India plays catch-up in global chip race

Despite a $10 billion incentive package, the country is competing with rich countries offering bigger subsidies, markets and efficient ecosystems to attract investments

Last week, Prime Minister Narendra Modi made a persuasive pitch to global giants to help make India one of the key partners in the global semiconductor chain backed by a new supportive policy. His virtual address inaugurated the three-day Semicon conference organised by the Ministry of Electronics and Information Technology in Bengaluru. The conference included the who’s who of the business — Intel, Micron Technology, Globalfoundries, TSMC and Cadence.

All of them agreed that India has the potential to become a global chips powerhouse. Yet, none of them made formal investment commitments. The reality on the ground is that there is a race between the US, EU and Japan with incentives to get semiconductor companies to set up fab plants in their respective countries. India is just another entrant to that contest. And the news is that more countries will sign up — among them Brazil and Canada.

Taken together, the chip manufacturers are projected to invest $150 billion this year, according to Semiconductor Industry Association (SIA), the global industry body, to create and expand capacities in their home or other markets to meet the global chip shortage. The top destination is the US, which is keen to regain its dominance (it now accounts for just 12 per cent share of global chip manufacturing volumes) that it lost to Taiwan. Last year, the US grabbed half the new investments in this space.

TSMC, the world’s largest chip contract manufacturer, is investing $44 billion this year and that includes $12 billion in the US. Samsung is making its largest fab investment in the US for $17 billion. Intel is investing $20 billion in the US but also plans to splurge $80 billion in Europe, which will include manufacturing facilities in Ireland, Italy, Poland, Spain and an R&D centre in France.

So, what is India offering? Just four months ago the government offered a $10 billion incentive package to create a semiconductor ecosystem straddling various areas. These covered at least two fab and display plants each (20-50 per cent of the project cost would be funded by the government in line with global trends), 15 Outsourced Semiconductor Assembly and Test (OSAT) facilities and compound semiconductor chips (such as those that control your charger) facilities, plus incentives for at least 20 domestic design companies through a design-linked incentive scheme. Minister of Communications Ashwini Vaishnaw stated that government funding would never be an impediment.

The scheme has received some responses. There is Rajesh Exports, a gold refining-to-jewellery retailer, which wants to build a fab plant as part of its diversification into high-tech businesses. Then there is ISMC, a consortium led by a venture fund that has roped in Tower Semiconductor (which Intel is acquiring) and is talking to West Asian sovereign funds. And there is Sterlite, which has Foxconn as an equity partner for a fab plant (it has also applied for setting up a display plant).

At Semicon India, Vaishnaw acknowledged that developing a semiconductor industry ecosystem is like a “marathon”. The $10 billion incentive scheme is impressive, but it does not match competing schemes from other countries with larger captive markets. India is not even in the list of top ten in market share of chips.

Japan offers a classic example of the marathon. The country started wooing TSMC in 2019 when a partnership was signed with the University of Tokyo to develop leading-edge semiconductors. TSMC then announced that it would set up a research centre in Tokyo. Last year, the Japanese government announced a $6.8 billion package to support the domestic semiconductor industry. TSMC has signed a joint venture with Sony to invest $7 billion in a chip plant and is being offered subsidies worth $3.47 billion.

The US announced an aggressive incentive package of $52 billion for chip manufacturing. It is an attractive market because it controls 47 per cent of global chip sales.

Last year, the government of South Korea, the world’s second-largest chip manufacturer, also wanted its companies to grab a larger share of the semiconductor market by expanding capacity in the country. Last year, it announced incentives of $55-65 billion over three years to chip makers such as Samsung, according to SIA. It also is the second largest chip market after the US in sales (20 per cent).

Even China, which has been pushing for “self-sufficiency” since 2018, a process that has been hastened by the trade war with the US, will be doling out $150 billion in incentives till 2025. And the EU last year declared it wants to double its share of chip manufacturing to 20 per cent by offering incentives of $20-35 billion.

Opinion is divided on India. Should the country straddle the entire value chain or focus on becoming a global winner in one segment of the global supply chain? “Atmanirbhar does not mean you do everything, especially in semiconductors where no one can. The focus should be to concentrate in the areas where we already have strength and build that up on a global scale,” said a senior executive with a global chip maker.

Chip design is one such area. Nearly 90 per cent of the global semiconductor companies have a design footprint in India. And industry estimates show that 2,000 chips are designed annually in the country. Intel’s design centre in Bengaluru — the second largest in the world — is working on key global projects. On the flip side, most of the patents lie with the global companies. And despite the skills available, a vibrant home-grown design ecosystem does not even exist. “We don’t even have 10 homegrown design companies and their total revenues are not more than $30 million. There is capability to build many unicorn start-ups in this space and India can become a global hub for design with patents in India. But the government has to do much more than a design-lined incentive scheme, that’s just the beginning,” said the CEO of a small design company.

Chip manufacturing is a complex business and many experts said the talent and expertise for making chips has to be nurtured. Also, because of huge demand there is a shortage of machines with waiting lists of 18-24 months, so a chip plant is at least three to four years away. Visible infrastructure such as uninterrupted water, power and logistics are hard to guarantee in India. Indian foundries will also find it challenging to convince fabless electronics manufacturers to shift part of their contracts to them. That is because fabless players (such as Qualcomm) find it cost-effective to consolidate their global volumes to well-established vendors like TSMC.

Satya Gupta, advisor to the Indian Electronics and Semiconductor Association, suggested that “India should focus first on getting memory chip players, because unlike in foundry, in logic chips you directly deal with the end buyer and not with fabless players as an intermediary”.

Vaishnaw said the country will need at least 10 fab plants. What he might need first is for just one global major to come in, just like Apple Inc for the government’s production linked incentive scheme for mobile devices, and set the ball rolling.

Many experts said the talent and expertise for making chips has to be nurtured. Also, because of huge demand there is a shortage of machines with waiting lists of 18-24 months