECS and the PLI scheme are also a step in that direction.
So, to what extent these measures are helping India prepare for any chip shortage in future? More importantly, are these contributing to the segment’s self-reliance bid? Experts maintain the road to self-reliance in this category has to be gradual and should be in sync with ground realities.
iStockTaiwan is a leader in chip manufacturing.ELCINA’s Goel stresses that India first needs to have a large and robust ATMP (Assembly Test Mark & Pack) industry for meeting the needs of its electronic products. These include microprocessors, storage, memory devices, etc. With due focus, the segment could be the most ideal launchpad the country needs today as it firms up strategy for a viable domestic semiconductor industry. Goel also emphasises that India needs to focus on the segment where investments are lower and build its capability and capacity, before moving to investment in a full-fledged fab. “India still has a long way to go before it can establish a full-fledged fab. It would take several years just to set up one and make it fully operational.”
There certainly are roadblocks plaguing chip manufacturing in the country. However, for now, one can draw solace from the fact that the much critical domestic ESDM sector looks poised for significant growth ahead. And the spillover of this growth is bound to further push the demand for semiconductor manufacturing in the country.
As Indian players battle the chip shortages, they certainly need to keep forging ties with alternative and trusted sources for chips. This would provide them with some breathing space while it focuses on developing an indigenous value chain, contend experts.
(Illustrations: Manali Ghosh and Sadhana Saxena)
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