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Published on: April 19, 2021, 2:41 a.m.
India's hunt for semiconductors
  • Have we missed the bus in manufacturing semiconductors?

By Rakesh Joshi. Executive Editor, Business India

A recent news report by Reuters created a flutter in business circles: India is offering more than $1 billion in cash to each semiconductor company that sets up manufacturing units in the country. Such cash hand-outs, even for a government which goes by its own whims rather than the set rules, are rare. The agency quoted an unnamed government official saying that the government will be a buyer and there will also be mandates in the private market (for companies to buy locally-made chips). The idea, it was explained, was to build on India’s success in the smartphone assembly industry and strengthen the entire electronics supply chain. 

Following the success of mobile manufacturing in India, now only second to China, the Modi government believes it is time to set up chip fabrication companies in the country. Indian engineers are said to be good in semiconductor design but the country lags far behind others in manufacturing chips. The Modi government is now trying to rectify the situation. However, this isn’t the first time India is trying to build semiconductors. “We have missed every bus instead of growing step by step,” an observer puts it.

India has been goaded into action by the post-Covid crunch in semiconductors, which hit an array of industries after production resumed in factories last year, after the lifting of lockdowns imposed to fight the pandemic. Indeed, as economies worldwide started recovering from the pandemic-hit lows, they had no idea that another challenge was waiting for them. From electronic appliance makers to car manufacturers and mobile makers – all had to hold back the production after the $450 billion industry for semiconductors got ravaged by the after effects of the Covid-19 pandemic.

A massive surge in demand for consumer electronics, globally, due to work from home practices adopted by firms and a sharp uptick in personal vehicle sales amid the virus fear caused the crisis. Bulk orders placed by Chinese smartphone maker Huawei to circumvent a ban imposed by the US also crippled the supply of essential components, including chipsets, to smartphone makers. In India, operations of domestic mobile set manufacturers like Lava and Micromax almost stuttered to a halt after their chipset supplier MediaTek, a Taiwanese company, ran out of stock. The acceleration of global 5G rollouts was also a contributing factor.

The shortages exposed the myth of India’s self-reliance which began when the Indira Gandhi government set up the Semiconductor Complex Limited (SCL), which started a fabrication unit in Chandigarh in 1983. However, a mysterious fire in 1989 knocked out the fabrication unit (fab) until 1997. The cause of the fire is still unknown, but there are suspicions of arson, since SCL was designing and developing technology for the military at the time. India's only major VLSI (very large-scale integration) fabrication facility was once eyed by global players like Motorola, STMicroelectronics and Matsushita. But government delays in finding a private partner or disinvesting the company resulted in lost opportunities.

“Potential partners cannot wait for long. The proposal for a joint venture in design, for instance, could have given SCL a path into the global market. For a country with a growing design services industry, SCL is also hampered by its inability to retain experienced engineers. Pay revisions at SCL were scheduled to kick in during 1997, but impatient engineers began leaving for design houses in India or overseas at salaries that begin 150 per cent above those paid by the fab,” recalls a former senior executive in SCL.

Successive governments wanted to rope in Intel but the American major refused to part with its latest generation technology. Intel was always willing to give technology that was one or two generations old. India wanted the latest, so Intel went to Malaysia. Texas Instruments recognised the value of India for global research and development (R&D) as early as in 1985. Attracted by the country's engineering talent, it established an R&D centre in Bengaluru, the first global technology company to do so. While chip makers like TI have been eyeing the growing local market in India, they had no plans to set up a manufacturing base here, primarily because a chip making facility or a fab is a very expensive proposition running into several billions of dollars.

Domestic efforts too faltered. In 2006, Bengaluru-based SemIndia signed a contract with the Andhra Pradesh government to set up a wafer manufacturing unit for which, it was allocated 1,200 acres of land, but the $3 billion project could not take off. The government suffered a loss of Rs300 crore. 

For some time now, it has been reported that a consortium of investors led by Abu Dhabi-based fund Next Orbit Ventures has reportedly shown interest in setting up fabs in Andhra Pradesh and Gujarat. In 2017, Next Orbit Ventures announced the launch of $2 billion fund for building semiconductors and electronics fab ecosystem in India. Next Orbit then said that it intends to raise $1.5 billion from the Gulf region as feeder fund, the remaining $500 million has already been secured by Next Orbit Ventures Fund II from a consortium of investors involving both the Indian government and UHNIs. Later, it signed agreements with technology providers UMC (Taiwan), AMD (US), TowerJazz (US) and Centrotherm PV (Germany) as technology licensees for its projects. Yet the project is yet to materialise.

