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Mint Explainer: Why India wants to get into the semiconductor game

This is not India’s first attempt at building a domestic manufacturing base for semiconductors. Photo: Bloomberg

What are semiconductors?

A semiconductor is a key component used in electronics that manages the flow of electric current in a device. These are used widely in electronic devices like cars, smartphones, healthcare equipment, aircraft and weaponry. These chips are manufactured through a complex process by chip fabrication plants, popularly known as fabs.

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There are various types of chips. More advanced semiconductors, like the 5 nanometre (nm) chip, are able to fit smaller transistors onto a silicon wafer and thus pack more processing power while using less electricity. These are typically used in cutting-edge technologies. Other chips, which have larger transistors, are said to be on the “lagging edge" and are used in consumer and everyday products.

Why does India want to get into the semiconductor game?

It is hard to point to a component that is more vital to the global economy. While India has notable strengths in designing chips, it does not manufacture semiconductors domestically and is largely import dependent. This became a problem during the pandemic where shortages in the supply of chips slowed down manufacturing for key industries like automotives. For example, carmakers in India alone had 7 lakh pending orders in December 2021 because of an inability to get their hands on the appropriate semiconductors.

Further, the ongoing tensions over the Taiwan straits have worried India. Taiwanese firms like TSMC control over 60% of the market for semiconductor manufacturing and hold an overwhelming 90% market share for advanced chips. With China looming over Taiwan, it has become increasingly clear that India’s 100% import dependence when it comes to chips is no longer sustainable.

What has India done so far?

India unveiled a 76,000 crore ($10 billion) Production Linked Incentive (PLI) scheme to attract major semiconductor manufacturing firms to India. As part of the scheme, the government will fund 50% of the project cost for the manufacture of all types of semiconductors domestically.

In recent months, Vedanta and Taiwanese manufacturing giant Foxconn signed an MoU with the state government in Gujarat to invest 1,54,000 crore to set up a plant in the state. Major firms like TSMC and UMC have also visited India to scout out possible locations for investments. Tata has also made forays into the semiconductor supply chain. It has invested in building a presence in the chip packaging and testing business while Tata Motors has tied up with a Japanese chip manufacturer to design and produce automotive chips.

What role can India play?

Outside of India’s strong contribution to the semiconductor design process, the existing semiconductor manufacturing proposals, like those from Vedanta-Foxconn, seek to build less advanced chips that are in the 28 nm range. For reference, the most advanced chips currently in production are the 5nm chips, with a 3 nm chip currently in development. Given the advanced technologies and massive investment required, India will likely find it hard to break into the advanced chip industry which is dominated by Taiwanese players like TSMC and South Korean firms like Samsung.

Tata’s investments in packaging and testing are also important. While less talked about given the focus on semiconductor manufacturing, the global chip packaging and testing sector is expected to reach a value of about $46 billion by the end of the decade. This represents a lucrative business opportunity.

What are the challenges?

This is not India’s first attempt at building a domestic manufacturing base for semiconductors. During the 1980’s India stole a march on Taiwan’s firms by setting up a state-owned semiconductor factory. This ambitious attempt sputtered to a halt after the factory caught fire. Later attempts stalled due to bureaucratic inertia. This is an error India will be keen to avoid this time around.

Given the delicacy and complexity of the manufacturing process, fabrication plants will also need uninterrupted supplies of water and electricity. Further, the Indian government and private industry will have to commit billions of dollars in investments over decades to constantly innovate in a rapidly evolving industry.

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