Chipping in: Inside India’s big push to gain a strategic edge with USD10 billion semiconductor plan – The Economic Times

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SynopsisAmid a massive global chip shortage, India is playing catch-up in the economically and geopolitically critical semiconductor manufacturing race. But is the country too late to the party and what can it do to make its presence felt?

India could finally have its chip and flaunt it too — over two decades, several missed opportunities, and multiple policy initiatives later.

The country’s wait for housing a reasonably modern semiconductor manufacturing unit could be over with the government planning to belt out a USD10 billion package before the end of this year.

The package for electronics and hardware manufacturing, product design, and R&D comes at a time when a massive global semiconductor shortage is sending a chilling message through sectors from automobiles to mobile phones to dishwashers to smart-city projects. The impact of the shortage, which consulting firm AlixPartners estimates to have caused losses of USD210 billion just in the , is likely to . The of the global semiconductor supply chain will pan out in the long term.

To be sure, India is only playing catch-up.

To de-risk themselves economically and geopolitically,several countries have already moved aggressively on semiconductor manufacturing, which was over the decades outsourced by the US and Europe to countries like China, Taiwan and South Korea. Now, there are at least 29 such manufacturing units coming up globally, most of them in the US and Europe with countries like Singapore also throwing their hat into the ring. The underlying reason for this shift is semiconductor nationalism, and the fear of losing control to the Chinese, particularly in the context of Chinese expansionism.

TSMC, the Taiwan-based big daddy of semiconductor fabrication, is setting up a fab in Arizona, the US and Japan. Samsung on the other hand is planning one in Texas, the US. Texas Instruments, which opened its office in India back in the 1980s, is setting up three fabs in the US.

India’s late entry into the party could be armed with Production Linked Incentives (PLI), soft loans, subsidy on land, etc. According to reports, the proposal is expected to go to the Union Cabinet for its approval this week.

Cash-rich conglomerates have already started rolling up their sleeves in anticipation of a big opportunity. Tata Group, Vedanta and others are keen on semiconductor electronics and are planning to set up units for assembly, testing, marking, and packaging (ATMP), and display fabs.

That brings us to the moot question: Can India make it all work?

The blueprint
What is in the works currently is a plan to push electronics and hardware manufacturing, product design and R&D. “We need to incentivise all three together as they are interlinked and vital to create a sustainable demand for semiconductors. Manufacturing cannot prosper without design and R&D,” says an industry watcher who wished not to be named.

Electronics manufacturing in India is expected to be around USD400 billion by 2025. India mostly imports semiconductors. According to industry estimates, in 2020 almost USD20 billion worth of chips were consumed by electronic and hardware manufacturers in India and this will jump to USD60 billion by 2025.

On the semiconductor fab side, the aim is to get at least three types of fabs or ATMP units. These include silicon fab, display fab and compound semiconductor fabs (used in automotive electronics, EV charging, solar-power units, etc.).

Satya Gupta, advisor, India Electronics and Semiconductor Association (IESA), says, “The government’s thought process is much deeper and consultative this time. But this is another policy and it has to translate into activity on ground.”

According to him, policy is a government intent. But what’s lacking is involvement of people who are running fabs. “There are a lot of global Indians who have deep expertise in fabs. We must involve them,” adds Gupta, who is also CEO of EPIC Foundation and president of VLSI Society of India.

Global Indians who are pioneers in this space include Sanjay Mehrotra, CEO, Micron Technology; Siva Sivaram, executive vice-president, Western Digital; Barun Dutta, chief scientist of semiconductor technology, IMEC (he also helps do R&D for big players like TSMC); and Vinod Dham, often referred to as ‘father of the Pentium chip’.

The Ministry of Electronics and Information Technology (MeitY) has received at least 20 proposals to set up fabs. MeitY is spearheading the effort to get a fab. An inter-ministerial group of secretaries is also involved in discussions and the matter is being handled at the PMO level. That’s not just because fab involves mega investments in the order of billions of dollars, but also because the chip is too strategic a component.

According to people in the know, who were also part of some of the inter-ministerial discussions, a 28nm to 40nm fab unit will be a huge leap from where India is at present, with a 180nm plant in Mohali near Chandigarh. Says a senior official who was part of the discussions, “To start with, ATMP will take off (most likely by mid to end of 2022) and only later a chip fab will come up.”