In the past, India’s efforts to woo semiconductor players were deterred by India's wobbly infrastructure, unstable power supply, bureaucracy and poor planning. As such, India finds itself in a not-too-happy position in this regard. While it has a decent chip design talent, it never built up fab capacity. The ISRO has a fab foundry and the DRDO has one too. But they are primarily for the requirements of the respective organisations and also not as sophisticated as the latest in the world.

Tata too wants to chip in

Hence, the renewed government push to lure chipmakers to set up manufacturing facilities following the success of the smartphone industry. Moreover, domestic conglomerates such as the Tata Group, which have also expressed interest in moving into electronics and high-tech manufacturing, could also be won over. 

In December last year, Electronics and IT minister Ravi Shankar Prasad met Sanjay Mehrotra, CEO, Micron Technologies, the US-based memory chipmaker and a major supplier to Apple. Micron agreed to partner the government in setting up a Centre of Excellence in memory and storage systems in India. Micron has front-end fabs manufacturing facilities in Singapore, Japan, Taiwan and the US. Its back-end manufacturing facilities are in Taiwan, Malaysia, Singapore, and China. Globally, there are only a handful of companies that actually do front-end leading-edge manufacturing at scale and Micron is one of them.

The dilemma of Micron, which plans to spend $9 billion this year, is the same as that of other chip majors. It shows the difficulty for semiconductor companies that choose to continue to make their own chips in multibillion-dollar fabrication plants. When demand shows, the plants are idled, or slowed to make fewer chips, but the cost to run them remains the same.

The meeting almost coincided with the Ministry of Electronics & Information Technology (MEITY) inviting expressions of interest for setting up or expanding existing semiconductor wafer or device fabrication facilities in the country or even semiconductor fabs outside India. According to officials, the response to the EoIs, with the deadline for these proposals now being extended up to 30 April, has been ‘good’ and shows “that we are really serious now”. V.K. Saraswat, former head, DRDO & now member, Niti Aayog, says that previous attempts to establish chip fabs failed because the government’s policy was to reimburse costs only after the private sector set up a project. “The government has realised that there is no way other than make upfront investments.”

Raghav Gupta, investment specialist, Invest India, the promotion and facilitations agency for investors, adds that no successful semiconductor ecosystem has come up anywhere in the world without significant government support. However, as the Reuters story said, "how to disburse the cash incentives has yet to be decided and the government has asked the industry for feedback.” The global majors being targeted include Taiwanese leaders Taiwan Semiconductor Manufacturing Co (TSMC), VIA Technologies Inc and United Microelectronics Corporation; US giants Intel, Micron Technology Inc, NXP Semiconductors, and Texas Instruments; and Japanese players Fuji Electric Co and Panasonic; apart from European players as well. 

But, will the government’s strategy work this time? Part of the problem has been investment required and the technology that needs to be mastered. The latest TSMC state-of-the-art fab unit costs over $13 billion to build. Even smaller and less sophisticated foundries would require several billion dollars of investment. Fab plants also require a lot of land, clean water, stable power and a highly skilled workforce. Above all, fab companies look at the long term – 10 to 15 years –when deciding on geography. They need policy stability, assured demand and long-term incentives.

Industry observers point out that many pieces of the jigsaw have been falling in place for some time now to form the ecosystem required to manufacture semiconductors within the country. Californian product engineering company INVECAS has planned to invest in design centers in Bengaluru and Hyderabad over the next few years. German semiconductor firm Infineon Technologies has partnered with the non-profit National Skill Development Corporation (NSDC) to impart education and training regarding semiconductors to young talents for the purpose of developing India’s electronics manufacturing ecosystem.

US semiconductor company Freescale merged into NXP Semiconductors in 2015. US engineering firm Aricent acquired Bengaluru’s chip design services company SmartPlay for $163 million, making this the largest acquisition in the space in India. For the development of trade and technical cooperation in the semiconductor industries between India and Singapore, India Electronics and Semiconductor Association (IESA) and the Singapore Semiconductor Industry Association (SSIA) have signed a memorandum of understanding.

On the policy front, to give a boost to the semiconductor industry, the Union Budget 2017-18 had increased the allocation for incentive schemes, such as the Modified Special Incentive Package Scheme (M-SIPS) and the Electronic Department Fund (EDF), to $111 million. To ensure further investments in the industry, create employment opportunities, and reduce dependence on imports by 2020, the government amended the M-SIPS by approving new incentives for investors, worth $1.47 billion.

The federal government has set up an empowered committee for manufacturing in high technology areas, which will be headed by the minister of Commerce and Industry, and notable people from the Indian industry, including Tata Sons chairman N. Chandrasekaran, Bharat Forge Chairman Baba Kalyani, Mahindra Group managing director and CEO Pawan Goenka, Zoho Corp CEO Sridhar Vembu, and semiconductor expert Anshuman Tripathi. In 2016, an electropreneur park was inaugurated at the University of Delhi’s (DU) South Campus to incubate 50 early stage start-ups and lead to the creation of at least five global companies over a period of five years. The government has approved a Scheme for the Promotion of Manufacturing of Electronic Components & Semiconductors (SPECS) and a Production Linked Incentive (PLI) scheme for 13 critical sectors, such as telecom, automobiles, etc. 

