Semiconductor manufacturing in India – Explained, pointwise

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To encourage semiconductor manufacturing in India, the Govt has decided to extend the PLI (Production-Linked Incentive) scheme with a budgeted incentive of Rs 76,000 crore over the next six years.

The scheme envisages providing fiscal support of up to 50% of project cost for firms looking to set up display and semiconductor fabrication facilities (FABS) in India

Semiconductor chips are the heart and brain of all modern electronics and information and communications technology products, contemporary automobiles, household gadgets such as refrigerators, and essential medical devices such as ECG machines. Emerging technologies like AI, 5G, or driverless cars also cannot progress without a fast and cheap semiconductor industry. After petroleum and cars, semiconductors at an annual turnover of $500 billion are globally the most-traded products.

Hence, securing access in advance to the latest and most powerful semiconductor chips will determine the winner in the latest technologies.

Let’s take a deep dive into the topic.

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What is the rationale behind the move?

The latest move is aimed at creating a viable design and manufacturing system for semiconductors in India.

Also, India imports almost all semiconductors to meet its demand, which is estimated to reach around $100 billion by 2025 from about $24 billion now. Further, these chips are made with embedded instructions, which may contain malware or backdoors and are impossible to diagnose. And as Semiconductor chips are used in various strategic areas like, defence and telecom, the domestic manufacturing of chips assumes strategic importance and would provide a measure of security. Further, it will cut the import bill too.

Safeguarding against future chip crunches: Presently, there’s a global shortage of many categories of chips, which is affecting global automobile production and the global prices of many electronic items. Setting up domestic manufacturing units would help to insulate India against future supply disruptions. Moreover, any intellectual property that is generated will be a big bonus.

This move will also make the Indian manufacturers globally competitive to attract investment in the areas of core competency and cutting-edge technology.

Additionally, economies with a large production of Semiconductor chips, like US, Japan, Korea, China and Singapore, have benefited the most in terms of enhancing their GDP and establishing a strong foothold on the global economy.

What are the issues/challenges in setting up a semiconductor FAB unit in India?

Capital intensive: Chip design and manufacturing is a highly capital-intensive business. It calls for a developed ecosystem for the business to thrive. As per a government estimate, it would cost roughly $5-$7 billion to set up a chip fabrication unit in India.

India has a large talent pool of chip designers, but lacks process engineers who can run a front-end chip factory where microscopic transistors are etched onto silicon.

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What are the defining features of Semiconductor manufacturing?

Semiconductor manufacturing has the following defining features –

i). Complexity: Its manufacture needs at least 300 different high-technology inputs.

ii). Highly concentrated global supply chain: The complexity has resulted in a global supply chain that is concentrated in US, Europe and East Asia. Within this chain, there’s an extraordinary degree of specialisation that makes it vulnerable to shocks. For example, 100% of the world’s most advanced (below 10 nanometres) semiconductor manufacturing facilities are located in just two countries, Taiwan and South Korea.

iii). Large investment: The product requires the largest investment on both R&D and manufacturing among all industries. It’s estimated that over the next decade about $3 trillion in investment will be needed.

iv). Revenue sharing b/w few companies: The outcome of this unique structure is that the top three companies in each stage of the supply chain take in about 80-90% of the revenue.

Must Read: Semiconductors: Why India should not make chips – Instead, the focus should be on other parts of the global value chain
Which part of the Semiconductor value chain should India focus upon?

India should focus upon the following areas:

R&D-intensive activities like electronic design automation (EDA), core intellectual property (IP), and chip design. The US is the leader in this segment. India can get part of the business by supporting its existing chip-design experts and funding technology and innovation centres, including top engineering colleges.

Set up semiconductor fabrication (FABS) facilities for making of advanced chips.

Focus on medium and low-end chips: Due to the pandemic related supply disruptions and tensions between the US and China, the US, Japan, and many other countries have announced plans for setting up local Fabs. This might lead to a surplus capacity for high-end Fabs by 2024. Hence, India should focus on making medium and low-end chips.

For the Medium and low-end chips, the distance between two transistors is more than 20 nanometres.

Much of the expertise needed for making such chips is available with local firms. This will allow India to become a high-volume and low-cost original design manufacturer (ODM) for medium- and low-end chips.

Assembly, testing and packaging (ATP) segment: This segment captures 10% of the value. China is the current leader. With low-cost skilled technical manpower, India is a natural choice to take some part of the business.

Must Read: Need of Indigenous Semiconductor Manufacturing Facilities in India – Explained Pointwise
What is the way forward?

Focus on back-end of manufacturing: Semiconductor foundries are the world’s most expensive factories, accounting for 65% of industry capital expenditure but only 25% of the value addition. Therefore, to lower the risks of investment, India should especially look at back-end of manufacturing such as assembly, packaging and testing. Once it stabilises and an ecosystem develops, front-end of manufacturing will follow.

Simultaneously, Govt of India needs to take advantage of the presence of Indian engineers in chip design, the part of the chain that contributes the largest value.

Hand-holding startups of entrepreneurial engineers can also produce large payoffs.

Proactive cooperation of states: Areas like stable power, large quantities of pure water and land, are state subjects, and it will be up to state governments to create the right climate for easy implementation of semiconductor projects.

Transport logistics: Good roads, and rail and air connections to the site are also critical.

Requires more budgetary outlay: The average fab unit incurs capital expenditures of several billion dollars. Samsung’s new advanced logic facility in Texas, United States, announced recently, will incur $17-18 billion, for instance. In that context, the $10 billion outlay is on the lesser side, considering fiscal support is needed for other sub-elements of the mission too. Govt should consider increasing the outlay in the future.


The Govt of India has rightly embarked on a bold industrial policy that would help lay the groundwork India requires over the next decade.

More such incentives and spending will be needed in the future, as India isn’t the only country looking to build a base in chips right now. Gaining a measure of control on semiconductors is of strategic importance to every country.

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