Opinion

Seizing the semiconductor opportunity

Ajit Manocha | Updated on September 29, 2021

Harnessing the potential   -  /iStockphoto

Government incentives on the research, manufacturing and tax fronts are key to developing this vital industry

The current semiconductor shortage alerted nations globally to the strategic and economic importance of chips, and this has opened up unprecedented growth opportunities for India – with 2021 representing a critical moment to secure its place and future success.

The country has been attempting the building of a semiconductor manufacturing facility (“fab”) since 2006 to no avail. Some analysts doubt the pragmatism of the efforts as the risks are too high and the investment required, too huge.

Semiconductor fabs have proven to be game-changers for the economies where they are operational, generating significant employment and bringing huge revenues for the countries involved. The government needs to clearly articulate a strategic vision to successfully build a broader semiconductor ecosystem.

Before delving into the critical components for success, let’s look at the semiconductor industry opportunity at hand for India. From the start of the US-China trade war in 2017, supply chains began to shift, and the Covid-19 pandemic has accelerated the push to diversify and incorporate more flexibility in supplier selection. In particular, companies in South-East Asia have benefited from this shift. India’s strengths include its software leadership, young talent base and start-up ecosystem.

The overall semiconductor industry is poised to more than double to over $1 trillion over the next decade. Additional benefits of investing in the industry include labour stability, lucrative pay and strengthened connections to global electronics markets.

Complex value chain

The semiconductor value chain is global, interconnected and incredibly complex, and it involves many specialised fields. Going forward, the government should take the initiative to encourage entries into the semiconductor manufacturing segments with relatively lower barriers to entry.

One such segment India should consider is raw wafer manufacturing. Wafers are round silicon discs, typically 4 to 12 inches in diameter, on which semiconductor devices are fabricated. This part of the industry costs much less to enter compared to other segments.

Another area primed for entry is assembly and packaging. After semiconductor devices have been fabricated on a wafer, individual chips must be cut from the wafer and, in most cases, put into a protective package. An assembly and packaging factory can cost several hundred million dollars to more than a billion dollars. The next step after packaging is testing of the semiconductor device, and test facilities are typically also part of or close to the assembly companies.

In addition to semiconductor hardware, Electronic Design Automation software (EDA) firms that facilitate semiconductor design offer a compelling draw to leverage India’s strength in software. India has done well in design and verification for the semiconductor industry, with most of the global semiconductor companies having an R&D footprint in India.

Building up India’s role in these segments will aid the success of building semiconductor fabs. A fab can cost upward of $10 billion, depending upon the complexity of the devices manufactured and the capacity of the factory, but the barriers to entry are large.

However, recent news concerning the emergence of a semiconductor industry in India have been encouraging. Some of the biggest Indian conglomerates have evinced interest in making an entry into semiconductor and display manufacturing and have already started investing in technology and other aspects in preparation for seizing the opportunity. But what is key is the Indian government’s support that would facilitate the path to success.

Recognising the importance of ensuring stable and secure supplies of chips for strategic and commercial applications, governments around the globe are moving to incentivise and grow semiconductor manufacturing. Government incentives for semiconductor research and manufacturing are a critical component to a nation’s goals of competing in the industry.

In particular, a refundable investment tax credit by the government for semiconductor manufacturing facilities and equipment would quickly provide a significant, direct and transparent incentive for Foreign Direct Investment (FDI). The credit would reduce the very large up-front capital investment required and close the cost gap with other nations.

The Ministry of Electronics and Information Technology (MEITY) should collaborate with organisations and leaders in the global semiconductor industry to develop India’s strategic vision and should involve Indian industrialists and academia.

Once the strategic vision is ready and socialised to garner international support, it will certainly promote foreign direct investment in India from multiple countries. With major nations the world over lining up resources to strengthen their semiconductor industry position, it truly is now or never for India to establish its place.

The writer is President & CEO, SEMI

Published on September 28, 2021

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