State governments have also pitched in. The government of Telangana has planned to launch T works, India’s largest prototyping centre, in Hyderabad for the purpose of acting as a prototyping centre for semiconductors. The government of Gujarat has planned to set up a new electronics manufacturing hub in the state, following the launch of its electronics policy in 2016, and is expected to generate around 500,000 jobs in the electronics sector in the next five years. But it is MEITY’s proposed push to provide the initial capital that is meant to attract more private players and push India to become a global hub for semiconductors.

The DNA of new age gadgets

What exactly is a semiconductor and why is it in demand suddenly? At the core of any electronic device is the processor built from materials which have conductivity between conductors (generally metals) and insulators (such as most ceramics). Semiconductors can be pure elements, such as silicon or germanium, or compounds such as gallium arsenide or cadmium selenide. For example, temperature sensors used in air-conditioners are made with semiconductors. Rice cookers cook rice perfectly because semiconductors control the temperature precisely. In short, semiconductors form the DNA of a wide variety of new-age gadgets like smartphones, computers, industrial equipment and cars. They are also sought for emerging markets of AI, computing and advanced wireless networks.

A chip manufacturing plant is a resource-intensive task but ultimately drives investment from various companies who use these wafers to make processors, GPUs, mobile SoCs and a lot more. India heavily relies on Taiwan for semiconductors; so, does the rest of the world. But a country like India has the labour to support a chip plant. 

Governments across the world are subsidising the construction of semiconductor plants as chip shortages hobble the auto and electronics industries and highlight the world's dependence on Taiwan for supplies. The Taiwanese semiconductor industry evolved from being job-shops for other firms into a multibillion dollar industry. 

According to TrendForce, the global market intelligence firm, TSMC commanded 54 per cent of the global foundry revenues of $86.65 billion in 2020. Taiwan drew in 64 per cent. Taiwan (which China regards as its province and wants the world to avoid dealing with it as a sovereign entity) is being courted for its capacity to make leading-edge computer chips. The action centres around TSMC, the world’s largest foundry and go-to producer of chips for Apple Inc, smartphones, artificial intelligence and high-performance computing. Taiwan’s role in the world economy largely existed below the radar, until it came to recent prominence as the auto industry suffered shortfalls in chips used for everything from parking sensors to reducing emissions.

With global carmakers including Volkswagen AG, Ford Motor Co and Toyota Motor Corp forced to slow down production and idle plants, Taiwan’s importance has suddenly become too big to ignore. The US, European and Japanese automakers are lobbying their governments for help, as did SIAM with the MEITY early this year. They all wanted their governments to persuade Taiwan and TSMC being to step in and fill the breach. Though TSMC opened an office in Bengaluru in 2007, its primary mission is to locally support existing TSMC customers in North America, Europe and Asia.

India accounts for 5 per cent of global semiconductor demand. But, just how important this component has become is evident from the fact that the country’s demand for 28 nm (a measure of the size of transistors in a chip) semiconductor nodes and higher ones are in excess of $25 billion. Experts believe that India’s best opportunities are in what are called compound semiconductors those made of two or more elements, like allium nitride, allium arsenide, silicon carbide.

These are used in a variety of media products, and these fabs cost much less set up than the traditional fabs. If India progresses in this direction, surely in the coming few years, India could indeed setup a semiconductor plant, which in turn will attract companies to invest in the soil. In a fast pacing digital world, this could be a game-changing move, if India somehow manages to do things in a right way possible.

However, aware that any large-scale dependence on Taiwan would be dangerous, India like the rest of the world is thinking anew. TSMC’s chip factories could become collateral damage, if China were to make good its threats to invade Taiwan, if it moves towards independence.

New urgency

Taiwan’s grip on the semiconductor business – despite being under constant threat of invasion from China – also represents a choke point in the global supply chain that’s giving new urgency to plans from Tokyo to New Delhi and Washington to Paris to increase self-reliance. Last year, Chancellor Angela Merkel of Germany and President Emmanuel Macron of France discussed the potential for shortages and agreed on the need to accelerate Europe’s push to develop its own chip industry. The European Union aims to bolster the bloc’s ‘technological sovereignty’ through an alliance armed initially with as much as E30 billion ($36 billion) of public-private investment to raise Europe’s share of the global chip market to 20 per cent (without a target date) from less than 10 per cent now.

