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India Announces A PLI Scheme for Chipmakers: Inside The Economics and Geopolitics of Semiconductors

Editor, TRANSFIN.
Dec 18, 2021 10:02 AM 7 min read

For what seems to be the umpteenth time in two decades, the Union Government is pushing for India to become a semiconductor manufacturing powerhouse.

Yesterday, GoI approved a ₹76,000cr ($10bn) incentive plan aimed at attracting semiconductor and display manufacturers. The Production-Linked Incentive (PLI) scheme (what are those?) will see the extension of fiscal support of as much as 50% of a project's cost.

Israel’s Tower Semiconductor, Taiwan's Foxconn and a consortium from Singapore are reportedly looking to avail the scheme. And officials in India and Taiwan are reportedly in talks to set up a $7.5bn factory.

India’s wager to become a major chipmaker comes at a time of great upheaval in the semiconductor market. Chip manufacturers are confronting a critical supply chain crisis (why?) that has affected any industry that uses electronic devices (so, all of them).

It also comes at a time when these tiny chips have become central drivers of the great power rivalry between the US and China.

Now, semiconductors are extremely fascinating devices. Let’s start at square one…

Semiconductor Basics

Simply put, semiconductors are materials whose electrical conductivity value falls between that of a conductor and an insulator.

This means these materials’ conductivity can be manipulated artificially using a variety of factors. And it is this unique property (+ these materials’ ability to function exceptionally well even in miniaturised conditions) that makes semiconductors one of the fundamental blocks of life in the 21st century.

Some examples of semiconductors are silicon, germanium and gallium arsenide. Of these, silicon is by far the most widely used.

 

Semiconductor Manufacturing

What goes into making a semiconductor chip?

The basic manufacturing process begins with the procurement of pure silicon, which is then cut, melted and shaped into cylindrical ingots. These are then cut (imagine slicing a cucumber) into wafer-thin disks and coated/etched with various design components - components that are thinner than a strand of human hair, mind you.

It is at this stage that certain impurities are added in a process known as doping, which allows engineers to, well, engineer semiconductors to perform a variety of tasks in countless devices.

The road to a usable disk involves as many as 700 processing steps and takes many weeks. Once finalised, these layers are assembled on top of each other (imagine different floors in a skyscraper, stacked atop each other). Over 30 such layers are assembled together, with each having its own function. The result is the all-powerful semiconductor chip, which then makes its way to every corner of the planet through the…

 

Semiconductor Supply Chain

The value chain for semiconductors is probably the epitome of globalisation - in fact, these chips arguably catalyzed the very formation of the intricately interconnected global supply chains of today.

This value chain is also a unique one. While some companies (like Intel) both design and manufacture their own chips, the bulk of the market relies on “fabless semiconductor firms”, which design their own chips but outsource manufacturing to so-called foundries (like Samsung).



Taiwan is the kingpin of the global semiconductor industry. Two of the largest chipmakers - TSMC and UMC - are headquartered in the country. But Taipei’s prowess is not a testament to any geographical chokehold on raw materials (on the contrary, silicon is found easily across countries, with the purest silicon found in the quartz rocks of North Carolina, USA).

No, Taipei’s premier position is due to the fact that the country began investing in this tech well before others did - way back in the 1970s, in fact. Over the decades, Taiwan built strong and unrivalled capabilities in OEM wafer manufacturing and perfected its value chain. And its chipmakers have mastered the delicate art of doing business with both China and the West whilst keeping their politics at arm’s length.

 

Semiconductor Paeans

Smartphones, laptops, EVs, data centres, autonomous cars, pacemakers, LED bulbs... As the “brains” of virtually all electronic gadgets, it wouldn’t be an exaggeration to say semiconductors enabled modern civilisation. Case in point: they are the world’s fourth-most traded products (counting imports + exports) after crude oil, refined oil and cars.

To comprehend the importance of semiconductors, you only need to look at transistors and integrated circuits - arguably the two devices that made modern electronics possible - both of which are made up of semiconductor materials.

FYI: Semiconductors may be miracles-on-chips, but the limitations of Moore's Law may be looming on the horizon. But that's a different topic altogether.

 

Semiconductor Ambitions

Now, the semiconductor PLI scheme is not the first time New Delhi has tried to move up the electronics value chain from simple labor-intensive assembly processes onto high-tech manufacturing.

The first attempt - in 2000 - saw GoI trying to attract foreign expertise to upgrade the ISRO-run Semiconductor Complex in Chandigarh. No major chipmaker showed any interest. Seven years later, a special incentive package involving tax holidays and a 25% subsidy was announced. By the time this scheme expired in March 2011, there were no takers.

In the coming years - 2011, 2013, 2017, 2018, 2020 - more sops were offered. Import duties on project equipment were waived. EoIs for setting up foundries were invited. Existing fabs were upgraded. Plans to manufacture $400bn in electronics goods by 2025 were unveiled…

All these attempts turned out to be futile. India missed the bus even as China, Taiwan, South Korea and Japan raced ahead. Why?

