Can India truly become a global semiconductor hub?

During Prime Minister Narendra Modi’s US visit in June this year, amid the multiple pacts signed between both countries, the joint development of technologies in the area of semiconductors was one of the highlights. US President Joe Biden and Modi signed the Memorandum of Understanding (MoU) on Semiconductor Supply Chain and Innovation Partnership with the objective of coordinating semiconductor incentive programmes of India and the US.

Following these developments, US chipmaker Micron Technology announced that it would invest up to $825 million to build a semiconductor assembly and test facility in Gujarat, taking advantage of the fiscal support being extended by the Indian government. Micron will receive 50 percent fiscal support for the total project cost from the Indian central government and incentives representing 20 percent of the total project cost from the state of Gujarat. The facility is expected to become operational in late 2024.

"After more than a year of discussions with Indian government officials, Micron is pleased to bring its industry-leading assembly and test capabilities to be a part of this transformation in India’s semiconductor industry," says Gursharan Singh, the senior vice president of global assembly and test operations.

During his visit, PM Modi also met with Applied Materials CEO Gary Dickerson, who announced an investment of $400 million spanning over four years. The semiconductor toolmaker has been functioning in India for twenty years, and with this investment, it intends to build a new engineering center in Bengaluru.

"We are hopeful that there will be large-scale manufacturing facilities set up here. It won't happen overnight because it takes close to three years to come up with a factory," explains Srinivas Satya, country president of Applied Materials India. India has positioned itself accurately to attract global semiconductor companies with a mix of policies, government incentives, and investment in research and development, he adds.

Charting a Path

In December 2021, the Indian government announced a $10 billion package to incentivise the manufacturing of semiconductors in India. The first three proposals submitted to the India Semiconductor Mission were from Singapore-based IGSS Ventures, the International Semiconductors Consortium (ISMC), and a joint venture between Vedanta Group and Taiwan’s Foxconn. All of them faced hurdles in setting up their plants.

The joint venture between Anil Agarwal-led Vedanta and iPhone maker Foxconn fell through. The latter withdrew from its pact with Vedanta to invest $19.5 billion to set up a semiconductor plant in the country. Both companies, however, shared the stage along with executives of Micron, AMD, SEMI, Cadence, and Applied Materials at the second edition of the SemiconIndia conference in Gandhinagar, Gujarat, which was also attended by PM Modi in July.

While addressing the attendees at the conference, Papermaster of AMD announced an investment of $400 million over the next five years to expand research, development, and operations in India. The investment also includes a new AMD campus in Bengaluru that will serve as the company’s largest design centre in the world.

"Our engineering teams in India play an important role in the development of every major AMD product across our diversified portfolio of CPUs for PCs and servers, data centre graphics processing units (GPUs), gaming GPUs, and more," says Jaya Jagadish, SVP and country head of AMD India, which has been functional for over two decades.

After pulling out of the deal with Vedanta, Taiwanese electronics manufacturer Foxconn recently signed a Letter of Intent (LOI) with the Karnataka government to invest Rs5,000 crore in two projects: Semiconductor equipment manufacturing and phone enclosure manufacturing. The world's largest contract electronics maker is collaborating with Applied Materials to manufacture semiconductor equipment.

"I don’t doubt India’s conviction to build up an indigenous semiconductor ecosystem. Success, though, will rely on many stakeholders inside and outside of India being able to count on each other, work together tirelessly, and persevere over a great period of time and through many challenges," Foxconn Chairman and CEO Young Liu told Forbes India.

Meanwhile, Vedanta is in talks with three companies to onboard them as technology partners for their massive plans of setting up a foundry fab, outsourcing assembly, and testing electronics hubs. "In 2.5 years, we will give you Vedanta made-in-India chips," Agarwal told reporters on the sidelines of the SemiconIndia 2023 event.

Vedanta has already announced an overall outlay of $20 billion for setting up semiconductor, integrated glass, and display fabs in India. "This will be in several phases. The Dholera Special Investment Region in Gujarat has been selected as the site for our fabs," says David Reed, CEO of Vedanta Semiconductor.

On June 1, the India Semiconductor Mission reopened a fresh round of applications for setting up semiconductor and display fabrication units and seeking incentives. Previously, the window for submitting the applications was closed in just 45 days, and the government didn’t receive many applications. This time around, they have dropped this criteria, and applications will be evaluated as and when they are received.

The current demand for semiconductors in India is around $24 billion, which is met entirely through imports. This demand is expected to reach $100 billion by 2025, according to Chandranath Dey, India head, operations and business development at JLL, a global real estate services firm. The growth of the sector is expected to be driven by factors such as the increasing semiconductor content in consumer electronics and automobiles, including electric vehicles, the adoption of 5G and IoT devices, and more.

The government has launched initiatives such as the production-linked incentive (PLI) and design-linked incentive (DLI) schemes to support companies setting up semiconductor manufacturing facilities in India. Further incentives, tax breaks, and eased regulations can attract more investments in the sector.

