India, Incentives, and the Race of Leading the Semiconductor Market!
Can India incentivise the semiconductor industry?
Semiconductors can be the least touched upon subject for many of us, given it is much underrated. But in fact, they play a vital role in the innovation and economic advancement of any country. We use semiconductor products in our daily lives without even realising it.
Confused, how is that possible?
Well, electronic chips are the primary product of this industry. These chips are used in most electronic devices, including our smartphones, laptops, televisions, cars, etc. For our devices to function, these chips are a core requirement. “If the hardware is the bone of the head, the skull; the semiconductor is the brain with the head.”
In 2020, India’s semiconductor market worthed US$15 billion, which is likely to be valued at US$63 billion by the year 2026. Yes, the progress seems promising. Though India relies 100 per cent on semiconductor imports, spending around $24 billion per year. As a result, we would need concrete measures to achieve the dream of making India the semiconductor hub.
Now, let’s skip to the good part!
In December last year, the Indian government announced a whopping US$10 billion package to help this industry thrive and lure global manufacturers to establish facilities in the nation. The semiconductor industry package introduced has two main categories for the incentives
- It will provide up to 50 per cent of the total cost for setting up projects in India to the eligible companies manufacturing chips lower or equal to 28 nanometers (nm).
- While for manufacturing chips ranging between 28 nm to 45 nm, incentives will be 40 per cent.
The objective of these incentives is to invite companies to set up their own chip manufacturing and fabrication facilities in India and help the country become a leader in this space.
The question is why domestic manufacturing of semiconductors is so crucial for India?
As I mentioned before, chips are the core product for the semiconductor industry but making chips is a Hercules task as they can be 50 times tinier than a virus. The supply chain for these chips is divided into i) designing ii) fabrication and iii) assembly. And now, comes the challenging part for us.
India already enjoy a competitive position for chip designing, with 20,000+ engineers designing around 2,000 chips annually. Also, there are 120 design units in India. But what we lack is the fabrication facility for making chips.
The companies that manufacture and sell these chips are known as ‘fabless’ companies. India hardly has any fabless companies established and has to rely on other nations, including Taiwan, the US, and ASEAN, to manufacture chips.
If this doesn’t seem that bad, there is more.
As soon as we send chip designs for getting fabricated in other nations, we lose Intellectual Property (IP) rights as patents on these chips have to be filed outside India. The conclusion is that even with bright minds and creative imagination, we don’t have the Indian mark on our products, officially.
Moreover, it also creates a threat for us as these chips are not only used for electronics, telecommunications, finance, or transportation space but also used in making defence equipment. We can link this with why domestic semiconductor manufacturing is key for India!
India has strong competition from other Asian countries, creating a question.
How will we gain the upper hand in the global semiconductor market?
Compared to the last decade, India has many advantages here. And government incentives are providing the required push. Let’s divide this part to understand the strategic move the Indian government is trying to pursue with its incentives.
i) Advantage of scalability: After the COVID-19 pandemic, semiconductor manufacturing has taken a toll. The scarcity has impacted many industries. In addition, the demand is constantly increasing given the global digital disruption and the increasing usage of electronic devices. The only solution here is to increase chip production.
India is a geographically and population-wise rich country having greater scalability to undertake this challenge. In fact, you would be surprised to know that India has the capacity to create so many chips that it can convert entire Taiwan into its own chip factory. And, this indeed is an attractive bargain for manufacturers.
ii) Geographical benefit: We also have a geographic advantage at the moment. China’s market capitalisation for chip manufacturing accounts for 6% in Asia. But because of the trade tension between the US and China, the entire supply chain of this industry has been hampered in the past.
This has led the EU and the US to opt for a different partner for managing the supply chain that China is no longer a part of. India has cordial relationships with both of these to establish itself as a reliable partner and increase its market share in the coming years.
We already have these advantages in our wing, and the government incentives will advocate the rest to attract manufacturers.
Let us see how?
For establishing a fab unit in any nation, the cost can be anywhere from US$5–10 billion. It also requires a constant supply of raw materials, human resources, and natural resources such as water. India has all these in plenty, and it aligns with the “Make in India” notion — utilises local material, increases employment, and helps the economy grow.
As a result, the government will be highly motivated to provide significant support to companies looking to make India their semiconductor hub. Apart from the 50 per cent incentives, India possesses a talented pool of engineers with well-established designing facilities that can lure investments in this industry — making it a win-win deal for chip manufacturing companies.
Well, guess what!
Unlike our past attempts, we can already see the positive outcomes this time.
In less than three months of announcing the incentive program, we have already got investment proposals from 5 companies amounting to $20.5 billion. Indian company Vedanta in association with Taiwan’s Foxconn, Singapore’s IGSS ventures, and ISMC, has showcased an interest in setting up a chip manufacturing facility in India worth $13.5 billion. Against their investment, they might be incentivised for $5.6 billion under India’s incentive scheme. The other two companies in this list are Elest and Vedanta.
In addition, Tata Group is also considering establishing $300 million worth of chip manufacturing units in the country by partnering with global companies. Also, how can we forget Israel’s Tower Semiconductor, the first global company to approach Indian regulators!
Fast-forwarding to today…
The Indian government aims to inaugurate the first chip fabrication facility in 2024, with the bid being open till March 31, 2022.
From its past mistakes on PIL (Production Linked Incentive) schemes, India has learnt that monetary support is insufficient to sustain. Regulatory support, ease of doing business, and availability of resources are a must. And, this time, we are all ready to rectify it and make India a dominant nation for semiconductors.
Lastly, this will also help create more than 35,000 skill-based and 1,00,000 indirect employment in the country.
Will this lead to Apple, Microsoft, or Intel landing on Indian soil like Tesla? Or will it actually help India become a $5 trillion economy by 2025?
The probability is undoubtedly high!
Let’s wait and hope for the best.
