India wants to go from being a chip taker to chipmaker — here’s a look at what it would take

From Tesla to Tata Motors, from Intel to Apple, companies around the world are starved for semiconductor chips — which go into computers, smartphones and other mobile communication devices, cars and aircraft, medical equipment, military systems and the gadgets we use for entertainment.

To understand how important semiconductor chips are to companies, and therefore, to economies, here’s an estimate of the bill of materials (BoM) — or the cost of semiconductor — per vehicle from consulting firm Boston Consulting Group (BCG).

Countries around the world want to build production capacity for these chips so that a similar shortage does not choke their economies in the future. India is no different. It wants to become a chipmaker, and not a chip taker, but the many pieces which make the plan wholesome need fixing too.

Incentives are always welcome, but they only work if the fundamentals are in place. Companies interested in applying under the scheme need certain things in place — foundational requirements, if you will — over and above the infrastructure they will be putting in place. These pillars are land, labour, capital and resources, such as ample electricity supply and ultra-pure water.

Let’s take a look at where we are placed in each of these four pillars:

Land is a state subject and so, it is incumbent upon state governments to provide adequate land for companies to set up fabrication units. A wafer fabrication unit (fab) can manufacture around 7,000 CPU cores per inch.

The Karnataka state government has signed an agreement with Israel-based ISMC Analog Private Limited to build a $3 billion 12-inch fab on a 150-acre parcel of land in Mysore. For instance, the average cost of a 12-inch TSMC fab is $11.64 billion. TSMC is the world’s biggest player in semiconductor fabs with more than 50 percent of the market share in its kitty.

So far, Vedanta Foxconn JV, IGSS Ventures, ISMC have submitted proposals for fabs worth $13.6 billion and have sought government support to the tune of $5.6 billion.

Dr Rishi Bhatnagar, Chairman of the IET Future Tech Panel — a private platform for engineering stakeholders — said other state governments should take a leaf out of Karnataka’s book and ease things for companies by setting up a single-window system for quick clearances and providing land in industrial parks.

“SEZs (Special Economic Zones) have to be brought up to speed to ensure that land and resources are utilised correctly and contribute towards developing local tech talent and building advanced R&D capabilities with a focus on the latest technologies,” suggested Anku Jain, India Managing Director of MediaTek, a fabless semiconductor company that supplies chips to several consumer and enterprise electronics manufacturers.

Sridhar Venkiteswaran, CEO of Avalon Consulting, reckons land is the easier of the four primary components for any company. “Land is a relatively small fraction of the overall investment, probably less than 10 percent. However, states could consider different ways of providing land — long-term lease, etc — to help bring the cost down,” he said.

Union Minister for Electronics and Information Technology Ashwini Vaishnaw said the government has tied up with 100 institutes across the country for talent development, and believes that talent is a resource the country has in abundance.

“Indian firms already provide mostly low-end chip design services for third parties. Over 2,000 chips are designed in India every year, with over 20,000 engineers involved in their design and verification,” Dr Bhatnagar said.

But what about skilled, non-engineering, non-design jobs that are a crucial component of any assembly line? Fortunately, Dr Bhatnagar says, India has an edge in that respect as well.

“Chip manufacturing is arguably the hardest technical exercise humankind currently undertakes — correctly etching and connecting tens to hundreds of billions of transistors 50 times smaller than a virus — and it’s getting harder,” he said, adding, “India already has existing labour-intensive, low-margin assembly infrastructure and a trained workforce in mobile manufacturing which could be leveraged.”

If India can develop robust outsourced semiconductor assembly and test (OSAT) and assembly, test, marking and packaging (ATMP) facilities, that’s game, set and match. “Combined, design, OSAT, and ATMP represent over 50% of semiconductor supply chain revenue,” Dr Bhatnagar said.

Semiconductor chip manufacturing is a capital-intensive industry, especially if companies looking to get the sector up and running in India are looking at setting up foundries. A foundry is a semiconductor manufacturing unit that makes chips to order, as opposed to an Integrated Device Manufacturer (IDM), which designs, manufactures, and sells integrated circuit (IC) products. An example of this is Intel.

Vedanta Foxconn JV, IGSS Ventures, and ISMC have proposed to set up “28 nanometer (nm) to 65 nm fabs with a capacity of approximately 120,000 wafers per month”.

This translates into Rs 6.34 lakh for a 12-inch wafer containing 28 nanometre (nm) chips, Rs 4.98 lakh for 40 nm, and Rs 4.25 lakh for 65 nm. This means companies in India will be spending between Rs 5,100 crore and Rs 7,608 crore per month in producing these wafers.

TSMC is foundry-driven, and a report by Bank of America (BofA) released earlier this year attributed TSMC’s rude health to “scale economy; singular focus on manufacturing; neutrality to avoid conflict of interests; process technology leadership; and a diverse set of customers/products with open and robust ecosystem.”

And foundries are grabbing an increasing share of the wafer fabrication. It stands to reason that for India to become a global player in semiconductors, foundries are the way to go. According to the BoFA report, the global foundry business stood at $95 billion last year, and is projected to grow at a 14 percent compounded rate annually by 2025.

