By Nantoo Banerjee
There is little to be excited about the government’s latest announcement of a comprehensive strategy to put India firmly on the world map of semiconductor manufacturers at a time when the global industry is silently cerebrating its diamond jubilee of existence. The world’s first semiconductor maker, Fairchild Semiconductor Corporation, was founded in Santa Clara, California, in 1957. Since then nearly 50 large semiconductor firms have come up in over a dozen countries. Last week, the Narendra Modi government finally unfolded a US$10-billion (Rs.760 million) package to boost semiconductor and display manufacturing.
The package aims to provide attractive incentive support to companies or consortia which are interested in taking up production in India of silicon semiconductor fabs, display fabs, compound semiconductors, silicon photonics, sensors (including MEMS) fabs, semiconductor packaging (ATMP/OSAT) and semiconductor design. Obviously, no Indian private business house has the capability to enter such a critical and highly capital intensive sector, except probably the Tatas, steering the world’s largest IT firm TCS. It also remains a big mystery as to how and why the government had earlier depended hopelessly on such politically-connected fund-starved enterprises as Himachal Futuristic and Jayprakash Associates to take up the challenging task of semiconductor manufacture in the country.
The government has decided to make available incentives worth $30.16 billion (Rs.2.3 trillion) to position India as a global hub for electronics manufacturing. Building a facility for high-end chips costs as much as $5.4 billion. The government is open to new incentives for chipmakers, beyond those detailed in the package. It will likely be based on the investment coming in and the company’s area of work, type of fab, and requirement. An earlier report said that over 20 semiconductor manufacturing and designing companies in high-end, display, and specialty fabrication submitted Expressions of Interest (EOIs) to set up manufacturing plants in India. The deadline was April 30, 2021. The notification about the EOIs was reportedly available in Chinese, Korean, Japanese and Hebrew. Incidentally, Taiwan Semiconductor Manufacturing Company (TSM) is the largest manufacturer of semiconductor chips. While Intel of the USA earns more in revenue, TSM makes around 90 percent of advanced chips produced globally. In 2020, Intel’s revenue was $78 billion having assets worth $153 billion.
Among the world’s 32 major semiconductor manufacturers, three are based in Taiwan, one in China, two in South Korea, four in Japan and one in Israel. As a country, China is the largest producer of semiconductors in volume terms, accounting for 24 percent of the world output, followed by Taiwan (21 percent) and South Korea (19 percent). The US and Europe account for 10 percent and eight percent, respectively. This may explain the government’s decision to go for multilingual notification. The Tatas are said to be in discussions with some major international companies, including those from Taiwan, for its foray into the semiconductor chip business. The Indian government had earlier tried to bring in Taiwan Semiconductor Manufacturing Company and United Microelectronics Corporation for chip manufacturing in India. One wished the government disclosed the names of companies which submitted EOIs and the current status of their proposals.
According to the India Electronics and Semiconductor Association (IESA), semiconductor consumption in India was worth US$21 billion in 2019, growing at 15.1 percent, annually. The country badly lags in semiconductor wafer fabrication (FAB). Notably, semiconductor FAB units require huge investments, gallons of water for production, uninterrupted electricity supply, high operating costs, and frequent technology replacement. This could be a reason why India chose to focus rather on its technical competencies in R&D, design, etc. due to its talent pool in IT design and R&D engineers. The Indian semiconductor design market was projected to grow by a CAGR of 29.4 percent from US$14.5 billion in 2015 to US$52.6 billion in 2020. The R&D capabilities in very large-scale integration (VLSI) and chip design are showcased by the Centre of Excellence in Nanoelectronics at Indian Institute of Science, Bangalore, and the Indian Institute of Technology, Bombay. Greater Noida in Uttar Pradesh and Prantij in Gujarat are two proposed locations for commercial manufacture of FAB.
The massive worldwide chip shortage since 2020 has impacted a whole range of industries. According to Goldman Sachs, as many as 169 industries, including automobiles, computers, medical equipment and other electronic devices, are facing a chip crunch. The situation got amplified by the pandemic, which disrupted both supply and demand. Towards the 2019 end, the Semiconductor Industry Association (SIA) projected an industry growth rate of 6.3 percent in value terms for 2021. It has since raised this to 25 percent — the highest growth in the last six years. A McKinsey analysis shows that making advanced chips is more expensive.
However, making earlier-generation chips isn’t cheap either. Existing facilities are expanding capacities. Supply will eventually catch up, but it will take time. Recently, Foxconn, which supplies to Apple, said chip shortages could last till the second half of 2022. Infineon, a major supplier of chips to the automobile industry, does not see supply catching up with demand “on a broader scale within 2022″. Marvell Technologies, another chipmaker, said it could extend even beyond 2022. Chip manufacturing involves a complex supply chain spanning the globe. The same chip may even cross the same national border multiple times in the production process. The large supply gap raised the prices of chips and, resultantly, the prices of products using chips.
The belated Indian government initiative seems to have come at an odd time. The global semiconductor manufacturers are expected to be more busy to invest funds to jack up their existing production than look for greenfield projects in another country irrespective of the nature of production incentives offered and size of the market. India is the world’s second largest user of smartphones (440 million). China is the biggest (912 million). The US is third-placed (270 million).
India still has a big growth potential due to relatively low smartphone penetration rate. Similarly, India is the world’s fifth largest producer of passenger cars (4.51million) behind China (25.72 million), the US (10.88 million), Japan (9.68 million) and Germany (4.66 million). While China, the US, Japan and Germany are among the world’s top manufacturers of semiconductors, India is struggling to find one. India’s lop sided industrial policy and lack of entrepreneurs in capital intensive, high technology manufacturing industry are primarily responsible for the poor state of semiconductor production facility in the country. Finding genuine foreign investors in semiconductor production in India at this stage does not look easy. (IPA Service)