Introduction
- Recently, the Union Cabinet, under the leadership of Prime Minister Shri Narendra Modi, has approved the establishment of a new semiconductor unit in India.
- Kaynes Semicon Pvt Ltd will set up this unit in Sanand, Gujarat, with an investment of ₹3,300 crore.
- The unit is expected to have a production capacity of 6 million chips per day.
- This development is part of a broader initiative to establish semiconductor plants across India. Alongside Kaynes Semicon Pvt Ltd’s unit, the following semiconductor plants have also been announced:
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- Sanand, Gujarat: Two units by Kaynes Semicon Pvt Ltd and CG Power.
- Dholera, Gujarat: One unit by Tata Electronics.
- Morigaon, Assam: One unit by Tata Electronics.
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What are Semiconductors?
- Definition: Semiconductors are materials with electrical conductivity between that of conductors and insulators. Common examples include silicon, germanium (pure elements), and compounds such as gallium arsenide.
- Properties: They exhibit lower resistivity than insulators but higher than conductors. Their resistance decreases with an increase in temperature, unlike typical conductors.
Importance of Semiconductor Chips
Core of Modern Technology:
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- Semiconductor chips power nearly all modern electronic devices.
- For example, they are essential components in smartphones, laptops, and televisions.
- In automobiles, semiconductor chips manage everything from engine control to navigation systems.
- Medical devices like ECG machines and MRI scanners also rely on these chips for accurate diagnostics and operations.
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Foundation for Emerging Technologies:
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- Technologies like artificial intelligence (AI), 5G networks, and autonomous vehicles are highly dependent on semiconductor chips for processing large volumes of data in real-time.
- For example, Tesla’s self-driving cars rely on advanced semiconductor chips to process sensor data and make decisions on the road.
- Similarly, 5G networks use high-performance chips to support faster internet speeds and massive data handling.
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Highly Traded Product:
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- Semiconductors are among the top-traded global commodities, only behind petroleum and automobiles, with a market value of $500 billion annually.
- Companies like Intel, Samsung, and TSMC are major players that manufacture chips used across a variety of sectors.
- In 2021, the global semiconductor market grew by over 20% due to rising demand from industries such as automotive and consumer electronics.
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Enabler of Electronic Development:
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- Semiconductor innovation has allowed devices to become more compact, cost-effective, and efficient.
- For instance, modern smartphones, such as Apple’s iPhone or Samsung Galaxy, have powerful processors (such as the A16 Bionic chip in iPhones) that enable multitasking, high-quality photography, and smooth gaming experiences. This compact and powerful design is made possible by advanced semiconductor technologies.
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Transformative Impact:
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- The semiconductor industry drives advancements in diverse fields. For example, in aerospace, semiconductor chips are used in spacecraft systems, satellites, and communication devices.
- In healthcare, innovations like wearable fitness trackers and remote patient monitoring are possible because of semiconductor advancements.
- In renewable energy, chips are crucial for developing smart grids and efficient solar energy systems.
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Defining Features of Semiconductor Manufacturing
- Two Phases: Manufacturing involves the front-end fabrication and back-end processes like assembly and testing. Front-end fabrication is complex and concentrated among a few major players.
- Manufacturing Complexity: The process requires over 300 high-tech inputs, making it highly specialized.
- Global Supply Chain Concentration: The semiconductor supply chain is concentrated in a few countries, such as the USA, Taiwan, and South Korea. This interdependence increases vulnerability to disruptions.
- High Investment Costs: Setting up and maintaining semiconductor facilities requires substantial investments, with future industry investments projected to reach $3 trillion over the next decade.
- Revenue Distribution: A few top companies dominate each stage of semiconductor manufacturing, claiming 80-90% of the sector’s revenue.
Semiconductor Manufacturing in India
- R&D Presence: India has a strong research and development (R&D) presence in the semiconductor industry, with global tech giants such as Intel, Texas Instruments, Qualcomm, and Micron Technology establishing R&D centers in cities like Bengaluru, Hyderabad, and Noida. These centers focus on chip design, testing, and development.
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- For instance, Intel India plays a critical role in designing next-generation microprocessors, and Qualcomm’s Bengaluru center develops cutting-edge technologies for mobile processors.
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- Limited Fabrication: India has two semiconductor fabrication units (fabs) operated by government agencies, which are primarily focused on defense and space applications.
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- The Semiconductor Laboratory (SCL) in Chandigarh, run by the Department of Space, manufactures chips for space and strategic applications, while SITAR (Semiconductor Technology and Applied Research Centre) in Bengaluru, under the Defense Research and Development Organization (DRDO), develops chips for defense purposes.
