How India’s first semiconductor fabrication plant can help plug in to global value chain
Context- The Union Cabinet has approved a series of semiconductor-related projects with investments totaling about Rs 1.26 lakh crore. The highlight of these projects is the Tata Group’s semiconductor fabrication plant, developed in partnership with Taiwan’s PSMC, due to its strategic significance. The plant is planned to be a pure-play foundry, producing semiconductor wafers for various industries, including high-performance computing, display drivers, and microcontrollers (MCU). The land for the plant has been identified, and construction is expected to commence in about three months.
The jump
- The approval of the Tata Group’s semiconductor fabrication plant marks a significant leap for India’s semiconductor ambitions, an area where previous attempts to attract global companies have been unsuccessful.
- This development is particularly noteworthy given that about 70% of the current global manufacturing capacity is concentrated in South Korea, Taiwan, and China, with the US and Japan accounting for much of the remainder.
- Semiconductors, also known as ‘chips’, are integrated circuits composed of transistors, diodes, capacitors, resistors, and numerous interconnections layered on a silicon wafer.
- These chips are manufactured in highly specialized facilities known as fabs, which require clean rooms to maintain sterile conditions and prevent contamination.
- The fabrication process is complex, involving between 500 and 1,500 steps and requiring multiple inputs such as silicon wafers, commodity chemicals, specialty chemicals, clean water supply, and uninterrupted power supply.
- However, the strategic and economic benefits of having a domestic fabrication plant outweigh the complexity of the manufacturing process, as these chips are used in virtually all downstream industries, from rockets to cars to kitchen appliances.
- The timing of this development is also significant in light of current geopolitical tensions and strained relations between the US and China, two major players in the technology value chain. With government-funded schemes to boost the local industry, India aims to play an increasingly prominent role in this space.
The incentives
- In December 2021, the Indian government launched a Rs 76,000 crore chip incentive scheme, offering to subsidize half of a plant’s capital expenditure costs. The approved proposals will receive 50% of their capex costs from the Centre.
- Additionally, the government offers subsidies to companies through schemes like the Production Linked Incentive (PLI) plan for smartphone and laptop manufacturing, based on their sales bills.
- India’s chip incentive plans aim to boost all three aspects of the semiconductor ecosystem: packaging units (ATMP facilities), assembly and testing projects (OSAT plants), and full-scale foundries that manufacture chips.
- Semiconductors, which are complex to design and manufacture, provide essential functionality for electronic devices to process, store, and transmit data.
- According to a report by the Semiconductor Industry Association, no other industry invests as much in R&D (22% of annual semiconductor sales to electronic device makers) and capital expenditure (26%), making semiconductor fabrication a highly capital-intensive business with high entry barriers.
Closed ecosystem
- The global semiconductor chip industry is dominated by a few countries and companies, with Taiwan and South Korea accounting for about 80% of the global foundry base for chips.
- The Netherlands-based ASML is the only company that produces EUV (extreme ultraviolet lithography) devices, essential for making advanced chips. Arm, a UK-based chip designer where Nvidia is a stakeholder, is the world’s largest supplier of chip design elements used in various products, from smartphones to game consoles.
- The industry is a nearly closed manufacturing ecosystem with high entry barriers, as evidenced by China’s SMIC, which is reportedly struggling to procure advanced chip-making equipment due to a US-led blockade.
- Nvidia dominates the market for chips used for high-end graphics-based applications, including gaming, crypto mining, and AI.
- India is making progress in semiconductors, aided by cooperation and partnerships with the US, EU, Japan, Korea, and others. Minister of State for Electronics and IT, Rajeev Chandrasekhar, stated that India has a unique opportunity in electronics and semiconductor design due to export control headwinds working against other countries.
- The government is currently evaluating a proposal by Israel’s Tower Semiconductor to develop an $11 billion fabrication plant in India. If accepted, this would enhance India’s potential as a significant destination for the manufacturing of mature node chips.
- Last year, India approved a $2.75 billion packaging plant being set up by US-based Micron Technology, currently under construction in Gujarat.
The challenges
- India faces several challenges in its semiconductor ambitions. Firstly, countries like the US and EU have rolled out more lucrative incentive schemes, causing India to focus on more mature nodes like 28 nm and older. It’s unclear how long it might take for India to attract companies like TSMC, which currently makes chips with a node size of 3 nanometres.
- Secondly, while India is a major hub for design engineers, there’s a shortage of skilled talent for fabrication plant operations. However, having a domestic foundry could allow engineering students to gain first-hand experience, potentially attracting more engineers to the field in India.
- Lastly, India currently lacks original research in semiconductor design. To address this, the government is setting up a R&D lab at the Semiconductor Laboratory (SCL) in Mohali as part of a Rs 10,000 crore modernisation plan.
- A significant portion of this will go towards establishing the Bharat Semiconductor Research Centre, focusing on developing chips that cater to India’s unique needs and demands.
