SEMICONDUCTOR SECTOR IN INDIA: CHALLENGES AND OPPORTUNITIES

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Picture Courtesy:  THE HINDU

Context

The Union Government approved four new semiconductor manufacturing projects in Odisha, Punjab, and Andhra Pradesh, with a total investment of ₹4,594 crore, under the India Semiconductor Mission to boost domestic chip production.  

What is a Semiconductor?

It is a material, most commonly silicon, that has electrical conductivity between that of a conductor and an insulator. Manufacturers control its conductivity by introducing impurities, this property makes semiconductors the foundational components of all modern electronics.  

Process of creating a semiconductor chip occurs in a specialized facility known as a fabrication plant, or "fab." Key manufacturing stages include:

• Wafer Production: High-purity silicon is grown into a single crystal ingot and then sliced into thin, polished discs called wafers.
• Deposition & Photolithography: Technicians deposit layers of materials onto the wafer. They then use ultraviolet (UV) light and a patterned mask (a reticle) to transfer complex circuit designs onto a light-sensitive coating.
• Etching & Doping: Chemically removes material to create three-dimensional circuit patterns. Subsequently, ion implantation dopes specific areas of the wafer to alter their electrical properties, forming transistors.
• Packaging: The finished wafer is cut into individual chips (dies). Each chip is then encapsulated in a protective package with electrical leads to connect it to a circuit board.

Global Semiconductor Ecosystem

The global semiconductor market holds a value of approximately $681.05 billion in 2024 and is projected to exceed $2 trillion by 2032.

Market Concentration: Taiwan leads the world in advanced semiconductor manufacturing, holding 68% market share in 2024. It is followed by South Korea (12%), the United States (12%), and China (8%).

Industry Leaders: U.S. firms lead in high-value areas like chip design, intellectual property (IP), and electronic design automation (EDA) software.

• Key American companies include NVIDIA and Broadcom.
• Netherlands' ASML maintains a monopoly on the advanced EUV lithography equipment essential for producing next-generation chips.
• Taiwan's TSMC operates as the world's largest contract manufacturer, producing chips designed by other companies.

Indian Semiconductor Ecosystem

India's semiconductor market is expanding rapidly, fueled by powerful demand from the mobile, IT, industrial, and automotive sectors. The domestic market is estimated at $39.5 billion in 2024 and is forecasted to surpass $82.96 billion by 2029 (Research and Markets).

Currently, India imports nearly all its semiconductors, however, initiatives taken to develop manufacturing capabilities, aligning with "AtmaNirbhar Bharat".

Key approved projects

• Tata Group: Building India's first major semiconductor fab in Dholera, Gujarat, with technology partner Powerchip from Taiwan. This facility will produce chips for power management, display drivers, and microcontrollers. Tata is also establishing a semiconductor assembly and test (OSAT) facility in Morigaon, Assam.
• Micron Technology: This U.S.-based memory chip giant started construction in September 2023 on its chip assembly and testing facility in Sanand, Gujarat.
• CG Power: In a joint venture with Renesas of Japan and Stars Microelectronics of Thailand, CG Power is setting up another semiconductor assembly and testing facility in Gujarat.

Initiatives Taken by Indian Government

India Semiconductor Mission (ISM): Launched in 2021 with a Rs 76,000 crore budget, to provide financial support for companies investing in semiconductor and display manufacturing.

• Fiscal Support Schemes: The ISM offers financial incentives through four targeted schemes:
  • Semiconductor Fab Scheme: Provides 50% fiscal support on the project cost for setting up silicon-based semiconductor fabs.
  • Display Fab Scheme: Offers similar 50% support for establishing advanced display manufacturing units.
  • Compound Semiconductor/ATMP Scheme: Delivers 50% fiscal support on capital expenditure for setting up Assembly, Testing, Marking, and Packaging (ATMP) facilities.
  • Design Linked Incentive (DLI) Scheme: Aims to nurture at least 20 domestic semiconductor design firms by providing financial incentives and infrastructure support.

Production Linked Incentive (PLI) Schemes: Existing PLI schemes for Large Scale Electronics Manufacturing and IT Hardware incentivize domestic production and attract investment across the electronics supply chain.

Challenges in the Indian Semiconductor Ecosystem

High Capital Investment: A modern semiconductor fab costs between $10 billion and $20 billion to build and requires a long gestation period with high financial risk. India needs to attract and sustain funding over the next decade to build and operate these expensive facilities.