- However, these facilities are not geared for large-scale commercial chip production, leading to a gap in the commercial semiconductor manufacturing sector.
- The Government of India has approved a proposal from Tata Electronics to build a mega semiconductor fabrication facility in Dholera, Gujarat, as part of the “Make in India, For the World” initiative. Tata Electronics, in partnership with Powerchip Semiconductor Manufacturing Corporation (PSMC), will invest INR 910 billion (~US$11 billion) in the project, which is expected to create over 20,000 skilled jobs.
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- Import Dependency: India is heavily dependent on imports for its semiconductor needs.
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- In 2020, the country imported semiconductors worth $15 billion, with 37% of these imports coming from China.
- This dependency impacts key industries, including consumer electronics and automotive sectors.
- For example, Indian car manufacturers like Tata Motors and Mahindra & Mahindra faced production delays in 2021 due to the global semiconductor shortage, as the country lacked domestic capacity to produce these critical components.
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- Growing Consumption: In 2022, the Indian semiconductor market was valued at US$ 26.3 billion and is projected to expand at a CAGR of 26.3% to US$ 271.9 billion by 2032. The consumption has increased because of rising domestic demand of Indian customers.
Global Race to Diversify Semiconductor Supply Chains
- Concentration Risks: Semiconductor manufacturing is concentrated in Taiwan and South Korea, making the supply chain vulnerable to disruption.
- Pandemic-Related Shortages: The pandemic caused significant supply disruptions, highlighting the risks of over-reliance on a few countries for production.
- Geopolitical Tensions: Conflicts like the Russia-Ukraine war have disrupted access to raw materials, such as neon, which is critical for semiconductor manufacturing.
- Potential Future Shortages: Tensions between the US and China have led to export controls, further threatening the global supply chain. This has sparked interest in diversifying production bases.
Significance of Developing India’s Indigenous Semiconductor Industry
Addressing Supply Shocks:
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- During the global semiconductor shortage, Hero MotoCorp and other automotive manufacturers had to reduce production due to a lack of chip availability.
- Similarly, electronics companies faced delays in product launches. Building domestic semiconductor manufacturing capabilities will ensure that key industries such as automotive, consumer electronics, and healthcare are not affected by supply chain disruptions in the future.
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Meeting Rising Demand:
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- With the rapid expansion of India’s digital ecosystem, demand for semiconductor-driven devices like smartphones and cloud-based servers is rising.
- For example, the growing popularity of online education platforms and work-from-home setups is pushing the demand for laptops, tablets, and networking equipment.
- Establishing local semiconductor manufacturing facilities will help meet this increasing demand domestically, reducing the reliance on imports.
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Employment Creation:
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- Indigenous semiconductor manufacturing will boost job creation, especially in skilled fields such as chip design, manufacturing, and assembly.
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Revenue Generation:
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- Reducing dependency on imported semiconductors will lower India’s import bill and create revenue streams through exports.
- For example, the development of solar panels and electric vehicles (EVs), which require advanced chips, presents opportunities for exporting locally manufactured components.
- Establishing a domestic semiconductor industry will enhance India’s ability to export these products, further boosting the economy.
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Enhanced Security:
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- With the increasing adoption of digital technologies in critical sectors like defense, telecommunications, and financial services, ensuring the security of semiconductor chips is crucial.
- For example, chips used in India’s defense communication systems must come from trusted sources to avoid the risk of espionage or sabotage.
- Locally manufacturing these chips will safeguard national interests by reducing dependency on foreign suppliers, especially in strategic areas like defense and communications infrastructure.
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Factors Favouring India on Establishing Itself As A Semiconductor Hub
- Skilled workforce: India leads the world with record number of Science, Technology, Engineering and Mathematics (STEM) graduates, offering the much-needed skilled workforce required in semiconductor manufacturing, design, research, and development.
- Cost advantage: India offers a substantial cost advantage for semiconductor manufacturing due to the following factors:
- Global supply chain diversification: The semiconductor value chain, traditionally dominated by the US, its allies, and China, is shifting due to pandemic disruptions and rising labor costs. India is becoming a key location for back-end assembly and testing, with potential for front-end manufacturing.
Government Initiatives for the Semiconductor Industry
India Semiconductor Mission:
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- The India Semiconductor Mission (ISM) functions as a dedicated division within the Digital India Corporation. Its main goal is to nurture a strong semiconductor and display ecosystem to position India as a prominent global player in electronics manufacturing and design. Under ISM, there are several schemes in place:
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National Policy on Electronics, 2019:
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- Aims to position India as a global leader in Electronics System Design and Manufacturing (ESDM) by promoting the development of key components like chipsets.
