Will India be able to attract global chipmakers with $10 bn incentive?

India is now the world’s biggest smartphone manufacturer after China. And in its next step to make the country a global hub for electronics production, the government has approved a $10 billion incentive package to semiconductor and display manufacturers. 

The government announced it will provide support of up to 50% of the project cost to eligible companies. The Centre also said it will work closely with state governments to provide the right infrastructure for fabrication plants.

India imports 100% of its semiconductors, spending about $24 billion annually. Now the plan is to make India self-sufficient in production of semiconductor chips that go into phones, computers, cars and everyday electronics such as washing machines, TVs and refrigerators. 

It all comes at a time when tech companies and automakers around the world are grappling with chip shortages. Despite strong demand, Indian carmakers are estimated to lose sales of 5 lakh units in FY22 due to chip shortage, according to ICRA

Ironically, India is a leading chip designer with 25,000 engineers working in this field. Our semiconductor design market was worth more than $33 billion in 2020. 

The new incentive package includes support to homegrown chip product design companies. The semiconductor industry is an extremely concentrated one both in terms of companies and countries. 

Just top 3 companies, Intel, Samsung and TSMC made $188 billion in revenue in 2020, as much as the next 12 largest chipmakers combined.

When it comes to foundry business, TSMC’s home country Taiwan alone accounted for 63% of the total global foundry market share in 2020, followed by South Korea at 18% and China at 6%.

The chip supply crisis that began after the pandemic highlighted our reliance on Taiwan and China. Geopolitical factors are also pushing India to reduce its dependence on Beijing.

While the domestic opportunity is huge, making semiconductors is a complex process. It takes hundreds of precisely controlled steps over several months to make a chip.

India’s previous attempts to attract chipmakers in 2017 and 2020 had failed. In 2007, Intel had shown 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 by Jaypee Group and HSMC with a promise to subsidise the project cost but the projects were aborted as they failed to attract investors. Promoters failed to raise finances and the projects were aborted.

It takes years and costs upwards of $5 billion to set up a fabrication unit. Factories of companies like Samsung and TSMC cost over $20 billion each. 

They require continuous power supply as they run 24x7. Moreover, an entry-level factory consumes more than 20 million litres of ultra-pure water per day. Chip manufacturing requires a pollution-free environment and very clean rooms. Even a single speck of dust can compromise a chip, costing millions of dollars. 

India can find early success in outsourced semiconductor assembly and testing or OSAT.  An OSAT plant packages, assembles and tests foundry-made silicon wafers. This is what the Tata Group is reportedly planning to set up at a cost of $300 million. 

To establish autonomy in the entire semiconductor value chain -- which includes designing, fabrication, testing and assembly, India must promise the right infrastructure apart from the financial incentives. It will take a lot of effort like finding the right spots for factories and coordination with states for uninterrupted water and power supply.