Setting up a semi-conductor fab plant: Will India be third time lucky?

The government hopes to learn from two failed attempts in 2007 and 2013 to attract fab manufacturers to India but it's up against some stiff challenges

The time for India to attract semi-conductor fab manufacturers never looked better. There is a major global chip shortage owing to the unprecedented demand surge from electronics and auto companies as the pandemic had initially started easing around the world. Adding to the shortage are US-China trade tensions.

According to IC Insights, a US-based semi-conductor market research company, leading chip manufacturers such as TSMC, Intel and Samsung are collectively investing over $130 billion this year just to set up new plants across the world, a 14 per cent increase over last year.

A large part of this additional investment will be funded by foreign governments, which see semi-conductor fabrication plants, or fabs, as a strategic industry. So the US is offering funding of $37 billion to fabs and the Chinese government, which wants to expand capacity quickly, recently provided $2.35 billion to Semi-Conductor Manufacturing Internat­ional, a partially state-owned publicly-listed Chinese semi-conductor foundry company, to build a new plant.

India is taking cautious steps in this space, no doubt because previous attempts failed. In 2007, Intel showed interest, but moved to China and Vietnam instead because the Indian government’s policy and incentives were not thought through. In 2013, the government approved two proposals, one by the Jaypee group and the other by Hindustan Semiconductor Manufacturing Corporation, promising to subsidise the project cost. The promoters failed to raise finances and the projects were aborted.

So will it be third time lucky? The government appears to have learnt from past mistakes. Last December, for instance, it invited Expressions of Interest (EoIs) from global and Indian consortia to specify what kind of investment and incentives they would consider to set fab plants in the country. The final scheme will be prepared after incorporating suggestions from these EoIs, for which the deadline is April 31.

The other change is that the government has been proactively pursuing the world’s top players — Intel, TSMC, Samsung, Infineon, Texas Instruments, STMicroelectronics, among many others — to consider India in their expansion plans. To underline that it means serious business, the government has recently set up an empowered committee headed by the minister of commerce and industry to consider and support high-tech proposals. This resembles the key support mechanism that kick-started Vietnam’s push in electronics exports.

So are these efforts working? Sources said most of the EoI interest from global pla­yers has been for setting up “specialty fabs” — wafers made of gallium nitride or sil­i­con carbide used in multiple applications such as chargers, electric vehicles, LED drivers, base stations and data centres.

Satya Gupta, chairman of India Electronics and Semiconductor Association that is working closely with the government on the policy, said, “We have been informed that 15-16 specialty fab companies have shown interest in the EoI.” The investment required to set up these fabs is only $150-250 million compared with a minimum $4 billion for an integrated plant. That is because the wafer sizes are six to eight inches compared to logic chips, which are above 12 inches. “So you can be viable at lower volumes,” Gupta pointed out. But he added that even these will take seven to 12 years to break even, so government financial support of up to 50 per cent of the project may be needed.

But the challenges multiply if the government wants domestic companies to join the programme. “A domestic company will have to raise the rest of the money even after government help. But that is a challenge. Unlike start-ups where PE players can get returns in three to five years, financing a fab unit demands patience,” Gupta said.

The government is looking at supporting an Indian consortium to acquire or buy a stake in a fab company abroad, learn the ropes, get access to technology collaboration and possibly relocate the plant to India. “There are enough units available and they could range from $200 million to $2 billion. For instance, the Malaysian foundry SilTerra has been up for sale. It is a likely route if the government supports domestic players,” said a senior executive of a semi-conductor company that has a presence in India.

But the government is also hoping to rope in some big fab players. That is why it has extended the EoI deadline from January to March and now April. Yet, the question being asked is why global players should invest between $2 billion and $8 billion in a country that has virtually no semi-conductor manufacturing base. India does have a vibrant chip design base, with majors such as Qualcomm and Intel setting up R&D units here. But it lacks a huge domestic market like the US, which accounts for 47 per cent of global semi-conductor sales.

So while the government might want Intel, the US company is investing $20 billion to set up two new plants in its home base. And TSMC, the world’s largest chip manufacturer, is investing $100 billion over three years to expand its already huge base in Taiwan.

Everything depends on the incentive package the Indian government offers. But in this space, India has to compete with other countries that are also making big bets. According to the Ministry of Electronics and Information Technology, the only commitment that has been made so far is $5 billion of fiscal incentives. And that amount is not reserved only for semi-conductor fab players; it has to be shared with a display fab player (talks are on with Vedanta) and Internet of Things and wearable device players. 

The government is also looking at wooing Indian companies to lead a consortium to set up a fab plant. But as a top executive of a leading Indian business house pointed out, “Indian companies have failed to get into this space because, apart from money, fab requires aggressive commercial acumen that none of us have. You have to get into long-term contracts with multinationals so that the fab unit is running at high capacity. Otherwise it is a financial disaster.”