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Semicon India Program:
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- Allocates INR 76,000 crore to develop a semiconductor and display manufacturing ecosystem. In the interim Union Budget for 2024, India has raised the allocation for the Semicon India Program to be equal to Rs. 6,903 crore (US$ 833.7 million).
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Modified Semiconductor Fabs Scheme:
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- Provides fiscal support of 50% of project costs to attract investment for semiconductor fabrication.
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Electronics Manufacturing Clusters (EMC 2.0) Scheme:
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- Supports the creation of electronics manufacturing clusters and common facility centers.
- FDI Policy: Allows 100% foreign direct investment (FDI) under the automatic route in the ESDM sector.
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Production Linked Incentive (PLI) Scheme:
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- Offers financial incentives to companies manufacturing electronics components in India.
- Two Karnataka-based semiconductor firms, Saankhya Labs, a subsidiary of Tejas Network, and Sensesemi Technologies are latest beneficiaries approved under the Design-Linked Incentive (DLI) Scheme.
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Global Partnerships:
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- India and the European Union signed a Memorandum of Understanding (MoU) on November 24 concerning semiconductors, aiming to foster a resilient supply chain and promote innovation.
- The Cabinet has also approved an MoC regarding the Japan-India Semiconductor Supply Chain to build a stronger partnership between the two nations.
- India and Singapore have also signed agreements for a semiconductor ecosystem partnership.
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Challenges Facing India’s Semiconductor Industry
High Setup Costs:
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- Establishing a semiconductor fabrication unit requires massive investments, ranging from $5-7 billion.
- For example, TSMC’s (Taiwan Semiconductor Manufacturing Company) advanced fab facility in Arizona is estimated to cost $12 billion.
- Similarly, in India, the proposed fabs will require significant capital and infrastructure investment, making it a major challenge for the country to become a semiconductor manufacturing hub without substantial financial backing and subsidies.
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Bureaucratic Delays:
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- Setting up a semiconductor plant in India involves obtaining multiple clearances from various government departments, which leads to bureaucratic delays.
- For instance, Vedanta-Foxconn’s joint semiconductor venture in India has been delayed due to issues related to regulatory approvals and land acquisition. Such delays can discourage global companies from investing in India’s semiconductor industry.
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Power Supply Issues:
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- The manufacturing of semiconductors requires a 24/7 uninterrupted power supply, which is not consistently available in many parts of India.
- For example, regions like Uttar Pradesh and Bihar face frequent power outages, making them unsuitable for setting up semiconductor fabs.
- Reliable electricity is critical to ensure continuous production and maintain the precision required in chip fabrication.
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Technological Constraints:
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- The semiconductor industry relies on cutting-edge technologies, such as extreme ultraviolet lithography (EUV), which is expensive to license and requires specialized expertise.
- India lacks access to such advanced technologies, as the technology is primarily held by companies like ASML in the Netherlands.
- Acquiring these technologies would be costly and time-consuming, making it difficult for India to compete with established players in the industry.
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Structural Barriers:
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- India faces several structural barriers, including labor shortages, delays in land acquisition, and a lack of skilled workers for advanced manufacturing.
- For instance, despite the Production Linked Incentive (PLI) scheme aimed at attracting FDI, India’s electronics sector receives less than 1% of the total global FDI in semiconductors.
- The lack of skilled engineers for high-tech manufacturing and complex land acquisition processes are significant hurdles that need to be addressed to boost semiconductor production.
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Focus Areas for India’s Semiconductor Industry
- R&D Investments: India should prioritize research-intensive activities such as electronic design automation (EDA) and intellectual property (IP) creation.
- FAB Facilities for Advanced Chips: Setting up advanced semiconductor fabs will be key to India’s global competitiveness.
- Focus on Medium and Low-End Chips: With global attention shifting towards high-end fabs, India could benefit from specializing in medium and low-end chip production.
- Assembly, Testing, and Packaging (ATP): India can capitalize on its skilled, low-cost workforce to develop its capabilities in ATP, capturing more value in the supply chain.
Way Forward
- Increased Funding: Government support for research at technical institutes is essential. For example, IIT Madras developed the ‘Moushik’ microprocessor with financial backing.
- Sovereign Patent Fund (SPF): Fast-track the establishment of SPF to help acquire and license patented technologies.
- Domestic Procurement Support: Guarantee minimum domestic procurement for manufacturers to ensure demand for locally produced chips.
- Business Support: The government should encourage Indian businesses to acquire overseas semiconductor manufacturing units for immediate production gains.
- Focus on Back-End Manufacturing: India can initially focus on back-end processes like packaging and assembly, which require less capital and can lay the groundwork for full-scale manufacturing.
- State Cooperation: State governments must ensure reliable power, water supply, and land availability to attract semiconductor investments.