As part of an ambitious drive to establish India as a global electronics production hub, the government gave the nod for a $10-billion incentive plan to establish chip and display industries in India. This push is aimed at building a complete semiconductor ecosystem -from the design of semiconductor chips to their fabrication, packing and testing in the country.
This production-linked incentives (PLI) and capital support scheme comes at a time when industries across sectors, including the auto sector, in India are grappling with massive production cuts due to global chip shortage. India currently imports all chips to meet the demand, which is estimated to reach around $100 billion by 2025 from $24 billion now.
Offering PLIs to companies for a period of over six years, the government expects to attract investments worth ₹1.70 trillion from more than 20 units, said media reports. Chipmaking and display units already have plans to set up units with investments ranging from ₹30,000-50,000 crore, said the government. Media reports in dailies like the Times of India in November had suggested that the government was in active discussions with companies like TaiwanSemiconductor Manufacturing company, Intel, AMD and United Microelectronics.
In August of 2021, Tata group Chairman N Chandrasekaran announced that the salt-to-automobile conglomerate will foray into semi conductor manufacturing business.
Despite a poor track record, India is now trying hard to create robust supply chains in the midst of a global chip shortage and to cut its reliance on China.
The importance of chip manufacturing in an economy
The country’s need to establish chip and display manufacturing units was emphasised by ministry of electronics and information technology in a statement on Wednesday (December 15). “In the current geopolitical scenario, trusted sources of semiconductors and displays hold strategic importance and are key to the security of critical information infrastructure,” the statement said.
With this incentive plan, the government hopes not just to boost the production of critical components used in automobiles and mobile phones locally but also focus on design, fabricate, packing and testing the semiconductor chips and end up creating a complete ecosystem.
Emphasising the importance of the incentive plan, communications and information technology minister Ashwini Vaishnaw told reporters, “Any country that does not learn to make wafers (semiconductors) will lag behind others in the days to come. Any economy that does not have control over semiconductors, quality and design and does not have a focus on talent development will not be able to move forward.”
The scheme is expected to generate 35,000 direct and 100,000 indirect jobs, he added. A government release stated that semiconductors and displays are the foundation of modern electronics driving the next phase of digital transformation under Industry 4.0.
A very complex and technology-intensive sector involving huge capital investments, high risk, long gestation and payback periods, and rapid changes in technology, it requires significant and sustained investments. This scheme would provide an impetus to this sector by facilitating capital support and technological collaborations.
The government will extend financial support of up to 50 per cent of the project cost to firms selected to set up semiconductor and display fabs in India.
It will also work closely with states to establish high-tech clusters with requisite infrastructure such as land, semiconductor-grade water, high-quality power, logistics and research ecosystem to house the fabs.
The government will provide 30 per cent of capital expenditure for setting up compound semiconductors and semiconductor packaging facilities. It expects at least 15 such units to be established with its support. Under a separate design linked incentive (DLI) scheme, the government will extend product design linked incentive of up to 50 per cent of eligible expenditure and product deployment linked incentive of 6 per cent -4 per cent on net sales for five years.
Support will also be provided to 100 local companies engaged in semiconductor design for integrated circuits, chipsets, system on chips (SoCs), systems and IP cores and semiconductor-linked design. The government added that this scheme would enable the growth of at least 20 such companies that can achieve a turnover of more than ₹1,500 crore in the coming five years.
An India Semiconductor Mission will also be set up and this will be helmed by global experts in the semiconductor and display industry. This will act as a nodal agency for efficient and smooth implementation of the schemes and long-term strategies for developing sustainable semiconductors and display ecosystem. Semiconductor laboratories will also be modernised and commercialised.
The government will also try to enter into a joint venture with a commercial fab partner.
How the chip shortage had impacted India?
With mobility restrictions due to the pandemic lockdown last year, demands for the chips from consumer tech product manufacturers increased substantially. The chip makers too shifted their production capacity accordingly. Later, when the auto industry restarted operation and demand for microchips increased significantly, a major disruption occurred as chip manufacturers were unable to cater to the demand.
The auto sector reportedly was worst affected by the chip shortage. Around 40 per cent of the components that are used in these cars are electronic and will require a chip to function. Typically, the more features a car has, the more chips are required to control them. According to auto manufacturers, the global chip shortage is all set to impact India for the next 2- 2.5 years.
Also read: These mega roadblocks could bite into Tatas’ ambitious chip plans
India’s largest carmaker by deliveries, Maruti Suzuki, had to cut production by 60 per cent at its Haryana and Gujarat plants due to a lack of chips.
Since then, there has been a lot of discussions about building a local chip manufacturing ecosystem that can support the auto industry and other relevant sectors as well. With the newly approved PLI scheme for the microchip manufacturing sector, this concern is expected to be addressed.
“We appreciate the government’s effort to understand and recognise industry’s demands and envisioning a time-bound incentive-led vision that will help the industry with every aspect—from design and fabrication to packing and testing,” industry body Nasscom said in a statement.
However, industry leaders pointed out that necessary permissions to establish the industry need to be given with the same swiftness. There is current and potential demand, and hence India must not miss the boat, they said.
India’s track record for setting up chip manufacturing units is poor
India’s track record to build this sector has been poor. Earlier, an Israel-based semiconductor foundry, Tower Semiconductor, had to appeal to Prime Minister Narendra Modi to intervene to fast-track a government proposal for chip manufacturing after waiting around for nine months after the government floated an Expression of Interest for the project. In 2020, the government floated EoI inviting applications to set up semiconductor fab plants. The response was lukewarm. At that time, foreign manufacturers had pointed out that the US government was offering incentive support of $50 billion dollars, South Korea $100 billion dollars, and China around $450 billion dollars.
While the US is still the leader in researching and developing chips, China and other Asian countries have developed their chip making capabilities. In fact, Taiwan and South Korea have emerged as leaders in manufacturing. In a March 2021 note, US chip leader IBM had said: “You never want to be in a spot where another nation can control a valuable resource that your nation depends on.”
And, this is one of the main reasons, India seems to be actively supporting the creation of a chip and display manufacturing ecosystem. In total, the government of India has committed support of $30 billion to position India as global hub for electronics manufacturing with semiconductors as the foundational building block.