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Context: The article is discussing India’s efforts to set up a semiconductor fabrication plant, also known as a fab, and the importance of this endeavour. It highlights that India lags behind China in terms of semiconductor manufacturing capabilities and suggests that India could learn from China’s experience in this field. The article mentions that establishing a fab in India is not a matter of mere pride but has practical reasons, such as the growing market for semiconductors in India and the strategic importance of reducing dependence on semiconductor imports to avoid potential coercion. It acknowledges the government’s Semiconductor Mission for 2022 as a commendable step towards this goal. However, it also points out the uncertainty surrounding the establishment of a fab in India and the past failures in similar attempts. The article suggests examining the reasons for these failures and exploring alternative approaches to successfully set up a semiconductor fabrication plant in India.
Semiconductor Fab Background
What are Semiconductors?
- Semiconductors are materials that have electrical conductivity between that of a conductor (e.g., Copper) and an insulator (e.g., Rubber).
- This means that semiconductors can conduct electricity, but not as well as conductors, and they can also act as insulators, but not as effectively as insulators.
- This property allows for the creation of electronic components with specific electrical properties, enable the design of complex circuits and devices.
- Semiconductors are typically made from materials such as silicon, germanium, and gallium arsenide.
- Applications of semiconductors:
- Electronic devices: Semiconductors are the basis transistors, diodes, integrated circuits, microprocessors, and memory chips which are used in electronic devices such as computers, smart phones, televisions, radios, and more.
- Solar cells: They are used in manufacture of solar cells, which convert sun light into electricity.
- Lighting: They are used in light-emitting diodes (LEDs) to produce energy-efficient lighting.
- Sensors: They are used in power-electronics, which are used to control and convert electrical power.
Semiconductor market in India
- Indian semiconductor market was worth nearly $23.2 billion in 2021 and is further projected to reach $80.3 billion by the year 2028, growing at the CAGR of 17.10% in the forecast period.
- India’s semiconductor market is mainly driven by:
- The increasing demand for electronic devices, fuelled by a growing middle class
- Rising disposable incomes
- The increasing adoption of digital technologies.
- Government initiatives to promote the growth of the industry
- The Indian semiconductor industry is dominated by the design and development segment, which accounts for almost 80% of the market.
Why is the government encouraging semiconductor manufacturing?
- Reducing imports and achieving self-sufficiency: India imports 100% of its chips from Taiwan, Singapore, Hong Kong, Thailand, and Vietnam.
- Semiconductor manufacturing in India would not only help domestic companies reduce dependence on imports, but also generate revenue from exports to other countries.
- Criticality: Semiconductor chips are the lifeblood of the modern information age. They enable electronic products to compute and control actions that simplify our lives.
- Drivers of ICT Development: Semiconductors are essential to drive the ICT (Information and Communications Technology) development in the country, which is critical for India to benefit from the 4th industrial revolution.
- Enhances National Security: They are used in critical infrastructures such as communication, power transmission, etc., that have implications for national security.
- Strategic independence: Domestic semiconductor manufacturing can enhance India’s strategic independence and reduce vulnerability to supply chain disruptions by making the country less dependent on other countries for critical technologies.
- Multiplier Effect on Different sectors: Development of the semiconductor and display ecosystem will have a multiplier effect across different sectors of the economy with deeper integration to the global value chain.
Challenges in semiconductor manufacturing in India:
- Complex value chain: The chip design component is highly dependent on Research and Development (R&D) and Intellectual Property (IP) protection, and hence extremely expensive.
- Though many foreign companies have their R&D divisions in India, inadequate IP protection and contract enforcement make it difficult for the companies to collaborate with Indian companies.
- Requires Huge investment: Semiconductor manufacturing is a complex, capital and technology intensive process.
- Requirement of specific raw materials: Semiconductor fabrication requires specific raw materials such as silicon, germanium, gallium arsenide, as well as chemicals and gases, that need to be imported.
- Lack of uninterrupted power and water supply: In addition to the huge cost, manufacturing a single chip requires hundreds of gallons of pure water, which is both difficult and unsustainable for India.
- Other Issues: Lack of long-term stable policies, constant price pressure from other global players, ever-changing innovations and rapid changes in technology etc.
Decoding the Editorial
The article is discussing India’s efforts to set up a semiconductor fabrication plant.
- In 2007, a Special Incentive Package (SIP) was introduced, but it did not receive any positive response from potential investors or companies.
- However, in 2012, a Modified SIP was implemented, which had better results.
- After more than two years of extensive outreach to major fab companies worldwide, India came close to securing a fab.
