India's Semiconductor Mission: Decoding Challenges & Opportunities that lie ahead

Over the past few years, the word ‘semiconductor’ or ‘chip’ has been generating considerable buzz the world over, especially in India. Rapid digitization has led to an unprecedented demand for semiconductor chips. This tiny material has become a part of our everyday lives, and it is omnipresent now. The semiconductor chip industry is a more than $550 billion business in the world today.

The world is currently grappling with a significant shortage of chips. This shortage has had a profound impact on the production processes of major industries that heavily rely on semiconductor chips for their efficient functioning, such as automobiles and electronic devices. As a result, there has been a noticeable slowdown in their overall operations, causing global disruptions and challenges in meeting consumer demands.

India's push for chip ecosystem at home:

In the absence of domestic manufacturing, India currently relies completely on imports to meet its semiconductor chip needs. More than 30% of India's semiconductor needs are imported from China, followed by Hong Kong and other Asian countries. India roughly imports more than $10 billion worth of semiconductors. The Indian economy has suffered a huge blow due to disruption in the supply chain of chips. And also, the heavy reliance on chip imports from China poses significant risks to India's defence forces and telecommunications sector, given their extensive use of large-scale semiconductors.

Realizing these challenges, and in order to tackle them, the government of India, in its endeavour to achieve self-reliance and spur 'Atmanirbhar Bharat', announced an ambitious new incentive scheme worth ₹76,000 crores (nearly $10.2 billion) in a bid to boost the semiconductor ecosystem in the country. Through this scheme, the Indian government provides financial support of up to 30% towards capital expenditure to eligible companies who want to set up businesses in India. India's vision is to achieve a target of $300 billion in electronics manufacturing by 2025-26.

This article aims to provide readers with an understanding of semiconductors and the intricacies of the chip-making industry. It explores the potential opportunities and challenges that lie ahead on India's road to becoming a major semiconductor hub.

Semiconductor or Chip?

Before delving into the topic, let us first briefly understand what a semiconductor or chip is. Semiconductors are materials that have electrical conductivity between that of a conductor and an insulator. The most prominent materials among them are Silicon, Germanium, and Gallium. They find their application in the manufacturing of electronic devices like integrated circuits (chips), diodes, transistors, LED lights, solar cells, etc. Among these applications, chips (integrated circuits), represent a significant portion of the semiconductor industry. Silicon is the widely used semiconductor material in the production of chips.

The term ‘chip’, also known as ‘microchip’, because of its tiny size, is often used interchangeably with ‘semiconductor’ due to the integral role semiconductor materials play in the production of Chips. These semiconductors form the foundation of the chip's functionality. Given the close association between semiconductors and the manufacturing of chips, the terms chip and semiconductor have become synonymous. These chips are categorized as Memory chips, Microprocessors, etc., depending on their application.

These semiconductor chips serve as the backbone of the electronic industry; they are the brains behind everything these electronic devices do. From smartphones and laptops to television and automotive systems, semiconductors are omnipresent in our daily lives.

India as a suitable destination for global chip-making companies:

Many semiconductor giants are looking to set up chip-making plants in India. Companies, as part of their diversification plan and to meet surging semiconductor demand, are trying to gain entry into India. India also offers a favourable environment for these semicon companies. Some of the reasons companies want to invest in India are:

1. Cheap labour cost:

India with its huge population and large workforce offers cheap labour to companies. It helps producers in cutting the production cost. This low-cost workforce facilitates backend chip production.

2. Availability of bright engineering talent and skilled labour:

India is the producer of the best engineering talents in the world. The workforce is highly skilled and the available talent pool is capable of contributing immensely to the development of advanced technology. Indian Engineers could play a crucial role in R&D in chip making domain.

3. Easy market access:

India is the second most populous country in the world. It has a large consumer base. Indians use a lot of electronic devices in everyday life. India is going to become the largest consumer of semiconductor chips in the future.

4. Encouraging startup culture:

India offers a fertile ground for the startup ecosystem. Government policies and innovations towards startups spur budding semiconductor-related startup companies to set foot in India.

5. Incentives schemes by the government:

India's incentivization schemes are the major motivators for global companies to set up plants in India. India offers attractive and flexible financial support to eligible companies.

Positive developments so far

Currently, the semiconductor chip industry is concentrated in a handful of countries like the USA, Taiwan, China, South Korea, Japan, and to a small extent, a few European Countries. The USA holds a firm grip over the design of chips; while, production capacity is heavily cantered in Taiwan, China, and South Korea. Major chip companies are increasingly looking to diversify their chip manufacturing sites. India, as one of the fastest-growing economies in the world, is viewed as a promising and favourable destination for establishing full-fledged chip fabrication facilities.

Looking at the positive developments that have happened over the recent months, the Micron deal brokered last month marks a significant step forward in this endeavour. Through this deal, Micron has pledged to set up chip manufacturing facility in India at an investment of $2.75 billion. It has already announced to start ATMP- Assembly, Testing, Marking and Packaging- in the first phase of the project, and it is going to come up in Gujarat by 2024. ISMC Digital, a semiconductor consortium, is also planning to build a chip manufacturing facility at a cost of $3 billion in India.

