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Context

Semiconductors are essential to almost all sectors of the economy including aerospace, automobiles, communications, clean energy, information technology and medical devices etc.
Demand for these critical components has outstripped supply, creating a global chip shortage and resulting in lost growth and jobs in the economy.
The shortage has exposed vulnerabilities in the semiconductor supply chain and highlighted the need for increasing domestic manufacturing capacity.

India is now aiming to become the global hub for Semiconductor Design, Manufacturing and Technology Development. In this article, we shall study all aspects of the issue and roadmap for India’s ambitious target.

What are Semiconductors?

A semiconductor sits between a conductor and an insulator and is commonly used in the development of electronic chips, computing components, and devices.
It’s generally created using silicon, germanium, or other pure elements.
Semiconductors are created by adding impurities to the element.

Why are they important?

Semiconductors such as memory, processors chips are a backbone and a prerequisite for any endeavours in emerging technologies.
From Artificial intelligence (AI) reliant smartphones to the adoption of the Internet of Things (IoT), 5G, or the automotive sector- nothing has been left untouched by the semiconductors.
Semiconductors or the chip is used to power technologies that enrich the lives of consumers and make businesses run smarter, faster, and more efficiently.
India’s own consumption of semiconductors is expected to cross $80 billion by 2026 and $110 billion by 2030.

Various chips and their uses

Memory Chips: From the perspective of functionality, semiconductor memory chips store data and programs on computers and data storage devices. Ex. RAM, ROM
Microprocessors: They contain one or more central processing units (CPUs). Computer servers, personal computers (PCs), tablets, and smartphones may each have multiple CPUs.
Graphic Processing Units (GPUs): It is capable of rendering graphics for display on an electronic device.
Integrated circuits (ICs): An IC is a small chip of a semiconductor material that mounts an entire circuit on itself. It is very small when compared to the standard circuits, which are made of independent circuit components.

Global semiconductors manufacturing: Understanding the value chain

The semiconductor industry is not evenly distributed and is dominated by a few countries, mainly U.S., Taiwan, South Korea, Japan, China, and Europe.
There is no single region with the entire production stack in its territory.
Companies across the semiconductor value chain operate in different processes and technologies (like design, fabrication, and assembly) in pursuit of economic efficiency.
However, no region has achieved strategic autonomy in the industry. The US companies rely on foundries in Taiwan to manufacture the chips.
Thus, the technological complexity and need for scale have led to the emergence of a large number of players with business models focused on a specific layer of the semiconductor value chain

Disruptions in the semiconductor market

Semiconductor manufacturing is a complex global intertwined ecosystem, which has led to a supply chain that is vulnerable to macroeconomics, geopolitics and natural disasters.

Demand hike: During COVID-19, with people stuck at home and with work from home becoming a norm, demand for consumer electronics such as laptops zoomed.
Global scramble: As the economies opened up, other industries, where chips are also used commonly, such as automobiles, began to scramble for the same raw material.
Production bottlenecks: As demand soared and the supply of semiconductor chips could not catch up, what was unheard of during the pre-pandemic times – a shortage of consumer durables and vehicles – ensued.
Supply-chain constraints: Palladium and neon are two resources that are key to the production of semiconductor chips. Russia supplies over 40 per cent of world’s palladium and Ukraine produces 70 percent of neon.
Geopolitical tensions: Taiwan accounts for 92% of advanced semiconductors. The current trade tensions between the US and China has impacted chip production in Taiwan.

Despite the current uncertainty, the semiconductor industry is poised for additional growth, as more and more products and services become increasingly digitized.

Various challenges

Huge Investments involved: Semiconductor Fabrication facility requires many expensive devices to function.Complex tools and equipment are required to test quality and move silicon from location to location within the ultra-clean confines of the plant.
Economy of scale: In semiconductor fabrication, a high volume production is required to be maintain so as to meet the increasing demand of the marketplace, at the same time, a strong financial backing as Indian market is very much uncertain about financial fluctuations.
Requirement highly skilled labour: Semiconductor fabrication is a multiple-step sequence of photolithographic and chemical processing steps during which electronic circuits are gradually created on a wafer made of pure semiconducting material. This actually requires high skills.
Scarcity of raw materials: From a value-chain perspective, it needs silicon, Germanium & Gallium arsenide and Silicon carbide which are not available in India and needs to be imported.
Uncertain Indian market: A semiconductor fabrication facility in India cannot independently rely on Indian customers for their entire sales structure. They have to maintain overseas customer base to balance inflections from Indian market due to market trends, government policies etc.
Disposal of hazardous waste: Many toxic materials are used in the fabrication process such as arsenic, antimony, and phosphorus. Hazardous impact on the environment by the industry may act as an impediment to India’s commitment to mitigate climate change.

Policy initiatives in India

Make in India: This aims to transform India into a global hub for Electronic System Design and Manufacturing (ESDM).
PLI scheme: In December 2021 the Centre sanctioned ₹76,000 crore under the production-linked incentive (PLI) scheme to encourage the manufacturing of various semiconductor goods within India.
DLI scheme: It offers financial incentives, design infrastructure support across various stages of development and deployment of semiconductor design for Integrated Circuits (ICs), Chipsets, System on Chips (SoCs), Systems & IP Cores and semiconductor linked design.
Digital RISC-V (DIR-V) program: It intends to enable the production of microprocessors in India in the upcoming days achieving industry-grade silicon and design wins by December 2023.
India Semiconductor Mission (ISM): The vision is to build a vibrant semiconductor and display design and innovation ecosystem to enable India’s emergence as a global hub for electronics manufacturing and design

Way forward

To ensure greater resilience in a volatile world, India needs to undertake following measures to sustain the domestic and global semiconductor demand:

Policy framework: As foundry setup is highly Capital intensive, it must be supported with a solid long term plan and financial backing. This backing is required from the entrepreneur & the government both.
Fiscal sustenance: In text of Indian Government as tax holiday, subsidy, zero duty, financial investment etc. will play an important role in promoting the Fab along with the semiconductor industry in India; this will put further pressure on already large Fiscal Deficit.
Support Infrastructure: World class, sustainable infrastructure, as required by a modern Fab be provided, with swift transportation, large quantity of pure water, uninterrupted electricity, communication, pollutant free environment etc.

Conclusion

Overall, setting up semiconductor production units would be just the beginning.

Successfully running them would require good quality public institutions and a stable policy environment.
Setting up a thriving ecosystem takes time and by the time the incentives get translated into actual production and revenues, it may be difficult to withdraw the financial support after six years, as currently planned.
In sum, as the policymakers are aware, a holistic approach to the development of the semiconductor industry would be required if we are to become a world-class hub that the latest policy envisages.

The central and state governments’ co-operation on the policy priorities and execution would be central to achieve it.