It’s been a year and a half since India’s incentives to support the semiconductor manufacturing industry as a ‘national mission’, but progress in this regard has been rushed.
The American company Micron has announced an investment of about three billion dollars in an assembly and test plant in the western state of Gujarat.
Meanwhile, Taiwanese technology company Foxconn has withdrawn from its $19.5 billion joint venture with Indian company Vedanta to build a chip plant.
Local media say plans for at least two other companies are on hold.
The Narendra Modi government has given $10 billion in incentives to chip companies and is now looking forward to investing in the sector. The government is forming a group of technology partnerships to strengthen the industry.
India signed an agreement on Critical and Emerging Technologies (ICET) with the US to enhance bilateral cooperation on the semiconductor supply chain, while a similar memorandum of understanding was signed with Japan last week.
In addition, at least three Indian states have announced individual policies aimed at securing investment in the sector.
Konark Bhandari, a fellow at Carnegie India, says that while a large subsidy and strong policy have allowed the sector to grow, technology transfer will play a key role in its progress.
“Whether or not companies commit to bringing in these technologies will depend on a number of factors such as business environment, local market, export potential, infrastructure and talent,” he says.
Currently, only a few pieces of the puzzle of this industry’s success are found.
India’s superiority
Semiconductors are involved in virtually every aspect of modern digital life. Be it tiny smart phones or the mega data centers that rule the Internet.
Advanced semiconductor technology is critical to advances in fields ranging from electric vehicles to artificial intelligence.
At present, India accounts for five percent of global demand for chips.
According to industrial productivity research company Deloitte, this number is expected to double by 2026, thanks to new technology trends such as smartphones, appliances and self-driving cars.
According to the Deloitte report, ‘The local market is clearly thriving, but key steps in the chip production value chain include product development, design, fabrication, ATP (assembly, test and packaging) and support.
India only specializes in design function. As far as manufacturing is concerned, here it has to be started from scratch.
Kathir Thandavariyan, a member of Deloitte, told the BBC that there are 50,000 Indians doing this work. He said that India has 20% global talent in chip design.
Most major semiconductor manufacturers such as Intel, AMD and Qualcomm have their largest research and development centers in India, leveraging local engineering talent.
According to Deloitte, acquiring trained personnel can be a major hurdle for companies as an estimated 250,000 people are needed to work in the value chain when the investment starts.
Therefore, collaboration between industry and academia will be very important in this area.
For example, the government is working on making 85,000 engineers talented through its ‘Chips to Startup’ scheme.
According to experts, India is lagging behind in the global race because of the absence of logistics, infrastructure and a stable power system. These factors are important for the development of the semiconductor industry.
Regional politics also seem to favor India. The US has looked to India as an alternative to China for outsourcing parts of the semiconductor supply chain.
As a close ally, India is a viable solution for US companies to relocate some of its production, according to Thandavarin.
However, this protectionist trade policy, especially its absence in multilateral trade agreements like RCEP (Regional Comprehensive Economic Partnership), can prove costly.
“If semiconductor companies based outside of China diversify, if they move to Vietnam, they are unlikely to face major changes in the tariff scheme applied to their components,” says Bhandhari.
“This is because there is likely to be greater uniformity between countries that are part of the same regional trading arrangement.”
Obstacles
In positioning itself as a global option for chipmakers, New Delhi faces a challenge all too familiar to manufacturing industries.
The country is known for its software expertise but currently lacks hardware capabilities.
The share of the manufacturing sector in GDP has stagnated over the years due to the lack of enabling environment.
Experts say India will need “fundamental and sustainable reforms” to change this and make its semiconductor mission a success.
“This includes removing barriers to investment such as customs tariffs, tariffs and infrastructure,” Stephen Ezell of the US-based Information Technology and Innovation Foundation told the BBC.
“India will not be able to compete with China, the EU or the US if it cannot attract semiconductor ATP and fabs through incentives alone.”
This policy of concessions is also in other countries around the world. The European Union and the United States give far more concessions in this sector.
Bhandari says that most companies will not move their operations for subsidies because they have an existing ecosystem of suppliers, partners, customers, logistics network.
Experts say that India’s subsidies can also be improved. Currently, the country can play to its strengths.
For example, it could invest in training schools for engineers or redouble its competition in semiconductor ATP and design support rather than the actual manufacturing of chips, which is a highly capital-intensive and lengthy process.
Ezell cautioned that the Indian government should not just be attracted by the sector’s brilliance. Rather, it has to step in, for which the government’s efforts to get more investment are in the right direction.
Bhandari says the lack of local fabrication facilities will also have a serious impact on India’s import costs as domestic electronics production has crossed $100 billion.
A big gamble
A lot is clearly at stake with India’s semiconductor gamble.
Its initiatives have proved false in the past, but after years of delay, the One Commitment policy is only the first step in the right direction.
Bhandari says that this is a fresh opportunity to correct past mistakes for which the politics of the region is also helping.
In a world tangled with fragmented supply chains, India finds itself at a crossroads. He can either make a serious effort to boost hardware manufacturing or miss another opportunity.