Semiconductor industry: India’s final frontier in technology investment

mobile phone manufacturing success
India's mobile phone manufacturing has undergone a dramatic transformation, shifting from heavy import reliance to becoming a leading global producer.

India is trying to woo the US companies to set up units in the country as it looks to ramp up domestic semiconductor production. The country is striving to become the next big destination of the global semiconductor industry, even though it is fighting a plethora of sticky issues that need fast resolution.

IT and communications minister Ashwini Vaishnaw recently met the top executives of US technology companies such as Google in San Francisco, and made an outreach to them. The agenda was to persuade American semiconductor and OSAT/ATMP companies to invest in manufacturing plants in India. India offers incentives under the semiconductor scheme for chip making and is making diplomatic visits to interest companies in benefiting from these schemes while also allaying concerns they may have about government policy.

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After the ongoing outreach, meetings of the US-India Cooperation on Information and Communications Technologies will follow, organized jointly by the Ministry of Electronics and Information Technology and the US government. The meetings will take place in New York and Washington from May 15-18. Tech companies such as Amazon, Microsoft, Accenture, VMware, Equinox, Iron Mountain, Palo Alto, Yahoo, Intel, and Meta are expected to join.

Semiconductors are the lifeline of the technology industry, as their uses range from consumer electronics to bank ATMs, trains, the internet, communications, and other parts of social infrastructure. The fact that this commodity is so crucial to modern-day living can be emphasized by the fact that it is being called the new oil. It is estimated that the globe will require over 1 million additional professionals to power the growth of the semiconductor industry by the end of the decade, and India can provide a substantial portion of that talent.

India’s semiconductor manufacturing sales value increased at a CAGR of nearly 11% from 2017 to 2022. While the country designs semiconductors and then dispatches them to countries like China, Taiwan, the USA, and a few European countries for manufacturing, India still remains 100% import-driven and is only involved in designing, assembling, testing, and packaging of semiconductors.

A Deloitte report estimates that the Indian semiconductor market is likely to reach $55 billion by 2026. Over 60% of the market is driven by smartphones and wearables, automotive components, and computing and data storage industries. India has an edge over its European and US counterparts as the cost of putting up fab plants in Asia is far lower in the South-Asian nation.

To attract tech giants to invest in India, the government introduced a $10 billion semiconductor scheme under which financial incentives of up to 50% of the cost of a project are provided. The same attracted a handful of global players, including a partnership between Vedanta Resources Ltd and Taiwan’s Foxconn. Last September, Vedanta and Foxconn signed a pact with Gujarat to invest $19.5 billion to set up semiconductor and display production plants. India is likely to reopen the application process for $10 billion in incentives and assistance to encourage chip manufacturing soon and will allow companies to apply again. India will accept applications until its budgeted $10 billion in incentives is exhausted.

Concerns regarding the Indian semiconductor industry

While India has attracted global giants with policy tweaks and incentives, not many have confidence in New Delhi’s policy environment and have expressed concerns about its stability. With such concerns, tech behemoths are not sure if multi-billion-dollar investments in the country can reap benefits. Many Taiwanese companies in OSAT have already relegated these concerns and want more engagement with the government after pressure from their clients to follow a China plus and Taiwan plus policy and set up an alternative Asian hub.

Moreover, the semiconductor industry is capital-intensive, requiring significant investments in equipment, research, and development. Without assurance from the government, companies are reluctant to make heavy investments.

In addition to concerns over the stability of India’s policy environment, the semiconductor industry faces various challenges. It requires specialized infrastructure, including cleanrooms, fabrication plants, and testing facilities. Without ramping up the current infrastructure, India cannot scale up chip manufacturing. Furthermore, despite having the world’s highest population, the country lacks a skilled workforce that can be deployed in areas such as semiconductor design, materials science, and process technology.

India also faces stiff competition from countries like China, Taiwan, and South Korea, which have established semiconductor industries and a strong ecosystem of suppliers and customers. The United States, a strong bilateral partner in the industry, currently has a Chip 4 alliance with top semiconductor makers such as Taiwan, Japan, and South Korea. India is still far from becoming a trusted partner. The chip-making industry is highly concentrated, with 90% of 5nm (manometer) chips mass-produced in Taiwan by the Taiwan Semiconductor Manufacturing Company (TSMC). India can learn from Taiwan’s playbook that heavy investment in research and development is key to making its semiconductor industry viable.