Semiconductor push: Tapping global expertise & providing infrastructure can make chip-making the ramp for India’s manufacturing growth

In 2014, the Centre announced its Digital India initiative, comprised of nine “pillars.” Most of the focus in its formulation was on issues related to e-governance, but one of the pillars was electronics manufacturing. It has taken several years, but there is finally a promise of significant progress. In the interim, the Covid pandemic accelerated the already increasing importance of information technology for every economy, both advanced and developing. Aside from the kinds of economic restructuring resulting from the pandemic, as the world moves towards alternative sources of energy and modes of transport (particularly electric cars), the demand for digital technology tools will also increase more rapidly.

As part of its recent, more wide-ranging PLI scheme, the Centre announced incentives of Rs 2.3 trillion in December 2021, specifically for an “India Semiconductor Mission.” Semiconductors, known colloquially as chips, are an obvious focus area within the electronics sector. A recent McKinsey report estimates that the total market for semiconductors will grow at 6-8% a year for the next decade, even after a jump of 20% in 2020-21. A third of the government’s commitment is being allocated for the next six years, and the lure of such incentives appears to be jump starting new efforts.

In February, Vedanta, an Indian mining conglomerate, signed a deal with Foxconn, a major chip manufacturer and supplier to Apple. Arguably, becoming a significant chip manufacturer will not be an easy task. The incentives needed from the government may ultimately need to be much larger than the initial commitments. Countries like South Korea and China have spent much more, without achieving global leadership or establishing a presence in the more valuable and complex segments of the semiconductor spectrum. Indeed, an argument has been made that India should focus on chip design, where it already has an important global presence. That is what Israel has done, for example. However, Israel’s population is less than 10 million, and it does not have the need to create a large number of new jobs.

In any case, the two objectives—expanding India’s presence in chip design and in chip manufacturing—are not mutually exclusive. One might even argue that they can be complementary. A few decades ago, chip design and manufacture were typically done within vertically integrated firms. Even without that integration, geographic proximity can promote synergies between design and manufacturing. India’s need to create more “good” jobs is so great that making a push in more than one sector also makes sense. Chip manufacturing might also be complementary to manufacturing that mostly involves assembly, including an increasing number of products that use semiconductors whether they be advanced microprocessors or basic memory chips. And India is large enough to have its own internal production networks, as components of regional or global networks.

The case of Japanese car makers illustrates several points that are relevant for India’s strategy. Japan’s goal of becoming a globally significant automobile manufacturer was initially met with scepticism, but the justifications in terms of high demand growth, large market size, and important economy-wide benefits of learning by doing were ultimately validated. The process took decades, and global events like the 1970s oil shocks helped Japanese carmakers in the US market, but predictable trends are already on the side of India making a push in semiconductor manufacturing. The world is in a very different place than in the 1980s, when India’s attempts to manufacture computer hardware made little headway, as is India’s situation—after decades of success in software, it has gone from basic quality assurance and testing to high level software engineering. The promise can also be seen in the composition of a government advisory committee announced on April 5. The members are information technology leaders from academia and business, and include representation from those who are India-based, and the diaspora.

And of course, the diaspora in technology-related areas maintains strong connections with India. For example, one member of the committee, Vinod Dham, is the founder of Ind-US Venture Partners. Much earlier in his career, he played a key role in the development of Intel’s Pentium microprocessor, which embodied significant advances in chip design three decades ago.

All this bodes well for India’s semiconductor mission. There will be significant challenges and the Centre has to be prepared for a long haul. But if global expertise can be tapped quickly and appropriately and all aspects of the needed infrastructure can be provided, chip making could be the ramp that allows Indian manufacturers to grow, providing important components for other products, such as cars or medical devices.

A final benefit to note is that even for relatively commoditised segments of the semiconductor market, the value-to-weight ratio is relatively favourable, meaning that bottlenecks in roads and ports are less likely to hold back growth. Of course, if India is to achieve the double-digit growth that it desperately needs, those bottlenecks must still be overcome. But chip manufacture, despite its challenges, has practical as well as strategic advantages for India in its current situation. Financial Express