The US, under the Trump administration, had exploited the supply pinch to deny Beijing access to technology. By banning access to all US chip technology including design, it was able to cut off the supply of semiconductors from TSMC and other foundries to Huawei Technologies, hobbling the advance of China’s biggest tech company.

It also negotiated with TSMC to establish a $12 billion chip fabrication plant in Arizona. South Korea’s Samsung Electronics Co is set to follow, with a $10 billion facility in Austin, Texas. The ‘CHIPS for America Act’ introduced to Congress last year aims to encourage more plants to be established in the US News that Intel Corp, the one-time industry leader, was considering outsourcing production of some chips to TSMC under its former CEO underscored the need for a US player that can fabricate at the leading edge.

India also wants to establish reliable suppliers for its electronics and telecom industry to cut dependence on China following border skirmishes last year. Chips made locally will be designated as ‘trusted sources’ and can be used in products ranging from CCTV cameras to 5G equipment. The government estimates it would cost $5-7 billion to set up a chip fabrication unit in India and take 2-3 years after all the approvals are in place. Besides the cash handout, New Delhi is also said to be willing to offer companies concessions, including waivers on customs duty, research and development expenses and interest free loans.

Chip production is concentrated in the Asia Pacific region – Taiwan, South Korea, Japan, China and Singapore. Chip fabrication plants are running at full capacities but many analysts predict the shortage could go on till 2022 or longer because chip demand in every device is going up.

The chip business is segmented into integrated players such as Intel that design and manufacture their own chips; chip design companies such as Qualcomm; and pure chip fabrication foundries, such as Taiwan Semiconductor Manufacturing Co (TSMC), Global Foundries of the US or Semiconductor Manufacturing International Corporation (SMIC) of China. Some companies like Samsung design chips but also have huge fab capacity for other designers.

Chip nationalism

Chip nationalism – where countries with chip capacities are trying to ensure that they tie-up supplies and stocks for their requirements first – is going to create additional problems for those that do not have their own production facilities.

In the US, both Republicans and Democrats are worried enough about the chip shortage to propose a law that will allocate billions of dollars to increase development and manufacturing of chips in the nation and reduce outside dependence. President Joe Biden's recent meeting with CEOs of chip companies and auto giants was a step in this direction. Though the US has a lot of production capacity, its demand outstrips its supplies and lately, it has depended heavily on global suppliers in South Korea, China and Taiwan.

In China, the government is ramping up capabilities too. Till recently, China was considered to be lagging behind the US when it came to chip designs. And it was also behind Taiwan, South Korea and the US in terms of sophisticated fabs that churn out the most advanced chips. China has many foundries but Taiwan and South Korea’s newest fabs are far more advanced.

One thing that has turned in India’s favour is the growing consumption. While India currently accounts for 5 per cent of the world’s chip demand, the country’s consumption is growing at 25 per cent per annum. This could be attractive to a global fab manufacturer. But that alone might not be enough. The government needs to look at chip fabrication as a strategic industry where it needs to get involved and invest in, just as China is doing.

While the government plans to reduce its business footprint by divesting off most non-strategic Public Sector Enterprises (PSEs), it needs to remember that the original reason for setting up government-owned units in any country has been the need to build capacity and expertise in areas where the private sector was either unwilling or incapable.

The DRDO and ISRO foundries only cater to their requirements. The government could look at using one of the other PSEs – say, Bharat Electronics Ltd or Hindustan Aeronautics Ltd – to set up a foundry with the help of a global major. Allowing management a free hand in a joint venture where the global major has brought in technical expertise, as was done when Maruti was originally set up and providing long-term policy stability along with proper incentives could well lead to success where earlier attempts failed. Maybe the PSEs can finally play a role that will redeem their image.

India is only now understanding what the US, China, South Korea and Japan have long known – that being entirely dependent on global supply chains for something as critical as chips, which are at the heart of all modern machines, is not a wise policy. Better late than never!

Projects encouraged

Category A: Well-established integrated device manufacturers (IDMs)/foundries/ Indian company or consortium with Indian Industry partner

Having state-of-the-art mainstream complementary metal-oxide-semiconductor (CMOS) technology nodes for fabricating processors, memories, analog/digital/mixed signal integrated circuits

Desirous of setting up/expanding existing semiconductor fabs in India (preferably with a node size of 28 million or lower, wafer size of 300mn and a capacity of 30,000 WSPM or more)

Category B: Well established Integrated Device Manufacturers (IDMs)/foundries/ Indian company or consortium with Indian Industry partner

Having state-of-the-art compound semiconductor-based emerging technologies for fabricating high frequency/ high power/opto-electronics devices

Desirous of setting up/expanding existing semiconductor fabs in India (preferably a wafer size of 200 million or more)

Category C: Indian Companies/Consortia interested in the acquisition of semiconductor FABs outside India

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