Domestically, Vedanta Group is set to become India's first native semiconductor manufacturing company; it announced a $19.5 billion chip-making project last year and is awaiting a final nod from the government. Also, India's most trusted brand, The Tata Group, has also planned to venture into the backend semiconductor business- OSAT facility-, according to reports. Though these developments look promising for India's Semiconductor Mission, several hurdles need to be overcome to realize the vision of a thriving semiconductor industry in India.

In addition to significant developments in semiconductor production, India achieved a crucial breakthrough with two new announcements by Semiconductor Equipment Manufacturers, Applied Materials and Lam Research, respectively, during PM Modi's US visit. As per the plan, Applied Material will invest $400 million to set up an Engineering Center in India, and Lam Research unveiled its plan to train 60,000 engineers in India through its virtual-physical ecosystem in order to tackle the shortage of skilled manpower in semiconductor technology.

Setting up of ATMP plants are stepping stone into the transition towards a full-scale chip fabrication ecosystem in the country. India currently lacks the necessary infrastructure to manufacture chips. India needs to move from ATMP to full-scale manufacturing. In its pursuit of transitioning into a major semiconductor chip manufacturing hub globally, India faces a formidable set of challenges.

How the semiconductor chip industry works?

The semiconductor chip industry, due to its complex nature, encompasses different business models to ensure the smooth functioning of the ecosystem. These models include fabless chip companies, integrated device manufacturers (IDMs), foundries, or contract chip manufacturers; and there is ATMP/OSAT model which provides backend ancillary support to the semiconductor production.

1. Fabless Chip Companies:

Fabless chip companies are entities that focus on the design and development of semiconductor chips, but they do not have their own fabrication facilities for manufacturing. Instead, they outsource the manufacturing process to external foundries or contract chip manufacturers. Fabless companies typically specialize in chip design. Their core competency lies in developing innovative chip designs and intellectual property (IP) while relying on external partners for actual chip fabrication. The major fabless chip companies are Qualcomm, Nvidia, AMD, Media Tek, Broadcom, etc.

2. Integrated Device Manufacturers (IDMs):

Integrated Device Manufacturers, or IDMs, are semiconductor companies that handle both the design and manufacturing of chips in-house. Unlike fabless companies, IDMs have their fabrication facilities, commonly referred to as fabs. They have the capability to design and produce their own chips from start to finish. With complete control over the entire chip production process, IDMs have greater flexibility and can closely integrate design and manufacturing aspects. The global top IDMs are Micron Technology, Samsung Electronics, Intel, IBM, etc. These IDMs also serve a few Fabless chip companies by manufacturing the chips for them.

3. Foundries or Contract Chip Manufacturers:

Foundries, also known as contract chip manufacturers, are specialized companies that focus solely on chip fabrication. They provide manufacturing services for fabless chip companies and even some IDMs that outsource their chip production. Foundries operate advanced manufacturing facilities called fabs, equipped with cleanrooms, specialized equipment like high-cost lithography machines, and processes required for chip fabrication. Foundries offer a wide range of manufacturing processes and technologies, allowing their customers to choose the most suitable option for their chip designs. Foundries play a crucial role in the semiconductor industry by enabling fabless companies and IDMs to manufacture the chips designed by them using suitable technologies. The top foundries globally are Taiwan Semiconductor Manufacturing Company (TSMC), Global Foundries, etc. TSMC alone controls 60% of the foundries market. The customers of these foundries include non-semiconductor focused top tech companies like Apple, and Sony; in a few cases, Integrated Device Manufacturers (IDMs) such as Intel, etc; and a major chunk of customers constitute fabless chip companies like Nvidia, Qualcomm, AMD, Broadcom, Media Tek, etc.

In a nutshell, fabless chip companies focus on chip design and outsource manufacturing, IDMs handle both chip design and fabrication in-house, and foundries or contract chip manufacturers specialize in chip fabrication and provide manufacturing services to fabless companies and some IDMs. Each of these businesses plays a vital role in the semiconductor ecosystem, contributing to the development, production, and availability of semiconductor chips in the market.

4. Ancillary Backend Services: ATMP or OSAT:

The ATMP (Assembly, Testing, Marking, and Packing) or OSAT (Outsourced Semiconductor Assembly and Test) model in the semiconductor industry plays a critical role in the final stages of chip production. Most of the IDMs and Foundries have their own OSAT/ATMP plants, however, in the event of high demand for chips, these processes are outsourced to OSAT/ATMP companies. It plays an ancillary role in chip production. It involves the assembly, testing, packaging, and marking of semiconductor chips before they are ready for distribution and integration into electronic devices. The leading OSAT companies are ASE Technologies, Amkor Technologies, etc.

