Context: The Union Government has disbursed around ₹1,645 crore in performance-linked incentives (PLI) for electronics manufacturers so far, as part of its efforts to bring in more of the electronics supply chain to India. More and more nations are trying to turn away from China’s dominance in the space, following geopolitical pressures to de-leverage themselves from supply chain vulnerabilities.
What are semiconductors?
A semiconductor is a material that allows electrical conductivity between a conductor and an insulator. Semiconductors are made from pure elements like silicon or germanium, or compounds such as gallium arsenide. Sometimes their conductivity is changed through doping.
In a pure semiconductor, such as silicon or germanium, there are few free electrons or holes (missing electrons) available for conduction.
However, when impurities are intentionally introduced into the semiconductor, a process called doping, the number of free electrons or holes can be increased.
They are used to make electronic devices such as transistors, diodes, and integrated circuits (ICs). Transistors, which are used to amplify and switch electronic signals, are made by combining multiple p-n junctions.
Integrated circuits (ICs) are made by creating complex arrangements of transistors and other components on a single piece of semiconductor material. Semiconductors chips are the thumbnail-sized building blocks of almost every modern electronic device from smartphones to connected devices in the Internet of Things (IoT).
Semiconductors have revolutionized the electronics industry and are essential components in nearly all electronic devices, from smartphones to computers to automobiles. Semiconductors make the devices more compact, less expensive, and more powerful.
For instance, mobile phones weighed about 2 lbs, cost around $4,000, and held a charge for only about 30 minutes of talk time during their initial phase. However today an individual can buy a smartphone for 5000 rupees that would give a 1-day charge.
Semiconductor manufacturing in India
The semiconductor chip-making process is complex and highly exact, having multiple steps in the supply chain such as designing software for chips and patenting them through core Intellectual Property (IP) rights. They help give computational power to devices. The global semiconductor industry is currently valued at $500-$600 billion.
The chip-making industry is a highly-concentrated one, with the big players being Taiwan, South Korea and the U.S. among others. In fact, according to a New York Times estimate, 90% of 5nm (nanometre) chips are mass-produced in Taiwan, by the Taiwan Semiconductor Manufacturing Company (TSMC).
Globally, the entire value chain has seeped in the interdependence between a handful of countries like the USA, Taiwan, Japan, China, and some European nations.
- India has done well in design and verification for the semiconductor industry. Most of the global semiconductor companies having an R&D footprint in India.
- However, 100% of our chips, memory, and display are imported into the country, 37% coming from China.
- Chips import bill is estimated to touch $100 billion by 2025 from $24 billion now.
- Although India has two fabs — SITAR, a unit of the Defence Research and Development Organisation (DRDO) in Bengaluru, and a semiconductor laboratory in Chandigarh. These build silicon chips for strategic purposes like defense and space and not for commercial use.
Why is the government encouraging semiconductor manufacturing?
- National Security: Semiconductors are essential components in many critical industries, including defense, telecommunications, power transmission etc that have implications for national security. Chips made locally will be designated as “trusted sources” and can be used in products ranging from CCTV cameras to 5G equipment.
- Strategic competition with China: Countries have spotted strategic value in cornering segments of the value chain for fabs, even as the sophistication and capital needed to run them have climbed to historic highs. China pulled ahead of Taiwan last year, in terms of share of global sales from fabs, according to a report by the Semiconductor Industry Association (SIA).
- It’s not just India that is wary of this dominance. The U.S. passed the CHIPS Act last August, providing upwards of $280 billion in subsidies and investments to manufacturers opening fabs and making semiconductors in the U.S. This has been combined with restrictions on the Chinese semiconductor industry.
- Geopolitical Benefits: driven by data and the digital revolution. Further self-sufficiency will decrease reliance on Chinese chip imports especially during hard times like the recent Galwan Valley border clash.
- Economic Growth
- Development of the semiconductor and display ecosystem will have a multiplier effect across different sectors of the economy with deeper integration to the global value chain.
- Indigenous manufacturing of chips will build its smartphone assembly industry and strengthen its electronics supply chain.
- According to the Electronics and IT Ministry, semiconductor demand in India would increase to $70-$80 billion by 2026 with the growing demand for digital devices and electronic products.
- This will create numerous employment opportunities for the Indian youth.
- Indigenous capacity would attract local taxes and boost the export potential.
- Further, India would be required to import fewer semiconductor chips which would decrease the import bill.
- Technological Leadership: Semiconductors are the building blocks of today’s technology. Semiconductor chips are widely used in (a) Computers and laptops; (b) Phones, mobile devices and other electronic gadgets; (c) Automobiles; (d) Aviation; (e) Medical devices especially diagnostics; (f) Military equipment among others.
These semiconductor chips are the drivers for ICT (Information and Communication Technologies). Semiconductors and displays are the foundation of modern electronics driving the next phase of digital transformation under Industry 4.0.
