India’s $18 Billion Chip Bet: What’s at Stake

India is embarking on an ambitious quest to establish itself as a significant player in the global semiconductor industry. However, this endeavor faces considerable challenges. The competitive landscape is fierce, and India’s entry into the advanced chip manufacturing arena is relatively recent.

The global push for semiconductor self-reliance gained momentum in 2022 when the United States imposed export restrictions on advanced AI chips to China, aiming to limit Beijing’s access to cutting-edge technologies. This situation presented India with a strategic opportunity to reduce its reliance on imports, secure chip supplies for critical sectors, and seize a larger portion of the global electronics market, particularly as production shifts away from China.

Despite being one of the world’s largest consumers of electronics, India currently lacks a robust domestic chip industry and has a minimal presence in the global semiconductor supply chain. The Indian government’s “Semiconductor Mission” is designed to address this gap.

The mission’s overarching goal is to create a comprehensive supply chain within India, encompassing chip design, fabrication, testing, and packaging.

As of this month, India has approved ten semiconductor projects, attracting a total investment of 1.6 trillion rupees ($18.2 billion). These projects include two semiconductor fabrication plants and several testing and packaging facilities.

Furthermore, India boasts a substantial pool of engineering talent already employed by global chip design companies. This existing expertise provides a foundation for the development of a domestic chip industry.

Nevertheless, experts caution that progress has been inconsistent, and the current level of investment and available talent may not be sufficient to fully realize India’s semiconductor ambitions.

According to Stephen Ezell, vice president for global innovation policy at the Information Technology and Innovation Foundation, “India needs more than just a few fabs or ATP facilities. It needs a dynamic, deep, and long-term ecosystem.”

Ezell points out that leading semiconductor manufacturers consider a multitude of factors – potentially as many as 500 – before committing to multi-billion-dollar fab investments. These factors include talent availability, tax incentives, trade policies, technology policies, labor costs and regulations, and customs policies. India needs to make significant strides in all these areas to attract major investments.

In May, the Indian government introduced a new initiative to bolster its chip ambitions: a program to support the manufacturing of electronic components. This addresses a critical bottleneck in the supply chain.

Previously, a lack of domestic electronics component manufacturing companies, such as those producing phone cameras, meant limited local demand for chips produced in India.

The new policy offers financial incentives to companies producing active and passive electronic components, creating a potential domestic buyer-supplier base that chip manufacturers can leverage.

In 2022, India shifted its strategy away from exclusively focusing on incentives for fabrication units producing chips of 28nm or less. Smaller chip sizes generally correlate with higher performance and improved energy efficiency, making them suitable for advanced technologies like AI and quantum computing. These technologies benefit from the ability to pack more transistors into the same space.

However, this initial approach wasn’t effectively promoting the development of India’s nascent semiconductor industry. Consequently, New Delhi now covers 50% of the project costs for all fabrication units, regardless of chip size, as well as for chip testing and packaging units.

Fab companies from Taiwan and the U.K., along with semiconductor packaging companies from the U.S. and South Korea, have expressed interest in participating in India’s semiconductor initiatives.

Ezell acknowledges that “the Indian government has doled out generous incentives to attract semiconductor manufacturers to India,” but he cautions that “those sorts of investments aren’t sustainable forever.”

Currently, the largest chip project in India is a 910-billion-rupee ($11 billion) semiconductor fabrication plant being established in Prime Minister Narendra Modi’s home state of Gujarat by Tata Electronics, in partnership with Taiwan’s Powerchip Semiconductor Manufacturing Corp.

This facility will manufacture chips for power management integrated circuits, display drivers, microcontrollers, and high-performance computing logic, which are applicable in AI, automotive, computing, and data storage industries, according to Tata Electronics.

Additionally, the U.K.’s Clas-SiC Wafer Fab has partnered with India’s SiCSem to establish the country’s first commercial compound fab in the eastern state of Odisha.

These compound semiconductors have applications in missiles, defense equipment, electric vehicles, consumer appliances, and solar power inverters, according to a government press release. This signals the government’s intention to leverage the sector beyond consumer applications into areas of national security.

Sujay Shetty, managing director of semiconductor at PwC India, emphasizes that “the coming 3-4 years is pivotal for advancing India’s semiconductor goals.”

Shetty argues that the successful establishment of operational silicon fabrication facilities and addressing technical and infrastructural challenges beyond mere incentives will be crucial milestones in this journey. The industry observers are especially concerned about the ability to attract and retain the highly skilled workforce that is needed for successful operations.

Semiconductor fabrication sites have stringent requirements, including locations that are free from floods and vibrations, with reliable road connectivity. These logistical considerations can pose ongoing challenges for certain regions.

Shetty highlights that India also needs specialty chemical suppliers that meet the “ultra-high purity standards essential for advanced semiconductor manufacturing.” This underscores the importance of developing a supporting ecosystem of suppliers and service providers to enable a fully functional chip industry.

Besides chip fabrication plants, many medium-sized companies in India have expressed interest in establishing chip testing and packaging units. Several Indian groups are also entering this segment, attracted by the potentially higher margins and lower capital intensity compared to fabs.

Shetty emphasizes that “outsourced semiconductor assembly and testing (OSAT) represents a significant opportunity for India, though clarifying market access and demand channels will be important for sustained growth.”

Success in this area would mark India’s entry into the global chip industry. However, New Delhi remains far from developing and manufacturing the very latest in chip technology: 2nm semiconductors. Attaining this level of sophistication will require significant investments in research and development, as well as attracting leading-edge expertise.

Taiwan Semiconductor Manufacturing Corporation (TSMC), the world’s leading chip manufacturer, is expected to begin mass-producing cutting-edge 2nm chips later this year, according to a report in the Financial Times, highlighting the rapid pace of technological advancement in the industry.

Recently, Indian minister Ashwini Vaishnaw announced that ARM, a British semiconductor design firm, would design the “most advanced chips used in AI servers, drones, mobile phone chips of 2 nm” from Bengaluru.

However, experts suggest that the role of local talent is likely to be limited to non-core design testing and validation, as the core intellectual property for chip designs is primarily held in locations like the U.S. or Singapore, where established IP regimes support such activities. The challenge for India is thus to develop a more supportive environment for IP creation and protection.

Jayanth BR, a recruiter with extensive experience in hiring for global semiconductor companies in India, notes that “India has sufficient talent in design space, because unlike semiconductor manufacturing and testing that has come up in the last 2 years, design has been there since 1990s.”

He indicates that global companies typically outsource “block-level” design validation work to India.

To achieve its semiconductor ambitions, India’s government will need to address limitations for the global companies.

Sajai Singh, a partner at Mumbai-based JSA Advocates & Solicitors, suggests that “India may consider updating its IP laws to address new forms of IP, like digital content and software. Of course, improving enforcement mechanisms will go a long way in protecting IP rights.”

Singh concludes, “Our competition is with countries like the U.S., Europe, and Taiwan, which not only have strong IP laws, but also a more established ecosystem for chip design.” This highlights the need for India to not only offer financial incentives but also to create a robust and supportive legal and commercial environment for sustained growth in the semiconductor industry.