Efforts to create chips ecosystem must persist

Sushma Ramachandran

Senior Financial Journalist

SEMICONDUCTORS came into the limelight when the world began recovering from the Covid lockdowns. Till then, the role of this tiny electronic component in the modern technological society was hazy for the general public. It turned out that the production of automobiles and a host of consumer electronics was being held up merely for want of a product known as a ‘chip’. It also turned out that most of these chips were being produced in Taiwan, South Korea and China, where manufacturing had stalled due to the pandemic. It would take a while before output came back to normal and only then could the production of technologically advanced goods return to normal.

For the layman, a useful definition of semiconductors is that they allow electronic devices to process, store and receive information. The level of technology in them nowadays can be gauged by the US Semiconductor Industry Association’s statement that a single chip has as many transistors as all of the stones in the Great Pyramid of Giza. And these are getting smaller, faster and cheaper every year.

The shortage of these tiny electronic parts was manifest in India initially by the slow pace of passenger car production just as demand was getting back to normal in 2021. Waiting periods for popular brands stretched for over six months for lack of chips. The disruption of global supply chains owing to the worldwide economic slowdown was a major reason for the chips output not reverting rapidly to the pre-pandemic levels.

Developed and developing countries alike soon recognised that the heavy dependence on just a few countries for producing chips endangered economic growth.

India took its first step towards developing a new global supply chain in 2021 during the Quad summit when the Semiconductor Initiative was launched by member countries: India, the US, Japan and Australia. The aim was to utilise the strengths of each of them to forge a productive collaboration, leading to easier availability of semiconductors.

The US role was apparent as it is a significant player in semiconductors, with major integrated design manufacturers located in that country. Japan has its own strength in semiconductor manufacturing materials and chemicals while Australia has mineral resources critical for this industry.

The value that India brought to the table was also considerable and comprised trained human capital. Experts say as much as 25 per cent of the world’s design talent for semiconductors is already located in this country, largely in Bengaluru.

The next steps indicated that the government was determined to create a global hub for chips in this country. The India Semiconductor Mission (ISM) was launched in December 2021 with incentives up to $10 billion, though this number is not considered large for this capital-intensive industry. The drive to attract chips manufacturers was pushed further during Prime Minister Narendra Modi’s recent US visit when a memorandum of understanding was concluded for collaboration to create a supply chain for semiconductors.

The path to the goal of creating a chip-producing ecosystem, however, is looking rocky right now, with few firm offers to invest in this sector. The much-awaited $19.5-billion joint venture project between Foxconn of Taiwan and Vedanta has been called off. Two other consortia have also shelved their plans for the time being. On the positive side, Micron Technologies has announced an investment of $825 million to set up an assembly and packaging unit in Gujarat. And US chipmaker Advanced Micro Devices will invest $400 million to set up its largest design centre in India.

But the real big players have not yet made any firm commitments, though a lot of enthusiasm was shown at the recently concluded Semicon India conference. The fact is that India may now be showing commitment to becoming a semiconductor hub, but it has made several costly mistakes in the past. Offers were made by chip major Intel as far back as 1969, when the company’s co-founder visited this country to explore investment opportunities. The government was not prepared for a large production unit. Intel made another attempt, reportedly in 2005, to set up a multi-billion dollar chip manufacturing facility, but apparently, there was too much delay in the response to the proposal. Now India may be ready, but Intel is not in a hurry.

It would not be fair, however, to imply that the previous governments lacked the vision to invest in cutting-edge technology like semiconductors. It was the Indira Gandhi government in 1976 that approved the establishment of Semiconductor Complex Limited in the public sector. It was launched in Mohali in 1984, much before Taiwan, South Korea or China had entered this sector. By all accounts, the venture came to a premature end with a ‘mysterious’ fire destroying the plant in 1989. It took eight long years for it to reopen and become the Semiconductor Lab, producing components for the country’s space programme. It is now proposed to be revamped as a brownfield chips project as part of the ISM.

It is clear that enough attention was not paid earlier to India’s urgent need to develop sophisticated technological manufacturing skills. The mistakes of the past, no doubt, haunt experts in this sector as any initiative taken now will take a while to come to fruition. Countries like Taiwan and South Korea, for instance, took decades to develop their chips ecosystem. It must also be recognised that most of the leading chip-making countries today were given massive financial and policy support by their governments.

Clearly, Indian policymakers are trying to follow a similar pattern in terms of providing incentives and subsidies to both foreign and domestic companies in this sector. So far, the progress is slow, though there are reports of several proposals in the pipeline. Even so, these efforts need to be continued as creating a semiconductor ecosystem will lead to faster economic development in the long run. India needs to leverage its strengths in high technology and make this happen.

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