Need of Indigenous Semiconductor Manufacturing Facilities in India – Explained Pointwise


The Covid-19 pandemic and the subsequent lockdowns are impacting the production of semiconductor chips across the globe. It is creating shortages for the buyers, such as the car manufacturers and consumer electronics manufacturers in India. This in turn has forced manufacturers to reduce their production levels thereby their profit potential is decreasing. 

The Chip Famine presents an opportunity for India to develop the capacity to manufacture indigenous semiconductor chips. It would reduce its import dependence and help meet the rising demand of the future.

Semiconductors are truly a modern marvel, a feat of human ingenuity and engineering unmatched by any other industry. Therefore, robust reforms must be undertaken to establish the domestic manufacturing capacity of semiconductors in India.

About Semiconductors:
  • A semiconductor is a material that allows electrical conductivity between a conductor and an insulator. 
    • Conductors are the materials or substances which allow electricity to flow through them. They conduct electricity because they allow electrons to flow easily inside them from atom to atom. Conducting materials include gold, silver, mercury, seawater, etc. 
    • An insulator is a material that does not conduct electrical current. Insulating materials include paper, plastic, rubber, glass, and air.
  • They have less resistivity than insulators and more than conductors. The resistance of the semiconductor decreases with an increase in temperature and vice versa.
  • Semiconductors are made from pure elements like silicon or germanium, or compounds such as gallium arsenide. Sometimes their conductivity is changed through doping.
    • It is a process of adding small amounts of impurities to these pure elements, causing large changes in the conductivity of the material. 
Significance of semiconductor chips:
  • Semiconductors are the building blocks of today’s technology. For instance, They control 
    • the computers we use to conduct business, 
    • the phones and mobile devices we use to communicate, 
    • the cars and planes that get us from place to place, 
    • the machines that diagnose and treat illnesses, 
    • the military systems that protect us, and 
    • the electronic gadgets we use to listen to music, watch movies and play games
  • Semiconductors make the devices more compact, less expensive, and more powerful
    • For instance, mobile phones weighed about 2 lbs, cost around $4,000, and held a charge for only about 30 minutes of talk time during their initial phase. However today an individual can buy a smartphone for 5000 rupees that would give a 1-day charge.
  • Semiconductors will continue to enable the world’s greatest breakthroughs. From aerospace and consumer electronics to energy and medicine, entire industries will be transformed.
India’s sources for Semiconductors requirements:
  • Firstly, Semiconductor manufacturing comprises the front-end fab manufacturing and the back-end assembly, including packaging and testing. There are only a handful of companies globally that do front-end manufacturing at scale.
  • Secondly, Globally, this entire value chain has seeped in the interdependence between a handful of countries like the USA, Taiwan, Japan, China, and some European nations. 
  • Thirdly, India has done well in design and verification for the semiconductor industry. Most of the global semiconductor companies having an R&D footprint in India.
  • Fourthly, However, 100% of our chips, memory, and display are imported into the country. In 2020, India spent $15bn on electronic imports, with 37% coming from China.
  • Fifthly, although India has two fabs — SITAR, a unit of the Defence Research and Development Organisation (DRDO) in Bengaluru, and a semiconductor laboratory in Chandigarh. These build silicon chips for strategic purposes like defense and space and not for commercial use.
Why does India need indigenous capacity for manufacturing semiconductor chips?
  1. Tackle supply shocks: The pandemic and the subsequent lockdowns impacted the supply of chips to India. Automobile manufacturers like Mahindra & Mahindra and Tata group were compelled to reduce their production due to the shortage.
  2. Meet the rising demand: Experts estimate that around 50 crore people will join the internet in the next decade thereby demanding more phones and laptops. 
    • Similarly, the post-pandemic world is showing a greater inclination towards work from home culture. This warrants an enhanced demand for servers, internet connectivity, and cloud usage.
  3. Employment Creation: Indigenous manufacturing of chips will build its smartphone assembly industry and strengthen its electronics supply chain. This will create numerous employment opportunities for the Indian youth.