In 2020, India’s demand for semiconductors stood at Rs 1.1 lakh crore, which was met entirely through imports. India’s demand is projected to increase to $80 billion by 2025, and $110 billion by the end of the decade. As the saying goes, charity must begin at home. “This (growth) will be driven by wireless communications (24 percent of the market share), consumer electronics (23 percent), and automotive electronics (20 percent) by 2030,” said Sanjay Gupta, India VP and MD, NXP Semiconductors.

For that to happen, companies that are looking to set up a base here need a clear vision, as well as the right support from the government. “The government can also offer concessions on land or electricity and lower interest rates on the investment, waiver on import duty on machinery, and a tax concession, if not an outright tax holiday,” says Sanjay Kumar Kalirona, CEO and Co-Founder of Gizmore, a homegrown electronics brand.

Foundry-based companies, owing to their neutrality that attracts a larger clientele, have shown the highest growth in the previous decade, compared to other types of companies — IDMs and fabless (only provides design and specification; examples are Apple and MediaTek) — as illustrated in the chart below:

Raghavan BS,  senior technical lead at BorgWarner India — a tier-1 auto component manufacturer — said the smartest thing applicants can do is form a joint venture with an established player, such as TSMC, to make the teething process painless.

“This has a multifold benefit in terms of de-risking, control, and subject-matter expertise. The companies setting up plants must ‘copy exactly’ the latest technologies already in use elsewhere across the globe in semiconductor manufacturing,” he said.

He also suggested that the companies — competitors in spirit though they may be — could look to build their plants in localised clusters, which will allow them “the benefit of shared resources — raw materials, power, access to common testing and certification facilities, and  co-location with various OEMs to whom they can directly sell their output.”

Among other steps, he suggested the government could be these companies’ biggest customer, especially given its ‘Aatma Nirbharta’ ambitions for the defence sector, as well as offering a refundable investment tax credit which would incentivise foreign direct investment (FDI).

Further, under the Rs 76,000 crore incentive scheme, the government will offer a 30 percent subsidy for testing, and packaging facilities.

Dr Bhatnagar suggested that companies should focus on setting up OSAT and ATMP facilities. “These parts of the supply chain also employ more people and are cheaper to set up, making them a much better fit for India,” he says.

The government is also aggressively wooing the Indian diaspora, inviting them to invest in the Semiconductor India Programme and promising them minimum hassle.
 Union Minister of State for Electronics and IT Rajeev Chandrasekhar had assured overseas investors that they need not be concerned of execution risks and tariffs as the “government will handhold them.”

We will now look at the most crucial aspect of the supply chain — resources. These are the most immediate needs, and companies that apply under the scheme must absolutely make sure the necessary resources — raw materials, uninterrupted electricity and massive quantities of ultra-pure water (which is used to wash the wafers) — are in place before they begin work on the ground.

According to a government statement, India Semiconductor Mission — the nodal agency for India’s chipmaking push — “will work closely with the state governments to establish high-tech clusters with 300-500 acres of developed land, 100 KVA Power, 50 MLD (millions of litre per day) water, availability of natural gases and common facility centres for testing and certification.”

The government is electricity and ultra-pure water won’t be a concern.

“Quality of power supply is assured if the fabrication facility is near a 400 kilovolt power line," Minister Vaishnaw had said at the recently held SEMICON India 2022 in Bengaluru.

Owing to the complex manufacturing processes and the delicacy of the wafers, the industry requires copious amounts of water to ensure that the sensitive components are cleansed of contaminants, minerals, microorganisms, and trace organic and non-organic chemicals.

According to the US university, Stanford, a 12-inch wafer consumes around 9,100 litres of water to manufacture. TSMC said on its official website that it produced 1.4 crore 12-inch equivalent wafers — including 8-inch and 6-inch wafers — in 2021. That’s nearly 1.28 lakh crore litres of water per year.

To put this in perspective, the Central Public Health and Environmental Engineering Organisation — under the Union Ministry of Housing and Urban Affairs — says India uses 135 litres per capita per day. That’s 49,460 litres per person per year. Essentially, just one company — TSMC — uses enough water for nearly 2.59 crore people in India.

Given the recent, acute power crisis in large swathes of the country, and the fact that large tracts of agrarian regions are in drought, the government must strike a fine balance between business and meeting its citizens’ needs.

According to a report by environment-focused publication DownToEarth in August 2021, more than 21 percent of India’s land area was facing drought-like conditions. The report cited current data released by Drought Early Warning System (DEWS), which also showed that this was a 62 percent increase in area under drought compared to 2020.

This is 62 percent more than the area under drought during the same period last year, which was 7.86 per cent.

So, out of the four pillars of land, labour, capital and resources, around which India’s semiconductor ecosystem must be built, at least two  — labour and resources — are currently shaky, at best.

Given these potential complications and also the robust — if currently gasping — global semiconductor market, Venkiteswaran of Avalon Consulting suggests that it is impossible for India to ever become self-reliant on semiconductors. “India can never be self-reliant on semiconductors. One needs to recognise this. (Semiconductors) are a global, $550-billion business. We should not have unrealistic ambitions and instead, focus on critical parts of the ecosystem — ATMP and fabless — and provide as much attention to them,” he said.

The Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues, on May 20 released a report outlining the best practices a country must undertake in order to build a thriving semiconductor ecosystem.

Minister Vaishnaw said recently that the application process could take 15-18 months to complete and that a proper picture would emerge only by April or May next year. It will then become clear just how much behind-the-scenes heavy-lifting the stakeholders involved in the Semiconductor India Programme have been doing.