Making semiconductor chips in India, for the world

India is ready to open its purse strings and subsidise as much as 40-50% of the cost of setting up semiconductor fabs, as the government renews its ambition to kickstart the sector after several failed attempts over the last two decades. Late last month, it once again invited applications from companies to set up fabrication plants and reportedly placed $1 billion on the table as subsidy for new investors.

Over the last few years, India has built up a huge domestic electronics manufacturing ecosystem that not only caters to domestic needs but also for exports, officials said. Chip manufacturing will complete the chain and add value to local output, which is largely assembly driven. India is becoming attractive to chip makers due to the ongoing global shortage of chips, the advent of Internet of Things (IoT) devices as well as a need to de-risk from China.

These positives notwithstanding, getting companies to commit $1 billion to $5 billion — the bare minimum for setting up a wafer plant — is challenging. Interested stakeholders are urging the government to decide quickly on existing proposals and firm up its incentive model. Soon after coming to power in 2014, the Bharatiya Janata Party-led National Democratic Alliance government realised that domestic manufacturing of semiconductors — which comprise 30% of the cost of all electronic devices including mobile phones — is crucial to building an electronics manufacturing ecosystem in India, which is heavily dependent on imports.Then Minister for Electronics and IT, Ravi Shankar Prasad, wrote to top corporations asking them to invest in semiconductor manufacturing, but the response was lukewarm.

Last month, however, Tata Group Chairman Natarajan Chandrasekaran revealed that the salt-to-software conglomerate is looking at the possibility of manufacturing chips. The market opportunity for high-tech manufacturing of electronics is close to $1 trillion, Chandrasekaran said, adding that the Tata Group had already set up a business unit to capitalise on the opportunity. “On rebalancing supply chains, India can significantly benefit from the geopolitical shifts that we are seeing,” he said, while speaking at the IMC Chamber of Commerce’s annual general meeting. The Tata Group has identified new focus areas such as 5G equipment manufacturing. The group is also believed to have brought in Randhir Thakur, president of Intel Corp.’s foundry division and a key aide to the chipmaker’s chief executive Pat Gelsinger, as independent director in Tata Electronics, along with Raja Manickam, cofounder of Bengaluru-based semiconductor engineering solutions provider Tessolve.

Soon after Tata Group’s announcement, top ministers including Finance Minister Nirmala Sitharaman and Commerce and Industries Minister Piyush Goyal said that the Narendra Modi government is committed to setting up semiconductor manufacturing units in the country.

Biggest Opportunity
There is a stark difference in India’s electronics manufacturing ecosystem compared to 2013, when the last attempt to bring semiconductor manufacturing into the country was made, said Satya Gupta, an industry veteran and former chairman of the India Electronics and Semiconductor Association (IESA).

“The Indian economy is much bigger in size, but the government has the right type of policies to increase manufacturing,” he said. The production-linked incentive (PLI) scheme, for instance, is comparable to world-class ones offered by countries such as Malaysia, China and Vietnam, and has driven significant investment into India, he added. The government’s approach is more consultative now and it has taken inputs from companies as it formulates the policy, Gupta said. “This time around, there is involvement of the commerce ministry, NITI Aayog, PMO, along with the Ministry of Electronics and IT, so the effort is much more concerted across the government on this,” Gupta, who is also co-chair-digital economy at FICCI, said.

India’s total demand for wafers in the financial year 2019 stood at 7.5 million units and is expected to reach 17.6 million units in the financial year 2025, according to a joint report by IESA and Frost & Sullivan released in April 2020.

Though the country has done well in electronics design and established itself as a design hub, commercial semiconductor fabrication is almost non-existent. Demand from sectors such as mobile devices, telecom equipment, information technology, office automation, industrial machinery and automobiles is tremendous.

“The absence of commercial semiconductor operations in India has caused the country’s electronics import bill to skyrocket due to burgeoning domestic demand,” the report stated.This interest from large corporates could be because of several reasons, including a realisation across the world that semiconductors are a strategic industry, requiring a strong local ecosystem across talent, manufacturing, and demand, said Rajeev Khushu, chairman of IESA.

With the global semiconductor crisis, it is taking anywhere between 20 and 52 weeks for chips to be available and all major corporations are impacted. “The chip shortage has shown how many businesses depend on chips—showing companies that there are strong business opportunities,” Khushu, who is also the head of government affairs at chip designer Texas Instruments, said. The global chip shortage has impacted the automobile industry the most, forcing automakers to temporarily close factories.

Fast-tracking The Process
The government is aware that the situation calls for quick action. It is in the final stages of putting out a Request for Proposal document seeking applications from companies after an Expression of Interest issued in December saw applications from the top 20 firms, including big ones from South Korea and Taiwan, the official said. The government is open to setting up both traditional fabs as well as new-age ones like Gallium Nitride semiconductor fabs that are cheaper.

A consortium led by Abu Dhabi based Next Orbit Ventures has already finalised plans to establish a semiconductor fab and has roped in tech partners from Israel and Taiwan along with some large Indian companies, which are willing to not only invest but also commit to purchasing the chips. The proposal is worth $3 billion. The plan will start with an analogue fab of 65 nanometres producing 40,000 wafers a month and move on to a digital fab, said Ajay Jalan, founder of Next Orbit Ventures. The consortium has zeroed in on Dholera Smart City in Gujarat. The state has given incentives such as land at 50% subsidised rates, and water and power at international rates.“Last time, the government promised to provide support on a reimbursement basis, but if it’s a $3-$5 billion project, it is not easy to raise that much money, demonstrate that the plant is in production, and then start getting the incentive,” Jalan said.Across the world, fabs have come up through upfront support from the government, he added. “All we are saying is that—we bring a dollar, and you bring a dollar,” Jalan said.

The industry is also expecting a higher quantum of subsidy and wants the government to act quickly on proposals to not miss the bus again. “It should have been done last year itself, but at least if it can be done this quarter, we may still have some hope. Israeli firm Tower Semiconductor has been keen on India for many years,” said Arun Mampazhy, an expert on semiconductor manufacturing and design.

Tower Semiconductor—the seventh largest foundry in the world in terms of market revenue —has already received offers from Italy and Singapore, he said. India may lose out if it delays further, as big chip makers such as TSMC, Samsung and Intel are likely to prefer countries where the infrastructure is ready. So, the country should not miss out on offers from second-tier foundries like Tower, he said. “The decision must be taken as soon as possible and if there is a need for PM (Modi) to step in, he should, for the sake of India’s future.” Financial Story