India’s ambitions to become a global semiconductor hub, which received a multibillion-dollar investment boost last week, still need to overcome several issues, analysts have warned.
In a major step forward, Prime Minister Narendra Modi’s cabinet last week approved plans to build three semiconductor plants with investments of more than $15 billion - including a Tata Group proposal to build the country's first major chipmaking facility.
Tata plans to build an $11 billion complex that can fabricate about 50,000 wafers per month. The government also approved Tata's $3 billion-plus chip assembly plant and a packaging venture between Japan’s Renesas Electronics and the Murugappa Group’s CG Power and Industrial Solutions.
Work on the centres will start in the next three months. Once completed, they will manufacture chips for cars, defence, and telecoms, the government said in its announcement on February 29.
Bharat Innovation Fund
The ventures involve tie-ups with companies from Taiwan, Japan, and Thailand, which have established expertise in the sector, but still face numerous challenges, says Kunal Chaudhary, partner at EY India.
“The success of semiconductor manufacturing in India hinges on various critical factors, including power supply, access to energy-grade silicon and rare earth minerals, robust chip design capabilities, talent, and perhaps most significantly, meeting the water supply requirements.”
Semiconductors are essential for electronic products such as smartphones and electric vehicles.
Global shortages of chips, sparked by supply chain disruptions during the Covid-19 pandemic, as well as a surge in demand for consumer electronics, prompted India to focus on venturing into developing its own semiconductor manufacturing industry, ensuring a supply of the components needed for future technologies from AI to self-driving cars.
The Indian government sees indigenous chip manufacturing as essential to its plans to massively scale up the country's electronics manufacturing.
The India Electronics and Semiconductor Association (IESA) estimates that the country's semiconductor market will be worth $63 billion by 2026.
“A thriving semiconductor industry would act as a catalyst for India's growing electronics sector,” says Somshubhro Pal Choudhury, co-founder and partner at venture fund Bharat Innovation Fund (BIF) and former managing director of Analog Devices India, a subsidiary of US-based semiconductor major Analog Devices.
“This would not only cater to the massive domestic market but also potentially position India as an export hub."
Mr Choudhury, who is also a board member of the IESA, says setting up a chip fabrication industry "requires massive capital, with costs often reaching billions of dollars and takes several years to have them up and running”.
Mid-sized city demands
The global semiconductor manufacturing sector reached $544.78 billion in 2023 and is expected to reach more than double to $1.137 trillion by 2033, according to Precedence Research.
Taiwan is by far the world’s largest producer of semiconductors, while countries including South Korea also have a strong presence in the market.
Sanjay Gupta, chairman of IESA, says it takes the plants two to three years before they are manufacturing chips at scale.
“Had it been an easy industry to set up, many countries would have done it,” says Mr Gupta.
He says the power and water requirement of a chip plant for a day “can surpass a mid-sized city”.
Trade website Semiconductor Digest estimates that a chip manufacturing plant could require about 100 million litres of water a day.
Mr Gupta says while an uninterrupted supply of power and the “purest form of water”, India is capable of developing the required infrastructure, including large power plants, to support the industry.
Having the skilled manpower is another issue because “historically, India was not doing [chip] manufacturing, we did not have talent that was going in that direction, neither the technical institutes that were teaching this”.
Mr Chaudhary says while India "has a huge pool of design engineers, there are few sufficiently skilled manpower to handle highly specialised semiconductor manufacturing processes”.
“Initially, such experts can be called in from abroad to train Indian people, but in the long term, India will need to create a pool of skilled manpower in semiconductor manufacturing.”
Given its newness to the sector, India is also likely to be dependent on partnerships with other countries in its development of the industry for the foreseeable future.
US-based chipmaker Micron Technology in September started construction on a $2.75 billion assembly, testing and packaging plant in the western state of Gujarat in India.
“The government’s recent approval to large semiconductor manufacturing proposals with its foreign technology partners is testament to the government’s desire and need for global technical expertise in semiconductor manufacturing,” says Mr Chaudhary.
India will also face the challenge of securing the materials needed for semiconductors.
“Semiconductor manufacturing is acutely dependent on rare earth elements, critical minerals and critical metals. Many of these mineral supplies are dominated by China,” says Mr Chaudhary.
India last year announced that it had increased its focus on exploration for 30 critical minerals but Mr Chaudhary says that semiconductor manufacturing units in India would still largely depend on imports.
Mr Choudhury from the Bharat Innovation Fund says India is in a much better position to succeed than when it previously explored developing a semiconductor industry.
“While the efforts of starting semiconductor fab was started 15 to 20 years back, it just did not take off for a variety of reasons,” says Mr Choudhury.
“At the time, India’s consumption was still low. But with India’s economic growth, the new initiatives [including incentives] and plans, coupled with the geopolitical tensions and the China+1 strategy, the plans are progressing significantly.”
While becoming a hub requires enormous effort and investment, there are huge rewards to be reaped.
Mr Gupta says if India does not develop “the right ecosystem for semiconductors from every angle – design, manufacturing testing, packaging – then there's a big risk to the economy”.
“Because if tomorrow, we have a problem in the supply chain, be it for geopolitical reasons, unprecedented events like Covid, then that economy might crumble with a lack of availability of semiconductors,” says Mr Gupta.
