Central Idea

The Indian government is considering a proposal to pick an equity stake in domestic chip design-making companies as part of the second phase of the Design-Linked Incentive (DLI) Scheme for the semiconductor industry.
The aim behind the scheme is to establish a stable ecosystem and promote the growth of “fabless companies” in India—entities that design chips but outsource manufacturing.
However, this policy requires a long-term strategy due to the capital-intensive nature of the semiconductor sector and the lengthy gestation periods for setting up design and fabrication units.

What is DLI Scheme?

What is Design Linked Incentive (DLI) Scheme? - Civilsdaily

DLI scheme is a program aimed at providing financial and infrastructural support to companies establishing semiconductor manufacturing plants in India.
Eligible participants who set up fabrication units in the country can receive fiscal support of up to 50% of the total cost.
Additionally, participants building compound semiconductors, silicon photonics, and sensors fabrication plants can avail fiscal support of 30% of the capital expenditure under this scheme.
Companies engaged in semiconductor design for integrated circuits, chipsets, system-on-chips, systems, and IP cores will receive incentives of 4% to 6% on net sales for a duration of five years.
The scheme is expected to promote the growth of at least 20 such companies, achieving a turnover of more than ₹1500 crore in the next five years.

Long Gestation Period: Setting up design and fabrication units in the semiconductor industry involves long gestation periods before the first product is launched. Returns on investment are not immediate.
Capital Intensive: The semiconductor industry requires significant investment for setting up fabrication units, up-scaling manufacturing capabilities, and research.
Cyclic Nature: The industry’s cyclic nature and changing functional requirements of chipsets make research and development challenging.
Supply Chain Disruptions: Supply chain disruptions, such as those experienced during COVID-related lockdowns, can dampen investor confidence in the sector.

Talent Pool: India has a highly-skilled talent pool of semiconductor design engineers, making up around 20% of the world’s workforce, working for global companies like Intel, Micron, and Qualcomm, among others.
IP Ownership: Despite a thriving talent pool, India owns a smaller portion of the intellectual property (IP) related to chip designs, which is mostly retained by global companies.
DLI Scheme for Chip Designing: The DLI scheme introduced in December 2021 aimed to indigenize innovations and support the growth of chip design companies with financial incentives.
Changing Landscape: The scheme has led to the establishment of over 30 semiconductor design startups in India, with some already receiving government support.

The semiconductor industry is growing fast and can reach $1 trillion dollars in this decade. India can grow fast and reach $64 billion by 2026 from $27 billion today.
Mobiles, wearables, IT, and industrial components are the leading segments in the Indian semiconductor industry contributing around 80% of the revenues in 2021.
The mobile and wearables segment is valued at $13.8 billion and is expected to reach $31.5 billion in 2026.

Effectiveness and Efficiency: Some experts view the government’s plan to become a venture capital firm for chip design companies as ineffective and inefficient. Companies may prefer foreign buyers for higher valuations and global ecosystem connections.
Venture Capital Support: The lack of venture capitalists in the private sector focused on semiconductors is a challenge for the growth of design firms.
Equity Stake’s Impact: Offering an equity stake can align the interests of design companies with the project’s success, ensuring shared risk and reward. It may also help in selling chip-designing services more effectively and attracting a broader client base in the market.
IP and Value-Added Activities: The government must consider who can keep the IP and how investments can drive more innovation and employment generation. Moving up in the value chain and enabling the ecosystem is crucial.

The proposal to take an equity stake in domestic chip design-making companies in India’s semiconductor industry aims to promote the growth of fabless companies and ensure a stable ecosystem.
However, it requires a long-term strategy and careful consideration of IP ownership, venture capital support, and value-added activities in chip design.
The success of the scheme will depend on effective implementation and alignment of interests between the government and promising design companies.