Date: 28/01/2023
Relevance: GS-3: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.
Key Phrases: Semiconductor, Subsidies, Policy, Fabless Companies, Manufacturing, Atmanirbhar, Exports, Electronic, Design, Automation, Development, Indigenous, Innovations, Entrepreneurs.
Context:
- The government has announced subsidies totaling ₹76,000 crore (around $10 billion) to build a semiconductor ecosystem in India. Combined with matching private investments, this would amount to $30 billion in investments.
Key Highlights:
- The cost of building a semiconductor industry, including a single
fabrication facility, is extremely high.
- For example, TSMC, a leading company in advanced semiconductor manufacturing, has announced that its new fab in Arizona, USA will cost $40 billion.
- During the Cold War era, the Soviet Union attempted to replicate the semiconductor manufacturing industry in Silicon Valley, USA by building an entire town for scientists and engineers, but the effort ultimately failed.
- This serves as a reminder that attempting to replicate the entire supply
chain locally is unrealistic and futile.
- Instead, it would be more beneficial to gain control of strategic components of the supply chain, as Japan, Taiwan, and Korea have done.
The Thrust Areas:
- In India, the policy thrust is currently on self-sufficiency (atmanirbhar) and national security but due to the complexity of semiconductor manufacturing, it is unlikely for any country to achieve complete self-sufficiency.
- The main goal for developing our own semiconductor industry in India
should be to decrease the expense of importing semiconductor components
directly or indirectly.
- The consumption of these components within the country was $80 billion in 2020 and it is predicted to reach $110 billion by 2030, which is similar to what India spends on importing oil.
- This supports the idea of building export-oriented chip design companies (called fabless companies, which do not own a semi-conductor foundry) in India.
Do you Know?
- The life-cycle of chip manufacturing involves many stages.
- A semiconductor integrated circuit (IC) is designed using Electronic Design Automation (EDA) tools.
- A foundry etches this design on a silicon wafer using highly complex machines.
- Specialty chemicals are used to etch and deposit layers on the silicon wafer to build an integrated circuit.
- A modern production fab achieves nearly 100 percent yield, i.e. the percentage of defect-free chips per wafer. A supply chain for manufacturing ICs involves companies that are often geographically apart.
- No country, including the US, has all vendors in the supply chain within its borders. Thus, total self-sufficiency could be seen as a mirage.Favourable Conditions for India:
- The profits from sales of semiconductor ICs primarily flow to fabless companies and, fortunately, the design of ICs is done entirely in software, which is a strength for India.
- Also, India has a large pool of IC designers trained by
multinationals operating in India. This highly skilled workforce,
coupled with our hardy entrepreneurial class, is a significant
advantage.
- If incentivised well, this will play out as it did for Indian software industry.
- Fabless company start-ups, with their innovations, can build a world-class export industry. Most such companies will employ hundreds of engineers working for two to three years before the first chip is available to earn revenue.
- The government should also create a pool of capital that can help
large Indian conglomerates to acquire and relocate the headquarters of
mature fabless companies from abroad.
- These mature companies are valuable in growing ecosystems due to their significant IP portfolios and worldwide customer network. And the human talent they nurture would become future entrepreneurs.
Current Policy:
- The current policy in India focuses on providing incentives for the
manufacturing of semiconductor components, display panels and specialized
components, rather than utilizing the country's talented software and
hardware designers.
- The fourth scheme offers limited incentives for fabless companies involved in the design and productization of components.
- Subsidies of 30-50% of the total project cost are offered to companies proposing projects within the first three schemes, while subsidies for fabless companies are capped at ₹15-30 crore per company.
- These large investments may not be enough for advanced semiconductor fabs, and the fabless design industry, which has greater potential, is being overlooked.
- Additionally, some components of the proposed incentive package may not be as important and there may not be enough value in incentivizing packaging and testing companies.
Way Forward:
- Instead of aiming for unattainable goals or wasting resources on minor
advancements, India should adopt a long-term strategy.
- The success of the auto-parts industry serves as an example. These manufacturers did not initially attempt to produce the most advanced parts for foreign car manufacturers like BMW.
- Instead, they concentrated on producing less complex parts where they had a cost advantage and gradually advanced to producing more high-value parts over time.
- Similarly, India should focus on building fabs using older technology instead of the latest technologies. This technology is commonly used to develop mixed-mode logic circuits that are used as sensors, input/output data, and power electronics.
- By targeting this market, India can easily capture a share of the global market as there is little brand loyalty and we can provide quality parts at a lower cost.
Conclusion:
- By establishing fabs using older technology for the production of mixed-mode logic circuits, India can reduce its reliance on imports and increase exports of domestically produced goods such as TVs and refrigerators.
- Additionally, by encouraging the growth of fabless companies focused on cutting-edge product innovations, India can establish itself as a leader in the semiconductor industry.
- However, for this strategy to be successful, subsidies must be targeted towards the right areas of the industry.
Source: Business Line
Mains Question:
Q. The India Semiconductor Mission can give the required thrust to build a semiconductor ecosystem in India. Comment (150 words).