- The Cabinet approved two consortia for the fabs, one involving Jaiprakash Associates in partnership with IBM and TowerJazz, and the other led by Hindustan Semiconductor Manufacturing Corporation with ST Microelectronics.
- The total investment required for both fabs was $10 billion, and the government offered incentives worth almost $5 billion, including cash and tax cuts.
- The locations for the fabs were finalized, and land was allocated.
- Despite these efforts, both consortia ultimately failed to mobilise the necessary resources to establish the fabs.
China’s entry into the semiconductor fab industry:
- Although China started relatively late, it received massive government financial support over the last two decades, enabling it to acquire numerous loss-making fabs from around the world and establish its own fab industry.
- Leveraging lower manufacturing costs and a large electronics manufacturing industry, China’s chip production has grown rapidly.
- By the time the United States, which traditionally led in this field, realized it, China had become a major chip producer.
- Additionally, China’s market supremacy in rare earths, which are crucial for chip production, has given it a strategic advantage in chip-making.
- The US and its Western allies have recently blocked the transfer of the latest fab-related technology to China.
- However, these actions may have come too late to prevent China from establishing its dominance in the industry.
- To counter this, the US enacted the CHIPS and Science Act in 2022, providing substantial subsidies of nearly $40 billion to revitalise semiconductor manufacturing in the country.
- Similarly, the European Union sanctioned €7.4 billion for a new fab in France.
- India will need to compete with these countries in what has become a fierce competition in the semiconductor industry, emphasising the intense nature of this “chip warfare.”
Challenges related to investment in semiconductor fab and chip manufacturing:
- Investment Risk: Building a semiconductor fab requires a significant investment, and it takes time to recover the billions of dollars invested before the technology becomes obsolete. To achieve economic viability, substantial production volumes are necessary, often at levels that can meet global demand. This makes it challenging to rely solely on the domestic market for a fab’s success.
- Global Sales Advantage: Semiconductors have a small freight-to-price ratio and benefit from a zero-custom duty regime under the Information Technology Agreement. This enables production in a single location and facilitates global sales. As a result, companies are not interested in setting up a greenfield fab (a completely new fab) because they prefer a global sales approach.
- Challenges in Developing a Chip Manufacturing Ecosystem: Establishing a chip manufacturing ecosystem in a greenfield location is a significant challenge. It requires access to hundreds of chemicals and gases for chip fabrication, skilled workforce training, and abundant clean water supply. The art of chip-making is crucial, and despite having top-notch equipment, poor quality and low yields can lead to the failure of fabs.
- Different Types of Fabs: There are different types of fabs, including logic/processor fabs, memory fabs, and analog fabs. Logic chips are strategically important and generate high profits, requiring the most advanced technologies for manufacturing. Analog chips are essential but have less strategic value. Memory fabs use the most advanced feature nodes, while analog fabs can have larger feature sizes, like 130 nm. Logic fabs are the most expensive to set up, while analog fabs are relatively less expensive.
- Assembly, Testing, Packaging, and Marking (ATMP): ATMP is an option to develop the fab ecosystem before setting up a full-fledged fab. However, ATMP primarily focuses on assembly, testing, packaging, and marking of chips, and it has limited value in terms of actual chip-making.
Lessons for India from China:
- India’s strategy in the semiconductor industry is to set up a new logic fab, taking inspiration from China’s approach.
- China acquired loss-making fabs from around the world and subsequently established its own logic fab, which provides valuable lessons for India.
- Acquiring existing fabs offers several advantages, including reasonable pricing, established technology, a supply chain ecosystem, an existing product line, and an established market.
- By acquiring these fabs, India can build its fab ecosystem and train its human resources.
- Moreover, lower subsidies would be required for such acquisitions, allowing the saved funds to be utilized for advanced research and development (R&D) in fab technologies.
- This, in turn, would contribute to the development of a state-of-the-art fab in the coming years.
- Another strategy is the establishment of Assembly, Testing, Packaging, and Marking (ATMP) facilities.
- Tessolve, which is now owned by the Tatas, set up an ATMP in 2013-14.
- This ATMP has been successful in packaging chips with a feature size of up to 7 nm. China, on the other hand, has more than 100 ATMPs.
The article concludes by using a Chinese saying: “the best time to plant a tree was 20 years ago, but the second best time is now.” This implies that while China started its journey in the fab industry 20 years ago, it’s not too late for India to take action and make progress in this field. The saying encourages India to seize the current opportunity and make advancements in the semiconductor industry.
Beyond the Editorial
Initiatives taken for semiconductor manufacturing in India
|Semicon India Program
|India Semiconductor Mission (ISM)
|Modified Special Incentive Package Scheme (M-SIPS)
|National Electronics Policy (NEP) 2019: