Baba’s Explainer – A Push for Semiconductor Industry

  • IASbaba
  • September 27, 2022
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  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context: Semiconductors are the new battleground in the field of high technology as nations race to establish a foothold in the manufacture of these vital components that power everything from traffic lights to advanced weaponry

In a bid to make India’s $10 billion chip-making initiative more attractive to investors, the Centre on September 21, approved changes to the scheme for the development of a semiconductor and display manufacturing ecosystem.

What are semiconductors?
  • A semiconductor is a key component used in electronics that manages the flow of electric current in a device. The basic component of a semiconductor chip is a sliver of silicon, which is etched with billions of microscopic transistors, forming patterns to control the flow of current while following different computational instructions.
  • These chips are used widely in electronic devices like cars, smartphones, healthcare equipment, aircraft and weaponry.
  • These chips are manufactured through a complex process by chip fabrication plants, popularly known as fabs.
  • There are various types of chips. More advanced semiconductors, like the 5 nanometre (nm) chip, are able to fit smaller transistors onto a silicon wafer and thus pack more processing power while using less electricity. These are typically used in cutting-edge technologies.
  • Other chips, which have larger transistors, are said to be on the “lagging edge” and are used in consumer and everyday product.
  • The other vital component of semi-conductor chips are
    • Substrates connect chips to the circuit boards that hold them in personal computers and other devices.
    • Made up of thin copper wire sandwiched in resin, substrates help transmit user instructions to a computer’s chips and relay the answers.
    • They are necessary because the ultrathin wiring that comes out of chips can’t tolerate a direct soldered connection to a circuit board
    • Substrate Manufacturing is therefore seen as a backwater of the global chip supply chain.
    • Supplies of substrates is very tight and small disruption in this underinvested sector is causing big worries to chip manufacturers
Why does India want to get into the semiconductor game?
  • It is hard to point to a component that is more vital to the global economy. While India has notable strengths in designing chips, it does not manufacture semiconductors domestically and is largely import dependent.
  • This became a problem during the pandemic where shortages in the supply of chips slowed down manufacturing for key industries like automotives.
    • For example, carmakers in India alone had 7 lakh pending orders in December 2021 because of an inability to get their hands on the appropriate semiconductors.
  • Further, the ongoing tensions over the Taiwan straits have worried India. Taiwanese firms like TSMC control over 60% of the market for semiconductor manufacturing and hold an overwhelming 90% market share for advanced chips.
  • With China looming over Taiwan, it has become increasingly clear that India’s 100% import dependence when it comes to chips is no longer sustainable
How big is the semiconductor industry?
  • The global semiconductor industry is currently valued at $500-$600 billion.
  • The chip-making process is complex and highly exact, having multiple other steps in the supply chain such as designing software for chips and patenting them through core Intellectual Property (IP) rights.
  • It also involves making chip-fabrication machines; setting up fabs or factories; and ATMP (assembly, testing, marking and packaging).
  • The chip-making industry is a highly-concentrated one, with the big players being Taiwan, South Korea and the U.S. among others.
  • In fact, according to a New York Times estimate, 90% of 5nm (nanometre) chips are mass-produced in Taiwan, by the Taiwan Semiconductor Manufacturing Company (TSMC).
  • Therefore, the global chip shortage, U.S.-China tensions over Taiwan, and the supply chain blockages owing to the Russia-Ukraine conflict have led major economies to enter the chip-making sector with a renewed push.
  • For example, the U.S. announcement of $52.7 billion in government funding for the CHIPS and Science Act and the EU’s Chips Act that will mobilise €43 billion for public and private investments.
What has India done so far?
  • India unveiled a 76,000 crore ($10 billion) Production Linked Incentive (PLI) scheme to attract major semiconductor manufacturing firms to India. As part of the scheme, the government will fund 50% of the project cost for the manufacture of all types of semiconductors domestically.
  • It also announced fiscal support for a design-linked initiative (DLI) scheme to drive global and domestic investment related to design software, IP rights etc.
  • In recent months, Vedanta and Taiwanese manufacturing giant Foxconn signed an MoU with the state government in Gujarat to invest ₹1,54,000 crore to set up a plant in the state.
  • Two other projects have also been announced — a $3 billion plant in Karnataka by the International consortium ISMC and a $3.5 billion plant in Tamil Nadu by Singapore’s IGSS Ventures
  • Major firms like TSMC and UMC have also visited India to scout out possible locations for investments.
  • Tata has also made forays into the semiconductor supply chain. It has invested in building a presence in the chip packaging and testing business while Tata Motors has tied up with a Japanese chip manufacturer to design and produce automotive chips.
What are the changes to India’s chip-making scheme?
  • In December 2021, India announced its roughly $10 billion dollar production-linked incentive (PLI) scheme to encourage semiconductor and display manufacturing in the country.
  • According to the Electronics and IT Ministry, semiconductor demand in India would increase to $70-$80 billion by 2026 with the growing demand for digital devices and electronic products.
  • The new changes announced recently seek to harmonise government incentives for all technology nodes of semiconductors. In the previous version of the scheme, the Centre was offering to fund 30% of the project cost for 45nm to 65nm chip production, 40% for 28nm to 45nm, and 50% or half of the funding for chips 28nm or below. The modified scheme provides uniform 50% fiscal support for all nodes.
  • Besides, it will provide 50% of capital expenditure for other steps of the process as well (chip design and ATMP).
  • The modified scheme also emphasised the production of the 45nm chip, which is fairly less time-consuming and economical in terms of production.
What are the challenges?
  • Avoid Repetition of Previous Mistakes: This is not India’s first attempt at building a domestic manufacturing base for semiconductors. During the 1980’s India stole a march on Taiwan’s firms by setting up a state-owned semiconductor factory. This ambitious attempt came to a halt
    after the factory caught fire. Later attempts stalled due to bureaucratic inertia. This is an error India will be keen to avoid this time around.
  • Inadequate Funding: While the scheme is an encouraging move, chip production is a resource-intensive and expensive process. Notably, just the setting up of one semiconductor fab requires an investment of anywhere between $3 and $7 billion. While the new scheme provides equal funding for all steps of the process, the outlay of the scheme remains $10 billion
  • Prioritising Multiple Focus Areas: Analysts, while positive, are concerned that not much of the current scheme outlay would be left to support other elements including display fabs, packaging and testing facilities, and chip design centres. They also argue that the initial funding should focus on areas like design and R&D, for which India already has an established talent pool.
  • Huge Requirement of Water: Chip-making also requires gallons of ultrapure water in a single day, which could be a task for the government to provide to factories, compounded also by the drought conditions which often prevail in large parts of the country.
  • Need for constant innovation: Further, the Indian government and private industry will have to commit billions of dollars in investments over decades to constantly innovate in a rapidly evolving industry.
  • Dependency on Subsidies: Another task for the government is to drive up consumer demand in the semiconductor and linked electronics industry to not end up in a situation where these ventures remain successful only till taxpayers are forced to fund required subsidies.

Main Practice Question: Having made significant strides in digital technology, the time has come for India to become a reliable global source for semiconductor chips as well. Discuss.

Note: Write answers to this question in the comment section.

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