 

Semiconductor Challenges

A semiconductor manufacturing plant is not like any other plant. It’s a vast factory - bigger than many football fields - that needs (1) continuous electricity supply, (2) constant water supply, (3) advanced logistical systems, and (4) to be kept sterile 24x7. Even a speck of dust or hair on the circuitry can render it unusable; even a second-long interruption in power supply can set back the manufacturing process by days, if not weeks.

For a long time, India was deemed to lack these infrastructures. There was also a limited domestic pool of chip designers and process engineers. And the cost of doing business in India was considered to be too high (remember the Wiston plant incident last December?). Moreover, contemporary chipmaking factories have been overtaken by robots to make the process more seamless, error-free, and less prone to contamination. Replicating such astute and immaculate conditions in a country with no prior experience in such hi-tech manufacturing was too expensive and risky a gamble for many foreign chipmakers.

Also, just in case the autarkist or nationalist in you is getting frustrated: you can’t make semiconductors in India without foreign assistance. Chip manufacturers are known to guard their IP secrets closely (for obvious reasons), so first-mover advantage is crucial in this industry. And India, unfortunately, missed the bus a long time ago.

 

Semiconductor Repositioning

So, is GoI being foolhardy in announcing yet another incentive scheme? Well, maybe not. A lot has changed geopolitically over the past few years that may work in India’s favour.

The US-China trade war and the coronavirus pandemic have forced manufacturers to rethink the Beijing-centric global supply chains. The ongoing semiconductor shortage has alerted chipmakers of the importance of expanding their outputs. And worsening Sino-Indian relations have inadvertently led to New Delhi and Taipei cozying up to each other. (As it were, India’s aspirations to become the next Taiwan involves getting a lot of help from Taiwan.)

Moreover, earlier PLI schemes have done quite well in meeting their targets. The PLI for mobile manufacturing, for instance, has already made India the second-largest smartphone maker in the world in only a few years. (Important to note: the new scheme comes at the heels of $30bn in incentives already offered to big electronics manufacturers to set up shop in India.)

There’s also the domestic promise. While a skills gap remains a problem, India has added more chip designers over the years. The local market for semiconductors has also ballooned, thanks to increasing smartphone usage, elevating digitisation levels, and the blossoming mobile-first digital economy.

Furthermore, Indian players are upping their game. Vedanta is again trying to set up a display fabrication unit (it abandoned an earlier attempt five years ago). The Tata Group is in talks with three states to invest c. $300m to set up a chip assembly and test unit. And about 100 local firms working on integrated circuits and chips designs have been provided with fiscal benefits as well. 

 

Semiconductor Geopolitics

Broadly speaking, the semiconductor market today is being driven by two main trends: (1) escalating US-China hostilities and (2) the supply chain crisis.

The first one is fairly self-explanatory. China, the world’s largest semiconductor consumer, and the US, the world’s largest economy, increasingly view each other suspiciously. And one of the areas of this great power competition is semiconductors. So, for instance, while Washington has been pressuring TSMC to stop supplying Huawei, Beijing has warned against any reckless actions (warnings that often devolve into unsubtle threats to invade Taiwan, an island China claims as a breakaway province).

Meanwhile both countries, net importers of semiconductors, are showering domestic chipmakers with money to boost self-reliance. In the advent of an all-out conflict between the two nuclear powers, neither wants to depend on another nation for semiconductors of all things. Self-sufficiency = military preparedness. Techno-nationalism, if you will.

The second trend is equally important (although it doesn’t carry the risk of nuclear warfare). Everyone from automakers to tech manufacturers have gotten their fingers burnt by the ongoing semiconductor shortage. This, in turn, is leading to two (relatively favourable) developments.

One, chipmakers like Intel, Samsung and TSMC are slated to spend a fortune on building extra capacity in the near-term. This is to avoid another shortage, end the current one, and also in anticipation of a demand boom in the coming years.

And two, many big companies are investing heavily in ramping up in-house manufacturing facilities. Tesla, Bosch and Volkswagen are examples. This all-processes-under-one-umbrella approach was borne out of a frustration with the current supply chain, which is far too spread-out and far too reliant on a handful of companies in East Asia. More manufacturers would mean a fundamental realingement of semiconductor economics - and geopolitics.

 

Semiconductor Bottom Lines

GoI says the new semiconductor scheme will create c. 35,000 high-quality positions and 100,000 indirect jobs. It could also attract investments worth $8.8bn.

Expectedly, Government officials have heaped praises on the new scheme for being visionary and prescient. But we have already had so many of such visionary and prescient schemes. And none of them worked. Moreover, the main difference this time - geopolitical nuances - is something that’s not even under our direct control. So there are a lot of moving pieces and ifs and buts to be considered before this PLI scheme can be judged.

There is cause for optimism, but of the cautious kind.

As a parting thought, here’s what a GoI official said about semiconductor incentives: “...Large companies have already approached the Government…and the policy could immediately attract $6-9bn investment in fabrication units.”

And no, that’s not from yesterday. That’s from an Economic Times report on semiconductor “reforms” from way back in 2007.

FIN.
 

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