Should India Go Whole Hog for Chip Making?

Today, it is generally perceived that electronics is the core industry for economic success. For, electronic components are considered critical for manufacturing not just laptops, smartphones, and TVs, but also home appliances, cars, medical equipment, construction equipment, etc. If India wants to place itself in a prominent position in the changing world market that is today witnessing the Fourth Industrial Revolution, it must nurture companies that engage in design, innovation and manufacture of electronic devices.

Rightly, the Government of India has put in place a comprehensive industrial policy for electronics: It raised tariffs on certain electronic goods such as TVs and laptops and two, launched a Production-Linked Incentive (PLI) scheme for large-scale electronics manufacturing. Intriguingly, the PLI is currently focusing more on chip manufacturing.

In this context, we need to take a deeper look at chip-making. First things first. A semiconductor is a product made of silicon, which conducts electricity more than an insulator such as glass, but less than a pure conductor, such as copper or aluminium. The conductivity and other properties of a chip can be altered by introducing impurities, called doping, to meet the specific requirements of the electronic device in which it is going to reside. As we all notice, today these chips are found in many products such as smartphones, laptops, home appliances, gaming hardware, motor vehicles, medical equipment, etc.

Success in the chip business depends on creating smaller, faster, and cheaper products. The more the number of transistors on a chip, the faster it can perform the task. Incidentally, Moore’s law states that the number of transistors in a dense integrated circuit doubles in every two years. But nowadays, the doubling period is reduced to about 18 months. The result is: A consistent pressure on chip makers to come up with something better and cheaper than what is today available in the market—no matter even if it is considered as state-of-the-art.

Over it, the chip industry is highly cyclical—it is exposed to boom and bust cycles. For, demand depends on the demand for the end market products. Secondly, it is the hardest technical activity, for it involves, correctly etching and connecting billions of transistors that are 50 times smaller than a virus. And we lack the specialized hardware as well as service and skills ecosystems that the chip industry calls for. Thirdly, chip manufacturing calls for huge investments with long gestation periods. Fourthly, it requires ultra-pure water in large quantities and ultra-stable power supply.

Here, it is worth remembering what Chris Miller, the author of the book, Chip War, said in a fire-side chat at the Tamil Nadu Global Investors Meet: “Governments should be sceptical of the idea that spending a lot of money on fabrication is the best strategy. It could be in certain circumstances for certain purposes but your marginal dollar is probably best spent in other parts of the supply chain. There’s more money made in chip design each year than there is in fabrication.”

Miller went on to say that India already enjoys a distinctive advantage in chip design. For, currently more Indians are working on chip design than anywhere else in the world. This fact tells us that it makes more of a business sense to leverage on this part of the supply chain rather than investing afresh heavily in chip making.

Looking at these constraints, one wonders if India could become a global player in chip-making. Instead, as many academicians are recommending, the government may consider supporting the development of a cutting-edge fabless chip design industry in the country with appropriate incentives. Encouraging innovation in designing chips by appropriate subsidies may pave the way for the existing players to catch up with the high-end demands. Reports indicate that there are already over
20,000 engineers in the country designing and supplying about 2000 chips every year to third parties. So, leveraging on these strengths government should aid businesses to transform into such companies that design and sell their chips that are, of course, manufactured by a third party.

Similarly, we must also aim at leveraging our known strengths in the field of assembly and testing to credibly establish ourselves in the Outsourced Semiconductor Assembly and Test (OSAT) and Assembly, Test, Marking and Packaging (ATMP) segments of the industry. Indeed, these segments of the value chain are cheaper to set up and employ more people too.

As the US and EU are looking for new supply chains that exclude China, India can use its blooming relationship with them to step into these non-manufacturing segments of the supply chain of chips and make a mark for itself in the global chip industry as a reliable partner in the chain.

Against this backdrop, Tata Electronics is erecting a fabrication plant in Dholera, Gujarat with an investment of around $ 11bn (Rs 91 000 cr) in technical collaboration with Taiwan’s Powerchip Semiconductor Manufacturing Corp. It will focus on manufacturing legacy chips —chips of 28-nanometer—that are mostly used in automobiles, consumer electronics and defence.

Another Tata company, Tata Semiconductor Assembly and Test Pvt Ltd. is coming up in Assam with an investment of $ 3.26 bn (Rs 27000cr) to develop “indigenous advanced semiconductor packaging technologies” for automotive, EV and consumer electronic segments.

M/s CG Power is building its plant in Sanand, Gujarat in partnership with Japan’s Renesas Electronics Corporation and Thailand’s Stars Microelectronics with an investment of $ 1bn (Rs 7600 cr) to produce chips for consumer, industrial, etc., applications.

A couple of years back, Gujarat faced a shortage of even drinking water for supply to cities/towns. That aside, we also see the rush of fresh investment by giants such as Intel from the US, companies from Japan in partnership with Taiwan, and companies from the EU into chip manufacturing at the 'cutting edge'. Reports indicate a huge rush of companies from China, Korea, Japan and even Western countries to Malaysia to establish packaging, assembling, and testing chips. There is indeed a mad rush of fresh investment into semiconductor production, and amidst it, for a new entrant, the complexity and capital-intensive nature of chip manufacturing will become a real challenging endeavour. 

Normally, semiconductor companies are likely to realise positive cash flows within about five years, but if the utilization drops below the installed capacity, it may take even longer. Over it, the steady technological improvement being the mainstay of the semiconductor industry, a ‘winner-take-all’ dynamic has become the norm of the industry, in which a new player is certain to encounter stiff competition.

With so much at stake, the new players need to keep in mind all these consternations, which, of course, they would, for awareness of challenges may do a lot of good. 

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