The chips are stacked against India

The global semiconductor supply chain is undergoing a geographical shift even as India is aspiring to enter the space with its own chip fabrication plants. However, the attempts are fraught with challenges which India will find difficult surmount.

Harboring semiconductor ambitions for over two decades now, India has had several false starts over the years. The latest attempt too appears headed that way with an apparent lack of clarity on where to peg itself in the semiconductor supply chain, and pockets that appear too shallow to fund it. 

On the one hand, even though there are several interested parties, India’s effort to seed a chip fab appears an uphill task in the backdrop of the current global attempts to redraw the semiconductor supply chain map. On the other, it has joined issue with China protesting a restrictive US Chips and Science Act, which could place it on the wrong side of the US which is trying to “friendshore” the supply chain.

A chip war that predates Covid-19

To set the context, the chip war between the US and China predates the Obama era when in 2015 China made clear its intent of catching up with America by 2025 with its Made in China plan.

While the Made in China plan pitted China’s superpower ambitions directly with America’s industrial leadership, Covid-19 and the subsequent supply chain disruptions highlighted why the US wants to regain control over the semiconductor supply chain.

For US policy makers and industry alike, it is a worrisome fact that even though American companies contribute 39% of the total value of the semiconductor supply chain only about 12% of this is onshore. Allies, Japan, Europe primarily the Netherlands, UK and Germany, with Taiwan and South Korea contributed another 53% in 2021.

Interestingly, the US has taken a leaf out of the Chinese playbook with the Chips Act promising a host of incentives for companies either adding or shifting capacities to the American homeland. At the same time Japan, Taiwan and South Korea, which along with the US are dubbed the Fab-4 Alliance, have their own versions of the Chips Act.  

The US Chips Act includes conditions that prevent participating companies from working with China apart from setting profit sharing stipulations that semiconductors majors are not necessarily happy about. These restrictions also cover supplies of semiconductor equipment including highly sophisticated lithographic etching knowhow and equipment to China.

Big boys and deep pockets

The truth is that the global semiconductors industry is a turf that belongs to the big boys backed by governments throwing big money behind them.

For instance, while the EU will mobilize over €43 billion in public and private investments across the supply chain, the US Chips Act promises $52.7 billion in doles to companies, American and otherwise, setting up or expanding operations in the country. South Korea and Japan too have put together war chests that promise to be sizeable. But most of these war chests pale before the Chinese National Semiconductor Fund, which starting off at $29 billion in 2015, is said to have grown to $146 billion (1 tr Yuan) today. The country has set a target for producing 70% of its own chips by 2025 from the 16% in 2020. It is significant that China also accounted for 10% of the global chips sales in 2021.

Over this period, the Chinese plans seem to have worked well with most global companies setting up capacities there.

However, the US Chips Act, since it was announced in August 2022, seems to be showing results. Investments totaling close to $200 billion are said to have either already been grounded or on the drawing boards.  At least 40 new Fab facilities are reportedly on the anvil across 16 states in the country.  

India’s me-too chip drive

Coming back to India’s attempts to get on to the semiconductor bandwagon, it worth noting that it is starting off ground up and has a long distance to cover unlike China. A semiconductor ecosystem is non-existent in the country save for some electronics component makers apart from a sizeable chip design prowess thanks to a strong software industry.

On the other hand, the $10 billion that it has announced, through the PLI scheme for chips and display fabs, may be too little, too late.

The PLI scheme comes on top of the 2020 Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), which envisages a 25% incentive on capital expenditure for companies setting up capacities for downstream electronic goods including components, semiconductor/ display fabrication units, ATMP units, specialized sub-assemblies and capital goods to make them. 

The Modified Scheme for setting up of Semiconductor Fabs in India of 4th October, 2022 envisages fiscal incentives of up to 50% of the project cost at a minimum threshold capital investment of Rs 20,000 crore. Unlike the earlier notification in December 21, 2021, the modified policy does not specify the nodes, India is understood to be more interested in the 28 nm chip fabs on 300 mm wafers at a capacity of 40,000 wafer starts per month. This is the global norm with most capacities across the world aligning to this. 

However, investors and industry alike, are asking deeper questions of the government wanting more clarity on the scheme. Not surprisingly then, the few proposals that have come forth seem to be struggling.

The Vedanta-Foxcon combine, perhaps the most credible prospect for an Indian chip fab, is apparently finding it difficult to find a technological partner. ST Micro the reported partner was reportedly hard to get.

Vedanta last week said it had indeed tied up a technology partner apart from a host of potential customers most of them South Korean electronics components makers. However, it will not be till 2027 when the first chips will roll out of its factories slated to be set up in Gujarat.

The other potential fab maker in India is the ISMC Analog, a consortium of Mumbai-based Next Orbit Ventures and Israeli tech Tower Semiconductor, which was acquired by Intel some time back. The location for this fab is to be in Karnataka and to set up a $3 billion unit. 

This apart real estate major, the Hiranandani Group is said to be looking at setting up a Fab cluster in the NCR attracting several ecosystem players.

While the suspense continues, the reality is that even if the Indian government can action a credible and attractive policy, the Indian fab capacities will be limited to making legacy chips and displays. Not a bad thing to have surely, but an uphill task nevertheless given the current geographic shift of the supply chain from Asia back to the West in the midst of a restrictive and inward looking global environment. 

Just consider this, making a single computer chip involves over 1000 processes with several of them being carried out across several international borders before it reaches the end customer. It took TSMC, the world’s largest chip-maker over 30 years to build a network of 2500 top-tier suppliers and over 10,000 secondary suppliers, many of which are based in China, according to industry reports.  China clearly seems to have overcome this by building an advanced ecosystem that can withstand pressures from the US which is seeking to limit the former to making only legacy chips.

Moreover, this is the not first time India is trying to build fabs. There have been at least three attempts in the past with several proposals being put up by private sector players that came to naught for various reasons. Almost every big name in the semiconductor business was bandied around. Clearly, India was not ready for it. The question is, given that the global semiconductor supply chain map is being currently redrawn, perhaps for the wrong reasons, does India stand a chance this time round? One only hopes it does.