29 March 2023: India’s push for semiconductor

Context: India has committed itself to expand semiconductor manufacturing in the country, but bureaucratic dysfunction and water and energy shortages will prevent the country from competing internationally.

Background: The central government has so far disbursed around 1,645 crores in performance-linked incentives (PLIs) to electronics manufacturers as part of its efforts to bring more connectivity to the electronics supply chain in India. The push for semiconductors, or integrated circuits, is even more pressing now, as these chips are found in practically every modern electrical device and personal electronic device. More and more nations are trying to break away from China’s dominance in space, following geopolitical pressures to insulate themselves from supply chain vulnerabilities.

Why is the government so keen on promoting semiconductor manufacturing?

  • Semiconductor manufacturing facilities, or FABs, turn raw elements such as silicon into integrated circuits suitable for being part of practically all of the world’s electronic hardware.
  • Fabs are highly capital-intensive enterprises, with large facilities costing billions of dollars.
  • Today’s semiconductor fabs can still make circuits, but they require a highly reliable and high-quality supply of water, power, and insulation from the elements, reflecting the high degree of precision, cost, and capital required to make sophisticated circuits.
  • Countries have seen the strategic value of fabs in corner segments of the value chain, even as the sophistication and capital required to run them have climbed to historic highs.
  • According to a report by the Semiconductor Industry Association (SIA), China overtook Taiwan last year in terms of its share of global sales of fabs.
  • It is not just India that is wary of this dominance. The US passed the CHIPS Act last August, which provides more than $280 billion in subsidies and investments for manufacturers to open fabs and make semiconductors in the US.
  • This has been combined with restrictions and sanctions on the Chinese semiconductor industry.

Are fabs coming up in India?

  • The government’s Invest India agency estimates that electronics manufacturing will aggregate to $300 billion by fiscal years 2025–26.
  • While facilities for assembling finished products continue to grow in number, fabs for making chipsets and displays, which are critical parts of the manufacturing process for many electronics, are rare.
  • Electronics and Information Technology Minister Ashwini Vaishnav said the first semiconductor manufacturing facility would be announced in the coming weeks.

Can both the semiconductor and the finished product be made in India?

  • SIA, which represents the bulk of semiconductor makers in the US and elsewhere, said in a report in February, along with APCO Worldwide, that India should rely on its strength in the electronics manufacturing value chain.
  • So-called “foundry companies,” which turn silicon into semiconductors, require investments upwards of 35% of revenue, the SIA warned, and entry costs run into the billions of dollars.
  • But companies specializing in outsourced semiconductor assembly and test (OSAT) are less expensive to set up and generate better margins, SIA pointed out.
  • The OSAT setup takes care of the less capital-intensive parts of chip-making, such as assembling precision components already manufactured and running specialized tests to approve them.
  • One problem with many chip facilities in the traditional sense is that they tend to be captive units of large companies.
  • While Foxconn’s assembly facilities are seen as creating many jobs and inviting investment in India, some of its most valuable facilities globally are dedicated to manufacturing Apple devices, which account for a fraction of handsets sold in India. are responsible for.

What other advantages can India have?

  • A large portion of semiconductor manufacturing involves the design and intellectual labour. India has an advantage here, as a large proportion of semiconductor design engineers globally are either Indian or of Indian origin.
  • Chip-making firms such as Intel and Nvidia have large facilities in India that are already full of Indian talent working on design problems.
  • It is an advantage that China is losing control in the face of sanctions and a growing population.
  • “Without high-calibre talent, China’s goals for the semiconductor sector, especially in terms of making the industry more indigenous, will not be achieved,” said Dr Dennis Simon, Clinical Professor of Global Business and Technology at UNC Cannon. Flagler Business School said in testimony to the US-China Economic and Security Review Commission

Will India’s semiconductor ambitions be limited?

  • The opening of display and semiconductor fabs is one of the strategic and economic goals of India’s electronics manufacturing promotion programs, and breaking new ground on ambitious plans involving popular brands like Apple is something the central government and states alike are working to accomplish. are keen.
  • Overall, it appears that the government is developing those parts of the ecosystem that hold the promise of sustainable growth and fiscal viability.
  • Minister of State for Electronics and Information Technology Rajeev Chandrasekhar said at the Raisina Dialogue earlier this month that to be effective, the electronics value chain has to be an international undertaking between countries with similar values.
  • That is, if like-minded countries each specialize in different aspects of the semiconductor and electronics manufacturing process and work together on assembly and distribution, they still maintain the geopolitical landscape of Chinese dominance without monopolizing power with another country.
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