Integrated circuit(IC) chips, soldered on semiconductors, are the soul and mind of digital technology manufacturing ecosystem.
The semi-conductor IC chips ecosystem works on super-tech intensive interplay of four sub-systems: semiconductor materials, mostly polysilicon, designing of these chips, fabricating semi-conductor chips on semiconductor material and embedding semiconductor chips in final electronic products.
Semi-conductor chips are driving digitalisation of every process and equipment today in industry, services, farms, governance or regulation. The semiconductor chip industry has already become $500 billion strong and is heading strongly to reach $1 trillion by 2030.
For India to miss out on semi-conductor chip fabrication will be missing out on digital industrialisation, risking future prosperous digital economy and society.
Indian Companies Lag Behind in Chip-Making
India, unfortunately at this juncture, is nowhere in the semiconductor ecosystem. It has only two small semiconductor facilities, of 1990s vintage, making small number of outdated 180 nanometre chips.
India does not manufacture polysilicon or its wafers on which IC chips are fabricated. Many Indians design semiconductor chips for global companies, in their development centres abroad and in India, as technocrats but Indian companies has negligible presence in chip-designing businesses.
Many Indian industries use IC chips for manufacturing their mostly low-tech electronic products importing bulk of the chips.
Government’s Incentivising Scheme
To put India on the semiconductor fabrication map, Government is betting to pay 50% of the capital cost of the semiconductor chip fabrication units, currently estimated to cost over $10 billion in subsidies. Will this ploy work?
What is Government targeting? IC chips are broadly divided in three classes. Chips of less than 28 nanometre are the most advanced, powerful and occupy the least space on the equipment. Bigger chips upto 65 nanometres are mid-class chips which go into most of the electronic gadgetry of today.
Still bigger chips, called analogue chips, are for mass market relatively low-tech electronic products. Most of Indian manufacturers use analogue chips for their electronic products.
Semiconductor Production Linked Incentive (PLI) of the Government initially targeted high-end chips of 28 nanometres or less by offering the highest 50% capital cost subsidy for semiconductor fabs promising to manufacture such chips, with lesser 40% and 30% incentives for the next two classes of chips.
What’s the Best Bet?
Three bidders responded to Government’s invitation.Two of them want to manufacture mid-segment chips for mostly export as they don’t see much demand for such chips from the Indian electronic industry.
One has promised to manufacture mostly the analogue chips for largely domestic consumption. Most likely responding to this bid, the Government has questionably revised the incentive regime to offer 50% capital subsidy to any semiconductor chip fab.
However, there remains one roadblock. No bidder is offering to manufacture polysilicon or wafers in India.
There is another smaller PLI scheme for Chip Designing but the Semiconductor PLI is only coveted. There are odd schemes targeting electronic equipment manufacturing like the PLI on White Goods, but there is no expectation from these schemes to create demand for higher-end chips.
Of the semiconductor four-legged eco-system, Government, from the current bid process, is getting only one i.e. semiconductor chip fabrication, which also seem to be drifting towards manufacture of lower-end chips
Is This Worth the Cost?
There are three principal arguments for domestic manufacturing of industrial products.
First, to produce products at lower prices using comparative advantage of lower labour cost and available natural resources. Secondly, to add value domestically to contribute to higher GDP and lastly, to generate employment. Capital subsidy and other fiscal incentives are like public investment for securing these advantages.
Let us see whether the promised fiscal investment on semiconductor chip fabrication in India is value for money.
No one has asked and no bidder has promised that the IC chips manufactured in India would be manufactured and sold at lower price in India. The whole case for PLI incentive is to neutralise the disability cost of manufacturing semiconductor chips in India.
The fact that two of the three bidders are planning to export almost entire semiconductor chips manufactured in India negates the availability of these chips to Indian electronic manufacturers; forget lower prices.
Semiconductor chip fabrication is highly capital intensive. Production of polysilicon costs a lot. Chip designing is highly technical and design talent intensive. Chip fabrication is done using ultra precision technology completely autonomously. No doubt, there is next to nothing direct employment in semiconductor chips fabrication. India cannot therefore expect much employment from the semiconductor PLI investment
Bulk of the value addition in semiconductor fabrication chain comes from capital investment in technology of producing polysilicon from silica, waferisation, IC chip designing and in the fabrication technology equipment. There is not much investment likely to go into buildings and other locally supplied capital costs. There will be very little domestic value addition in semiconductor chip manufacturing.
Is There a Profitable Solution?
Semiconductor chips which India needs can be imported as the difference between importing or fabricating chips, in terms of net import costs, is not very material.
In such a case, should we do something different?
More than 50% of the IC chips fabricated globally are designed by non-fab enterprises. These enterprises design the chips and then get these fabricated on contract from semiconductor fabs. The real profit is made by the chip designing enterprises; the semiconductor fabs only make small profits.
India has enormous technical talent in chip designing. It is estimated that about 20% of the global chips are designed by Indians, of course for global major non-fab and fab manufacturers.
Indian technology workforce earn decent salaries and bonuses, which contribute to domestic value addition. Unfortunately, neither patents nor real profits of chip designing businesses accrue to India of chip-designing business
India Needs To Renew Its Focus on Chip Designing
Indian technology enterprises have invested massively in software technology services businesses, but not in the chip-designing businesses.
If Indian technology enterprises were to invest in establishing chip designing businesses, for which India has enormous technical talent, for not only end-use Indian electronic equipment manufactures but also for the world, India can emerge as the global chip designer on the lines of the software services businesses.
When that happens, global and Indian entrepreneurs might find it worthwhile to invest in establishing the semiconductor fabs also in India, probably without or with much less subsidies from government.
India must, therefore, instead of embarking on the path of building high-cost low-value adding semiconductor chip fabrication, course correct and focus on making India the semiconductor chip designer of the world.
This will be economically and fiscally immensely value accretive, in place of chasing a high-cost low-value trophy of semiconductor fabs.
(Subhash Chandra Gargh is an Economic and Fiscal Policy Strategist and Author of The $10 Trillion Dream and Former Finance and Economic Affairs Secretary, Government of India. This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)
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