Reports suggest that the Tata Group has plans to set up a USD300 million-USD400 million ATMP unit. Vedanta Group is partnering with a Korean player to build a display fab, and Sahasra Electronics is also planning to set up a facility.

The official quoted above adds, “We have already missed the bus several times. But given the changing geopolitics, reliance on imports for such a critical piece of hardware, particularly for defense and strategic needs and even for smartphones, is not recommended.”

India’s long semiconductor struggle

What’s in store
Barnik Chitran Maitra, managing partner, India and South Asia at Arthur D Little, says the move is likely to finally help India make its mark in semiconductor manufacturing. “No country can make it work without major government subsidies,” he says.

It is clear that this will be a watershed moment for the government’s Make in India narrative. Ajai Chowdhry, co-founder, HCL and chairman of the Electronics Sector Skills Council of India, says, “The fab plant will eventually happen as the government is very clear that semiconductors have to be made in India.” Chowdhry has also been involved in discussions on chip making in India.

Maitra adds that the earlier schemes failed to attract major players because the scale of subsidies were too small to make it viable to manufacturers. The internal rate of return (IRR) of the earlier schemes was in single digit, while the current push will help manufacturers cross into double-digit IRRs. What would also make a difference is that the capital cost is likely to be borne by local conglomerates.

The Tatas are seemingly interested in semiconductor manufacturing while Vedanta, which had invested USD158 million in AvanStrate, a Japanese manufacturer for LCD glass substrates, will likely go for another part of the silicon chain with panels.

What is clear is that Indian firms will need a leg-up in terms of technology transfer from global companies that control the semiconductor chain. The IP-heavy cutting edge of semiconductor manufacturing is unlikely to come to India anytime soon, but what is likely to happen, according to Maitra, is that the global firms will move some manufacturing of seventh and eighth generation semiconductors to India, as they focus on newer generations.

“The government’s thought process is much deeper and consultative this time. But this is another policy, and it has to translate into activity on ground.”

— Satya Gupta, advisor, India Electronics and Semiconductor AssociationKey challenges
It will take time for the initiative to fructify and that is not just because semiconductor manufacturing is notoriously time-intensive. There are multiple factors including a lack of high-tech product manufacturing by local companies.

Says an industry watcher, “Chinese, South Korean device or white-goods makers in India may not have any incentive to use locally made chips. In fact, they will be dictated by their head offices on what to use. For foreign brands, decisions on where to source chips from will be made in Beijing, Seoul, or Cupertino and not in New Delhi or Noida.” That’s why apart from attracting chip makers, the government needs to ensure that local players scale up electronics and hardware manufacturing in India.

So, if local consumption of semiconductors is to the tune of USD20 billion and just USD1 billion worth of chips are procured from India eventually, it could defeat the purpose. But at least a start is finally being made which will result in a factory on the ground, sometime in 2023-24.

There are other roadblocks as well. Chowdhry points out that close to USD500 billion investment is coming up globally in semiconductor manufacturing and there is a huge shortage of machinery (that goes into these plants to make semiconductors). What used to take 16 weeks in normal times to be shipped, now takes at least 62 weeks. Any proposal that’s approved now won’t be churning out chips in a hurry.

Interestingly, in the US, the Donald Trump administration had banned export of chip-related software and hardware equipment to China. And now with more countries wanting to set up manufacturing units, demand for plant and machinery has gone up leading to delays. ASML Holdings, Applied Materials, Lam Research, KLA Corp — all American entities — are among companies that make various chip-making machines including lithographic equipment, gas pumps, inspection machines and other gears that print layers of transistors on chips. They are banned from exporting to China.

India could have looked at buying a second-hand plant from Europe. But with changing geopolitics and countries wanting to move manufacturing back, no one is willing to sell now.

What is heartening is that in the long term, the move is likely to help the semiconductor sector in India learn the ropes of manufacturing and will likely give a leg-up to the design and R&D as well. According to an industry source, while major names like Intel have operations in system architecture of semiconductors in India, these were primarily in testing and lower value parts of the chain.

What is funny, however, is that in the long term, with so many fabrication facilities being built around the world which will start production in three or four years, the spectre of over-capacity is real. Talk about extremes.

(Don’t miss our PrimeTalk today on the chip mess and the way ahead. Click here to register.)

(Graphic by Mohammad Arshad)
(Originally published on Dec 14, 2021, 12:11 AM IST)

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