  4. Revenue boost: Indigenous capacity would attract local taxes and boost the export potential. Further, India would be required to import fewer semiconductor chips which would decrease the import bill.
  5. Geopolitical Benefits: Countries having a sufficient supply of chips would be in a better position to mold the future course of geopolitics, driven by data and the digital revolution. Further self-sufficiency will decrease reliance on Chinese chip imports especially during hard times like the recent Galwan Valley border clash.
  6. Enhanced Security: Chips made locally will be designated as “trusted sources” and can be used in products ranging from CCTV cameras to 5G equipment. This would improve the national cybersecurity profile.
Initiatives taken to promote indigenous Semiconductor capacity
  • National Policy on Electronics 2019: It envisions positioning India as a global hub for Electronics System Design and Manufacturing (ESDM) sector. It aims to encourage the development of core components (including chipsets) and create an enabling environment for the industry to compete globally.
  • Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS): The government will provide a financial incentive of 25% on capital expenditure for a list of products that constitute the supply chain of electronic products. This includes products such as electronic components, semiconductors, and specialized sub-assemblies.
    • India would be offering more than $1 billion in cash to each semiconductor company that sets up manufacturing units in the country.
  • Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme: Under this, the government will provide support for the setting up of Electronics Manufacturing Clusters (EMCs) and Common Facility Centres(CFCs).
  • Production Linked Incentive Scheme(PLI): Under this, the government will provide an incentive of 4% to 6% on goods manufactured in India and covered under target segments to eligible companies for a period of five years.
  • Foreign Direct Investment: The Government of India has allowed 100 percent (FDI) under the automatic route in the Electronics Systems Design & Manufacturing sector.  
What are the challenges in front of India?
  • Firstly, High Cost of establishment: As per a government estimate, it would cost roughly $5-$7 billion to set up a chip fabrication unit in India.  
  • Secondly, Bureaucratic inefficiencies: The process of establishing an indigenous semiconductor facility requires clearances and approvals from multiple government departments. Further, there exists a considerable degree of bureaucratic delays at each stage that discourages the establishment of manufacturing units. 
  • Thirdly, Unstable power supply: The smooth production of semiconductors requires the availability of an uninterrupted 24*7 power supply. However, this requirement is not fulfilled by many regions in the country. This restricts production to very few locations.
  • Fourthly, Technological Constraint: The indigenous manufacturing of semiconductors requires the use of high-end technologies. These technologies are licensed from patent holders at a very high price.
  • Fifthly, Structural Flaws: FDI in electronics is less than 1% of the total FDI inflow because of the dearth of skilled labor, delays in land acquisition, and the uncertain tax regime.
  • The government should provide adequate funding to augment the research and development potential of technical institutes. 
    • For instance, IIT Madras developed a microprocessor named ‘Moushik’ with funding support from the Ministry of Electronics and Information Technology.
      • The microprocessor is an integrated circuit (IC) that contains a few million transistors (semiconductor-based electronic devices) fused on a semiconductor chip.
  • The proposed Sovereign Patent Fund (SPF) under National Policy on electronics should be established expeditiously. It is a wholly or partly Government-backed entity that aims to bolster domestic businesses through the acquisition and licensing of patented technology.
  • Apart from this, the manufacturers need to be given an assurance of minimum domestic procurement by the government and the private sector. The focus should be on manufacturing economical and technically viable options like 28nm chips.
  • The government should also support businesses in the acquisition of semiconductor manufacturing units in other countries. This is easier than setting up a domestic facility and can be done swiftly for ensuring a continuous supply of chips.

The 21st century will be an era of Digital revolution signifying an increased use of mobile phones and computer devices. This enhanced usage can be met only with a robust availability of semiconductor chips that sustains their functioning. Therefore India needs to focus on the indigenous development of semiconductors in order to realize its digital potential and emerge as a strong power in the present era.

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