- Supply Chain Resilience: The COVID-19 pandemic highlighted the vulnerabilities of global supply chains, including those in the semiconductor industry. Governments are encouraging domestic semiconductor manufacturing to increase supply chain resilience and reduce dependence on foreign suppliers. The pandemic and the subsequent lockdowns impacted the supply of chips to India. Automobile manufacturers like Mahindra & Mahindra and Tata group were compelled to reduce their production due to the shortage.
- Environmental Concerns: The semiconductor manufacturing process can be energy-intensive and can produce hazardous waste. Governments are encouraging domestic semiconductor manufacturing to promote more sustainable and environmentally friendly practices.
- Changing work and employment pattern
- Experts estimate that around 50 crore people will join the internet in the next decade thereby demanding more phones and laptops.
- Work from home culture warrants an enhanced demand for servers, internet connectivity, and cloud usage.
Initiatives taken to promote indigenous Semiconductor capacity
- National Policy on Electronics 2019: It envisions positioning India as a global hub for Electronics System Design and Manufacturing (ESDM) sector. It aims to encourage the development of core components, including chipsets.
- Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS):
- The government will provide a financial incentive of 25% on capital expenditure for a list of products that constitute the supply chain of electronic products. This includes products such as electronic components, semiconductors, and specialized sub-assemblies.
- India would be offering more than $1 billion in cash to each semiconductor company that sets up manufacturing units in the country.
- Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme: Under this, the government will provide support for the setting up of Electronics Manufacturing Clusters (EMCs) and Common Facility Centres(CFCs).
- Production Linked Incentive Scheme(PLI): Under this, the government will provide an incentive of 4% to 6% on goods manufactured in India and covered under target segments to eligible companies for a period of five years.
- Incentive to all nodes of semiconductors: The new changes have been announced to harmonise government incentives for all technology nodes of semiconductors. In the previous version of the scheme, the Centre was offering to fund 30% of the project cost for 45nm to 65nm chip production, 40% for 28nm to 45nm, and 50% or half of the funding for chips 28nm or below. The modified scheme provides uniform 50% fiscal support for all nodes. Besides, it will provide 50% of capital expenditure for other steps of the process as well (chip design and ATMP).
- Foreign Direct Investment: The Government of India has allowed 100 percent (FDI) under the automatic route in the Electronics Systems Design & Manufacturing sector.
What are the challenges in front of India?
- High Cost of establishment: Fabs are highly capital-intensive undertakings, costing billions of dollars for large facilities. As per a government estimate, it would cost roughly $5-$7 billion to set up a chip fabrication unit in India.
- Low Ease of doing business: The process of establishing an indigenous semiconductor facility requires clearances and approvals from multiple government departments.
- Technological Constraint: The indigenous manufacturing of semiconductors requires the use of high-end technologies. These technologies are licensed from patent holders at a very high price.
- Lack of Fabrication Capacities: India has a decent chip design talent but it never built up chip fab capacity. The ISRO and the DRDO have their respective fab foundries but they are primarily for their own requirements and are also not as sophisticated as the latest in the world.
- Structural constraint: FDI in electronics is less than 1% of the total FDI inflow because of the dearth of skilled labor, delays in land acquisition, and the uncertain tax regime.
- Unstable power supply: The smooth production of semiconductors requires the availability of an uninterrupted 24*7 power supply. they require highly reliable and high-quality supply of water, electricity, and insulation from the elements, reflecting the high degree of precision, cost and capital needed to make the sophisticated circuits.
- Resource Inefficient Sector: Chip fabs are also very thirsty units requiring millions of litres of clean water, an extremely stable power supply, a lot of land and a highly skilled workforce.
- Augmenting Research and Development Potential: For instance, IIT Madras developed a microprocessor named ‘Moushik’ with funding support from the Ministry of Electronics and Information Technology.
- Fiscal Support for All Elements of Chip-Making Chain: Considering India’s considerable talent and experience, it may be best if the new mission focuses fiscal support, at least for now, on other parts of the chip-making chain including design centres, testing facilities, packaging, etc.
- Establishment of Sovereign Patent Fund (SPF): The proposed Sovereign Patent Fund under National Policy on electronics should be established expeditiously. It is a wholly or partly Government-backed entity that aims to bolster domestic businesses through the acquisition and licensing of patented technology.
- Push for Quad Supply Chain Resilience Fund: India needs to push for a Quad Supply Chain Resilience Fund to immunise the supply chain from geopolitical and geographic risks.
- Research ecosystem: government must focus on emerging technologies like LiDAR and Phased Array in which incumbents do not have a disproportionate advantage and the entry barrier is low.
- Focus on Manufacturers’ Assurance of Domestic Procurement – The manufacturers need to be given an assurance of minimum domestic procurement by the government and the private sector. The focus should be on manufacturing economical and technically viable options like 28nm chips.
- Support for Acquisition of Semiconductor Manufacturing Units: The government should also support businesses in the acquisition of semiconductor manufacturing units in other countries. This is easier than setting up a domestic facility and can be done swiftly for ensuring a continuous supply of chips.
- Free-Trade Agreement Negotiations: India and Taiwan have started negotiations for a free-trade agreement and setting up a semiconductor manufacturing hub in an Indian city, signalling their resolve to further expand the two-way economic engagement.