India wants to be the next Taiwan in chips, but its dream is misguided

Its government would be better off saving its money and luring more suitable partners in testing and assembly.

For more than two decades, India has maintained the fantasy that a major semiconductor manufacturer will set up shop on its shores, kicking off the nation’s journey along an inevitable path toward chip glory. It never happened, but there’s now a very clear script for how it might be done, if only government and industry leaders would take a more pragmatic approach.

In the latest incarnation of the dream, officials in India and Taiwan are apparently in talks to lure a new factory worth up to $7.5 billion. The local government is likely to foot half the bill to build and kit out such a project, Bloomberg News reported. While Taipei is eager to build closer ties with New Delhi, facilitating the construction of a chip fab in South Asia is not high on its priority list. That’s not due to Taiwan being particularly protectionist, but because it can’t see much point in the exercise given India's lack of expertise in the field.

Nevertheless, eager to continue the dialogue with an increasingly important partner, Taiwan may take the bait and start scouting for candidates.

What it’s likely to find is that the challenges facing the establishment of an Indian chip-making industry today are the same ones as the turn of the century. A reliable and stable electricity supply is the most crucial component of semiconductor manufacturing, but one which the nation struggles to provide. The process is so delicate that even the briefest blackout or power surge can trigger a halt that takes hours or days to reset. Abundant water supply, transport infrastructure, and experienced staff are among the other stumbling blocks.

Gone are the days when designing a component means actually building it. The rise of Taiwan Semiconductor Manufacturing Co. and Qualcomm Inc. is proof of this. The latter designs the most-advanced smartphone chips in the world, using sophisticated software and the best engineers, but only a handful of its workforce would have the skillset to run a factory. TSMC, meanwhile, has stayed out of the design business and left that to clients.

Today, India has a large talent pool of chip designers, but the roster of process engineers is much shorter and certainly not long enough to run a Taiwanese front-end chip factory — where microscopic transistors are etched onto silicon.

Under Prime Minister Narendra Modi’s Make in India campaign, scores of new factories have opened or expanded across the country--many run by Taiwanese electronics giants. This trend bolstered the belief that local production is a path to selling more goods there. But it turns out that slapping a big tariff on imported smartphones is a greater incentive to build locally, with even Apple Inc.’s iPhones getting assembled on shore.

Companies like Foxconn Technology Group and Wistron Corp. ramped up in India because the nation already had an established electronics assembly business--where margins are thin and labor costs matter--and the requisite workforce was in place. Tariffs moved the economic needle enough to justify the expansion. The same cannot be said for chips. There is no local history of production, so tariffs would just drive up prices, not spur a rash of onshoring.

It’s also apparent that India’s renewed push into chips comes amid growing rivalry with China, a country that’s already committed tens of billions of dollars to become a semiconductor powerhouse. Yet New Delhi should be learning from Beijing’s mistakes and rethink its eagerness to follow suit. The world’s largest nation, and number-two economy, is mostly churning out commodity memory chips and a small amount of processors using technology that’s more than a decade old. When it comes to semiconductors, India most certainly doesn’t want to replicate China.

Instead, it hopes to be the next Taiwan. And that’s not going to happen either. In fact, it’s already failed several times before on deals worth around $5 billion apiece.

Now, for at least the third time in two decades, India is reviving dreams of being a player in the chip space as a way for the nation to move its economy up the value chain from simple labor-intensive assembly to high-tech manufacturing. One imagines TSMC being high among the targets given it’s the global leader and boasts a client list that includes Apple, Qualcomm, Nvidia Corp. and even Intel Corp. The Hsinchu-based company might politely decline, though, as it’s already expanding at home, has broken new ground in the U.S. and is considering opening a new factory in Germany.

Smaller rival United Microelectronics Corp., however, might be curious to consider what New Delhi has to offer. Its spending budget is lower, margins thinner, and technology older, so it has a far bigger appetite to consider what sweeteners might be available. But India should also be wary of any entity that sets up solely because of the largesse that’s being doled out.

But India may be chasing the wrong types of companies. Keen to get their name in a press release alongside blue-ribbon names, generations of Indian leaders seem to have forgotten a far more suitable match: chip packaging and testing.

To the semiconductor snobs, outsourced assembly and test (OSAT) is considered the low-end part of the process compared to the high-cost lithographic steps that create the underlying component. It’s the leading-edge, multi-billion dollar factories that handle front-end wafer fabrication, while the more low-key plants test for flaws, attach wires, and then wrap them in a protective packaging. This may not sound sexy, but it’s still a highly technical and crucial aspect of manufacturing. 

Fortunately for Taipei and New Delhi, the global leaders in packaging and testing are based in Taiwan. After merging with local rivals, Kaohsiung-based ASE Technology Holding Co. is number one with Hsinchu-based Powertech Technology Inc. fourth.

And ASE may be looking for an excuse to diversify further. The recent power crisis in China forced the Taiwan company to shut its Kunshan factory outside Shanghai for almost five days. Such outrages are rare, but with labor costs rising and power and pollution concerns in China escalating, the time is ripe for ASE to consider breaking ground in India. 

New Delhi might think it wants a chip manufacturing facility to realize a long-held dream, but the government would be better off saving its money and luring more suitable partners in testing and assembly.