Infrastructure and Supply Chain: Chip fabrication demands an uninterrupted supply of ultra-pure water and a highly stable power grid, which remain infrastructure challenges. India also lacks a domestic supply chain for essential raw materials, specialty chemicals, and gases.

Talent Shortage: India faces a shortage of professionals with specialized skills in semiconductor fabrication, design, and advanced packaging. Projections indicate a shortfall of 250,000 to 300,000 skilled professionals by 2027.

Intense Global Competition: India must compete with established and heavily subsidized industries in Taiwan, South Korea, the U.S., and China.

Technology Access: Access to advanced, proprietary manufacturing technology from global leaders is a major hurdle. India's R&D ecosystem for semiconductor manufacturing is still in its early stages.

Weak R&D ecosystem: India lags in robust research and development, for developing indigenous chip technology and staying up-to-date of rapid technological advancements. Currently, India invests only 0.65% of its GDP in R&D, compared to South Korea's 4.8%.

Geopolitical dependencies and supply chain vulnerability: India heavily depends on imports for critical semiconductor equipment and raw materials like silicon wafers, vulnerable to global supply chain disruptions and geopolitical tensions.

Competition from established players: Countries like Taiwan, South Korea, and China possess decades of experience, advanced technology, and well-established supply chains, which make it challenging for India to compete in the advanced manufacturing space.

Way Forward for India to strengthen semiconductor sector

Focus on Niche Markets: Rather than competing immediately in leading-edge logic chips (below 28nm), target mature process nodes (28nm and above). These chips are in high demand for the automotive, industrial, and power management sectors, aligning perfectly with domestic needs.

Address infrastructure bottlenecks: Prioritize development of infrastructure, including uninterrupted power and ultra-pure water supply, essential for fabs.

• Establish dedicated semiconductor parks and clusters with features like world-class transportation and logistics.
• Invest in renewable energy sources to power fabs and reduce operational costs.

Develop the OSAT/ATMP Sector: Streamline and expedite the approvals for setting up semiconductor fabrication (fab) units and Assembly, Testing, Marking, and Packaging (ATMP) facilities.

• Offer enhanced financial incentives, including tax breaks, subsidies, and low-interest loans, to attract foreign direct investment and stimulate domestic players.
• Fast-track the establishment of Semiconductor Development Fund (SDF) to provide long-term capital for projects and mitigate risks.

Accelerate Talent Development: Invest in creating a skilled workforce through industry-academia partnerships, specialized university curricula, and collaborations with global training institutions.

Strengthen the Design Ecosystem: Continue to build on India's existing strength in chip design via the DLI scheme. Strengthening indigenous intellectual property (IP) will move the country up the value chain beyond contract manufacturing.

Ensure Policy Stability: A stable, long-term policy environment is critical to give global investors the confidence required for such massive, long-term projects.

Encourage domestic demand and industry growth: Encourage domestic procurement by government and private sectors, assuring minimum domestic demand for chips produced in India.

• Support startups in chip design and manufacturing through incubators and funding mechanisms like the Design Linked Incentive (DLI) Scheme.
• Leverage India's software expertise to complement hardware development and create innovative solutions.

Navigate geopolitical dynamics and global supply chains: Diversify sources for raw materials like silicon wafers, rare earth elements, and specialty chemicals.

• Develop strategic alliances with countries involved in different stages of the semiconductor supply chain through "chip diplomacy".
• Position India as a trusted partner and leverage its geopolitical position to attract technology transfers and strategic partnerships.

What India Can Learn from Other Countries?

• Execute a Strategic Government Vision: Governments of Taiwan and South Korea drove their semiconductor ambitions with long-term, strategic planning.
  • Taiwan's government established the Hsinchu Science Park and the Industrial Technology Research Institute (ITRI), which created the foundation for giants like TSMC.
• Foster Deep Public-Private Partnerships: Strong collaboration between government, industry, and academia is essential.
  • South Korea's model leveraged government support for its conglomerates (chaebols) like Samsung to help them achieve global scale.
• Build an Integrated Supply Chain: Creating a dense, domestic cluster of suppliers is crucial for efficiency. Taiwan with specialized companies handling every step from design and materials to manufacturing and packaging within a small geographical area.

Conclusion

India strategically positions itself in the global semiconductor value chain by focusing on design, encouraging a competitive OSAT sector, and learning from established leaders like Taiwan and South Korea.

 Source: THE HINDU