Setting up semiconductor manufacturing plants in India requires significant infrastructure investment in power, water, and transportation facilities. While other countries like China, Taiwan, and South Korea have already established themselves as semiconductor manufacturing hubs, India faces stiff competition on a global stage. Building a complete domestic value chain for semiconductors may take considerable time and investment, as a significant portion of the value chain is currently based outside India.

To reduce dependence on imports, efforts should be made to develop a local value chain for semiconductor manufacturing, suggests Dey. "This could involve incentivising the production of raw materials, such as silicon wafers, or promoting the development of semiconductor equipment suppliers and contract manufacturers. This industry is constantly evolving, with new materials, processes, and technologies emerging all the time."

On August 4, the Semiconductor Industry Association announced that worldwide sales of semiconductors added up to $124.5 billion during the second quarter of 2023, an increase of 4.7 percent over the first quarter of 2023 but 17.3 percent less than the second quarter of 2022. Global sales for the month of June 2023 were $41.5 billion, an increase of 1.7 percent compared to the previous month.

At present, globally, the technology required for manufacturing advanced semiconductors has very limited players in the world, with one being a dominant player. There is no natural advantage for them to invest in India, explains Nilaya Varma, co-founder of Primus Partners. The challenge is primarily finding the right human capital, supporting a vendor base in India, building strong infrastructure for exports, and forming partnerships that can ensure continued investments with strong technical capabilities.

"Other players setting up a facility here will have to import everything from equipment to manpower for the initial few years and invest in building the ecosystem. This would require India to provide both financial incentives and long-term stability of policy so that the company can be assured about its return on investment. The latter is still a challenge," says Varma.

In the past, the semiconductor sector has rarely been viewed as a strategic industry of national importance. Post Covid-19 and the global semiconductor shortage, that stance has changed, and the sector’s strategic importance has been imbibed by policymakers, all the way up to the PM’s office, explains Prithvideep Singh, general manager and the third generation in the family business of CDIL Semiconductors.

Delhi-based Continental Device India Limited (CDIL) has been manufacturing semiconductors in-house since 1964. Started by Gurpreet Singh in collaboration with Continental Device Corp. of Hawthorne, California, the company has designed devices from the ground up in their manufacturing facility at Mohali, which has an installed capacity of over 250 million units. Today, most of their production is consumed locally, around 70 percent, as opposed to a few years ago, when they would export up to 50–60 percent of all production.

Previous attempts by the country have always focused on glamorous mega-fab projects. These sound great and make for great headlines, but they are capital-intensive, according to Singh. "Today the government understands that ATMP (Assembly, Test, Mark, and Tape), or backend manufacturing, is an integral part of the semicon value chain and can be the cornerstone on which India builds its strategic foothold in the market."

Sustaining Momentum

Experts suggest that India must have a sharp focus on ease of doing business, in addition to providing incentives, in order to help semiconductor manufacturing flourish. Designing and manufacturing semiconductors is one of the most complex undertakings in the modern world. It requires precision at an atomic level where even dust particles can ruin production.

The chip manufacturing and design supply chain remains global and interconnected to a great extent, as the incredible complexity requires specialisation, materials, and talent that no single country can provide. India will need to partner with global players to fully realise its domestic potential. It will make sense to start manufacturing chips at mature nodes for applications such as automotive. To rise from these beginnings to more advanced node capabilities, India will need to forge strategic partnerships with established global players, explains Ajit Manocha, CEO of the industry association SEMI.

The global semiconductor industry needs multiple manufacturing hubs and a diversified supply chain to maximise its growth. The industry is poised to nearly double in revenue by the end of this decade to support emerging applications with more chip content, such as autonomous machines, smart medical devices, 6G communications, and AI cutting across electronics. India’s focus should be on capturing a healthy share of this growth, suggests Manocha.

The industry is facing a talent gap as it seeks to expand manufacturing to support this expected growth. Workforce development programmes and skills training will be crucial going forward.

The universities in India currently don’t have state-of-the-art infrastructure labs to do research, which is limiting a lot of students from entering this sector, explains Professor Rao Tummala from Georgia Tech University, who is a part of the advisory committee of the India Semiconductor Mission. "I can see genuine efforts from the government to make this work. However, it will need adequate infrastructure, expertise, and resources to make this successful,” he says.

Fabs have proven to be game-changers for the economies where they are operational, generating employment and bringing huge revenues for the countries involved, explains Manocha. The recent massive subsidy and incentive programmes are a testament to the fact that policymakers around the globe have come to understand the magnitude of investment required to gain semiconductor manufacturing share. India must stay the course and continue to invest in the industry to reap its benefits.

"We have a small window or opportunity to help this sector make inroads into India, given the global geopolitical situation. However, the sector needs a very long-term vision and government support with respect to not just initial financial assistance but longer-term national consensus on policy stability as well," concludes Varma of Primus Partners.