Right Time for India to Step In!

Foxconn, the Taiwanese major and the largest chipmaker in the world, has walked out of its joint venture with Vedanta group after a year of signing an agreement to set up a Rs 1.54 tn facility to manufacture semiconductors in Gujarat.

This joint venture was a kind of flagship attempt in encouraging domestic research leading to chip manufacturing. It is of course, not yet clear exactly why the joint venture was dissolved. But both companies have reiterated their commitment to the semiconductor sector. Reports also indicate that they are on the lookout for a fresh start independently. 

According to analysts, one probable reason for this fallout could be the revised incentive scheme of the government that offers bigger sops to smaller chips that are considered central to the ecosystem that caters to the needs of automobiles to consumer electronics and the lack of necessary technology with the Vedanta-Foxconn combine to manufacture such nano chips. 

Along with it, two other semiconductor proposals under the government’s subsidy scheme are also said to be in trouble. The ISMC, backed by Abu Dhabi’s Next Orbit and Israel’s Tower Semiconductor, appeared to have asked the government to hold back on considering its proposal till the merger of Tower with Intel is finalized. Similarly, the proposal of Singapore’s IGSS is still to be cleared, perhaps in want of right technology, delay in corporate action, etc.   

The government however does not consider these adverse developments a setback to its ambitious semiconductor program as is vindicated by what Prime Minister Narendra Modi said at the recently concluded ‘Semicon India 2023’, a global meet attended by investors from all over the world: “India will emerge as a global hub of the semiconductor and chip-making industry”. 

The government has thus made a fresh bid to attract global chip manufacturers into the country. And, as a policy, creating a necessary ecosystem for manufacturing chips in the country makes great sense for reasons galore: one, the major supply crunch that the world faced during the pandemic that affected China’s production compelled global players to look for a resilient supply chain; two, the Western players are looking at de-risking themselves from the likely diktat of China owing to its dominance in chip manufacturing supply chain through friend-shoring arrangements; three, the Russia-Ukraine war that resulted in the shortages of Neon, which is a crucial input for chip manufacturing; four, European Union and the United States refusing to let China buy sophisticated manufacturing gear and China in return imposing export controls on Gallium and Germanium which are key inputs in chip making and the resulting concern of producers to speedily look for resilient supply chains, etc., are cumulatively offering a right opportunity for India to set up chip manufacturing facilities in the country. 

Over it, India could also benefit from the newfound comfort that the US is of late exhibiting in sharing technology with it. Indeed, the US appears to be eager to deepen its ties with India in the technology sector, perhaps, in its concern to bolster the resilience of its supply chains. All these global developments cumulatively suggest that it is the right time for India to seize the opportunity to gain a foothold in chip manufacturing.   

That said, we must also bear in mind that chip manufacturing poses an enormous challenge: one, its manufacturing calls for a huge scale involving large investments in the range of $20 bn for it to be cost-effective; two, its manufacturing process requires huge quantities of absolutely pure water which places constraints on the location of such units; three, chips being of dual use, transfer of high-end technology may be a real challenge calling for deft diplomacy, and four, there is a fierce competition in the industry with the US declaring a $52 bn financing support that has already attracted an investment commitment of $200 bn in 2021 itself. Even EU announced similar support owing to which Intel has already committed an investment of $80 bn across the EU. 

In the light of these challenges, we must handhold the proposed Micron investment to manufacture memory chips in Gujarat till its fruition so as to create an alluring ecosystem. That aside, we must assure a stable operating environment through a reliable policy framework, besides comparable tariffs and trade linkages for global investors to log in. Yet, there could be a slip between the ambition and the chip!