India's Semiconductor Dream: Is It Becoming a Reality?

Semiconductors have become the unsung heroes of the digital age. They silently power the devices that have become essential to our lives.

These tiny wonders are the backbone of everything from smartphones, computers, advanced medical equipment, and transportation systems. Without semiconductors, the modern world as we know it would come to a grinding halt.

And halt it did.

In 2021, the pandemic's impact on the manufacture of semiconductors in South Korea and Taiwan caused a shortage for semiconductors across the world. The constrained supply impacted industries ranging from automotives to gaming.

India too faced issues. In December 2021, Tata Motors announced it was experiencing a semiconductor shortage and that it would impact the deliveries of its cars. Other Indian automakers also expressed the same.

To tackle this shortage, the Indian government announced incentives for semiconductor companies in the same month. These incentives were a part of the Rs 760 bn Product Linked Incentive (PLI) scheme.

Following this, various companies including large conglomerates such as the Tata group and the Vedanta group expressed their interest in setting up chip facilities in India.

Taking the first step

In February 2022, Vedanta announced its plans to set up a semiconductor plant in a joint venture with Foxconn (Hon Hai Precision). The company was one of the first few participants in the government's PLI scheme.

Later that year, we wrote about how India could be a major semiconductor hub. Some companies like Vedanta were working towards making it a reality.

Here's what we wrote...

• In its first major step, the Vedanta-Foxconn JV has selected the state of Gujarat for its semiconductor project. The project will include display and semiconductor facilities near the largest city of Ahmedabad in the western state.
  
  It will invest Rs 1.5 tn in Gujarat. It will set up a fabrication plant with Rs 945 bn and a semiconductor fabrication and outsourced semiconductor assembly and test plant with Rs 600 bn.

Vedanta-Foxconn was not the only Indian-international collaboration to take place under the PLI scheme. There were two other applicants for to set up a semiconductor fabrication unit. These were ISMC (International Semiconductor Consortium) and the Interuniversity Microelectronics Centre.

The joint venture with Foxconn was Vedanta's second attempt to invest in the country's semiconductor and display ecosystem. Nearly five years ago, the company had announced, and later abandoned, its plan to set up a display manufacturing unit with an investment of US$ 10 billion (bn).

The joint venture has recently fallen through. However, the company's commitment to foraying into the semiconductor industry still holds.

Last week, the Vedanta group said it will acquire the semiconductor and display businesses from sister concern Twin Star Technologies ltd. This makes it the country's first company in the integrated semiconductor and display fab business.

The group also owns AvanStrate, the fourth largest manufacturer of glass substrate in the world. Glass substrate is used in packaging of semiconductors. The diversified natural resources major also has a presence in oil and gas, aluminium, zinc, power, copper, steel, and iron ore.

Foxconn, on the other hand, still has its eyes firmly set on India. The Taiwanese firm has reached out to large Indian business houses seeking a partner for its semiconductor manufacturing ambitions in the country.

Besides Vedanta, the Tata Group too has its hands in the mix.

The Tata Group is expected to begin semiconductor chip manufacturing in India soon. According to a media report, Tata Sons Chairperson, Natarajan Chandrasekaran, said Tata Group has plans to begin chip manufacturing in India through Tata Electronics.

That's not all. US-based Micron Technology plans to begin construction on a US $ 2.75 bn chip assembly and test facility in Gujarat next month.

This facility will enable the assembly and test manufacturing for both DRAM and MAM products. This will address demand from both the domestic and international markets.

While phase 1 is set to begin operations by the end of 2024, phase 2 of this ambitious project is likely to begin by the end of the decade. Once the facility becomes operational, Micron's proposed plant is anticipated to generate nearly 5,000 direct jobs and close to 15,000 community jobs.

Why India's semiconductor dream could be a reality

The global semiconductor value chain is dominated by the US, followed by Japan, South Korea, Taiwan, and the Netherlands. These nations are more aligned with the US even though China is the biggest customer.

As a part of the US-China trade war, the US had imposed export restrictions on high end chips. Following the US, Japan, and the Netherlands also did the same. Companies such as Intel, Foxconn, TSMC, NXP, and Qualcomm focussed on moving their units out of China.

While this placed pressure on Indian companies, it ultimately highlighted the need for domestic chip manufacturing.

On these lines, the government announced the Semicon India Programme under the India semiconductor Mission (ISM) in December 2021 for the development of semiconductors and display manufacturing ecosystem in India. The programme had a financial outlay of Rs 760 bn.

The scheme was, however, later modified in September 2022, considering industry feedback, to enhance its competitiveness, and relaunched as the 'Modified Semicon India Programme'.

Under the scheme, the central government will offer a 50% subsidy on fab units and that state governments would offer a 10-25% subsidy over and above the central grant.

Now as per a report by the Economic Times, the Union Cabinet is expected to approve another Rs 250 bn in schemes for semiconductor manufacturing. This will give a much-needed boost to the sector.

The Indian semiconductor market is expected to reach around US$ 55 bn by 2026 and US$ 85 bn by 2030, a big jump from the current US$ 27 bn.

These investments along with the China +1 policy, where global companies are finding alternate manufacturing locations to reduce their dependence on China, will help drive this growth and ultimately position India as a semiconductor hub.

The challenge ahead

The semiconductor industry in India is growing steadily, but it still faces several challenges that need to be addressed for further expansion and competitiveness on the global stage. Some of the key challenges include:

• Lack of skilled workforce - The semiconductor industry demands a highly skilled and specialised workforce. India faces a shortage of experts in semiconductor design, fabrication, and testing. Addressing this talent gap requires focused educational programs and training initiatives.
• Inadequate research and development: India has made progress in research and development. But the sector needs more investments as well as collaboration between academia, industry, and research institutions to foster innovation.
• Infrastructure and investment - Establishing semiconductor fabrication facilities (fabs) needs massive investments in infrastructure. Investments in chip manufacturing run into billions of dollars, while the market size is only around US$ 27 billion.

However, despite these challenges, the Indian government has shown commitment to bolstering the semiconductor industry through initiatives like the National Policy on Electronics and the Production Linked Incentive (PLI) scheme.

Addressing these challenges will not only strengthen India's position in the semiconductor market but also drive overall technological and economic growth in the country.

Should you invest in the semiconductor industry?

One of the main reasons to consider investing in semiconductor companies is the industry's potential for robust growth.

As technology continues to advance, the demand for semiconductors is likely to soar, driven by emerging technologies like 5G, artificial intelligence, and the Internet of Things. This could lead to substantial revenue growth for semiconductor companies in the long term.

However, the industry is at a nascent stage and could be volatile due to factors such as global supply chain disruptions, geopolitical tensions, and cyclical demand patterns. It's also highly competitive, with constant innovation leading to shorter product life cycles.

As with any investment, diversification is crucial. It's best to balance your portfolio with investments in other sectors to spread risk effectively.

In conclusion

The Indian semiconductor industry stands at the cusp of transformation, poised for significant growth and influence on the global stage.

The journey towards self-reliance in semiconductor manufacturing will be challenging, but it's essential for India's economic resilience and technological sovereignty.

By reducing reliance on imports and nurturing a robust semiconductor ecosystem, India can become a pivotal player in the global semiconductor supply chain.

The Indian semiconductor industry's growth will have far-reaching implications, fostering job creation, technology diffusion, and will enhance India's position in the global tech landscape.

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