These companies focus solely on these backend processes and collaborate with fabless chip companies or integrated device manufacturers (IDMs) that outsource small parts of these operations. This model provides several advantages to semiconductor companies. It allows them to focus on chip design, research, and development while outsourcing the backend operations to specialized providers. This model offers flexibility and cost-efficiency, as semiconductor companies can leverage the expertise and infrastructure of the ATMP/OSAT providers without investing in their own assembly, testing, marking, and packing facilities.

ATMP/OSAT companies are crucial in the semiconductor industry's supply chain, ensuring that chips are efficiently assembled, thoroughly tested, appropriately marked, and securely packaged. They form the tail-end in this entire production of chips. They play a vital role in delivering semiconductors to the market after giving the final touch.

And at the end, a crucial and equally important component that supports and strengthens the entire chip-making process is the semiconductor equipment manufacturers (SEMs). Leading SEMs are ASML, Applied Materials, Lam Research, etc. ASML, which manufactures high-cost Lithography machines, wields a monopoly with 90% of the market share. Applied Materials, on the other hand, provides semico tech and manufactures equipment like ALD, CVD, etc. Lam Research also produces a range of equipment and offers tech support.

Challenges in realising a full-fledged fab hub

1) Capital-intensive industry:

The semiconductor chip industry by nature is capital-intensive. It requires a huge investment. The minimum investment may range from $3 billion to $6 billion. It is a long-term process, which typically takes 4-5 years to be operational completely. It is a key factor that is discouraging companies from setting up fabrication facilities. Chip companies also need to spend large amounts of money on R&D annually.

2) Specialized Machinery and Infrastructure:

Semiconductor chip manufacturing requires specialized infrastructure and highly advanced machinery & equipment. Moreover, it requires a sterile environment called a 'Clean Room' to prevent the chips from damage and corrosion.

It consumes a lot of electricity and an abundant water supply is essential for the successful operation of the plant. As chip manufacturing goes through lots of intricate processes, it consumes a lot of water. It is estimated that a large semiconductor plant needs 4.8 gallons of water per day.

Chip fabrication is also energy intensive. The government needs to ensure that there is an uninterrupted flow of electricity to the plant. This large consumption of energy results in a high volume of carbon footprint contributing to the climate crisis.

4) Race to minimize chip size:

Global Chip makers are racing against each other in a bid to reduce the nanometre size of the microchips. Last year, IBM achieved a breakthrough by unveiling a 2nm chip design. It is considered the smallest chip design so far. With the reduction in chip nodes, the production cost also increases. Currently, the conventional length of a chip is 10nm, however, leading companies like Intel and TSMC, were able to produce 5 and 7 nm chips, respectively. This competition pushes companies to develop cutting-edge fabrication processes and techniques, leading to increased efficiency, improved performance, and reduced power consumption in electronic devices. As a result, the industry evolves rapidly, and countries like India need to keep up with these advancements to stay competitive.

Opportunities for India in this semiconductor endeavour

1. Reduces import dependency:

Establishing India's own chip-making ecosystem helps it in becoming self-reliant by reducing imports. It will also allow India to not worry about global supply chain disruption or global trade sanctions.

2. Cost reduction:

Manufacturing semiconductors domestically can lead to cost reductions. Importing semiconductors involves various expenses such as transportation, customs duties, and taxes. By producing chips locally, India can avoid or minimize these additional costs, making the semiconductor industry more cost-effective and competitive.

3. Generates revenue from export:

With a strong domestic manufacturing base, India can produce semiconductors to meet its domestic demand and have surplus production for export. These domestically manufactured chips can be exported to other countries, generating revenue through international sales.

4. Helps local vendors & startups:

Local companies and vendors can become part of the semiconductor supply chain. As semiconductor manufacturing grows in India, there will be a need for suppliers of raw materials, equipment, chemicals, and other components. Local companies and budding startups can benefit from supplying these materials and services to semiconductor manufacturers, creating business opportunities and revenue streams.

5. Transfer of technology:

The chip companies setting up their fab in India will share their knowledge, expertise, and manufacturing processes with the Indian talent pool. This enables the transfer of advanced semiconductor technologies to India. The establishment of the fabs will help India in acquiring the crucial advances in chip-making technology.

6. Employment generation:

Even though front-end semiconductor production is a non-labour-intensive activity, it has the potential to contribute to the job market in the country. Self-reliance on semiconductors is expected to generate 35,000 specialized jobs and more than 1.5 lakh indirect employment.

7. Brings investments:

Development of the semiconductor environment is also expected to bring the investment to the tune of ₹1.7 lakh crore into the country. As the industry grows, it helps in attracting more global companies pumping investment to build their facilities in India.

India's journey towards becoming a global chip fabrication hub is marked by its ambitious initiatives, government support, and the entry of global players. With a focus on developing infrastructure, nurturing engineering talent, and attracting investments, India has the potential to emerge as a prominent player in the semiconductor industry. However, addressing challenges such as investment requirements and keeping pace with technological advancements will be key to realizing India's vision. With huge strides in the semiconductor initiative, India is clearly on the path of emerging as a global semiconductor powerhouse.