India, Taiwan May Ink Mega Deal to Set Up $7.5 bn Chip Manufacturing Plant. Here's Why it's Global Rescue

 In order to address the global semiconductor chip shortage issue, India is in talks with Taiwan. This could bring chip manufacturing to South Asia along with tariff reductions on components for producing semiconductors.

New Delhi and Taipei have met in recent weeks to discuss a deal that would bring a chip plant worth an estimated $7.5 billion to India to supply everything from 5G devices to electric cars

World leaders and executives at multinational corporations have been worried about the global scarcity of semiconductors, which has hit manufacturing and sales in numerous countries and no early solution is in sight.

WHAT CAUSED THE SEMICONDUCTOR SHORTAGE?

Semiconductors, or chips, have properties that are somewhere between conductors and insulators. Usually made of silicon, they have been used to power a wide range of devices - cars, laptops, smartphones, household appliances, and gaming consoles.

These tiny objects perform a host of functions such as powering displays and transferring data. So, a supply crunch has a consequent impact on sales of cars, fridges, laptops, TVs and other electronic devices.

Manufacturing cannot be increased on short notice. As a Bloomberg report points out, making chips is a complex process that takes months.

Taiwan Semiconductor Manufacturing Corporation (TSMC) is the world’s largest contract chipmaker, whose customers include Qualcomm, Nivdia and Apple. It holds 56 percent of the foundry business of manufacturing chips.

The surge in sales for electronic devices during the pandemic created a huge demand for semiconductors. But COVID-19 is not the only factor behind the shortage.

The tense relationship between the United States and China is also a factor, since many US companies do business with Chinese companies. For instance, Huawei, which supplied to American chip makers, has been blacklisted by the US government.

WHAT ARE THE POSSIBLE FALLOUTS?

Since production cannot be pushed at short notice, it takes chip manufacturers a long time to catch up with demand.

A report published by Gartner in May estimates that the chip shortage across categories of devices could continue well into the second quarter of 2022.

“The semiconductor shortage will severely disrupt the supply chain and will constrain the production of many electronic equipment types in 2021. Foundries are increasing wafer prices, and in turn, chip companies are increasing device prices," said Kanishka Chauhan, principal research analyst at Gartner.

One report by Bloomberg points out that chip lead times, or the period between ordering semiconductors and delivery, rose to a record 21 weeks in August, from six weeks in July.

According to data from Society of Indian Automobile Manufacturers (SIAM), automobile wholesales in India declined 11 percent year-on-year in August.

Maruti Suzuki, India’s largest carmaker, will see a 60 percent cut in production in September due to shortage in supply of semiconductors.

Mahindra and Mahindra M&M said it would cut output by 20-25 percent in September due to the semiconductor shortage. The automaker will observe seven “no production days" at its automotive plants during the month.

There is a strong likelihood that the semiconductor shortage will impact sales during the upcoming festive season in India.

WHAT ABOUT LAPTOPS, SMARTPHONES ETC?

Production of electronic devices has also been impacted by the shortage of semiconductors.

During a post-earnings call with analysts, Apple CEO Tim Cook had said that “supply constraints will hurt sales of iPads and iPhones. Cook said the shortage is not in high-powered processors, but “legacy nodes,” or chips that perform functions like driving displays or decoding audio, which can be manufactured using older equipment.

South Korea’s largest conglomerate Samsung Group had in August said it would invest 240 trillion won ($206 billion) in the next three years to expand its footprint in biopharmaceuticals, artificial intelligence, semiconductors and robotics.

Many tech companies have begun developing their own chips, a move that will not only alleviate the current supply concerns but will likely help the industry in the long-run.

Setting Up a Semiconductor Fabrication Plant in India: What Foreign Investors Should Know

• Over 20 semiconductor manufacturing and designing companies in high-end, display, and specialty fabrication have reportedly submitted Expressions of Interest (EOIs) to set up manufacturing plants in India. The deadline was April 30, 2021.
• The government is open to introducing new incentives for chipmakers, beyond those detailed in the PLI scheme. It will likely be based on the investment coming in and the company’s area of work, type of fab, and requirement. No further information has been put out yet.
• The demand for semiconductors in India is valued at over US$10 billion.
• India Briefing spotlights the latest developments in India’s nascent semiconductor industry, where the talent pool has focused, and recent government initiatives to boost investment growth.

India’s semiconductor industry profile 

Semiconductors or chipsets are used in all modern electronic devices and technologies, with a range of applications that range from electronic products and IT hardware to defense technology, industrial electronics, medical electronics, automation (workplace, healthcare, manufacturing etc.), and the Internet of Things (IoT).

Moreover, rapid developments in the capacity for intelligent computing and growth of AI in these applications and related industries has further expanded the dependency on semiconductor research and escalated the economic value of its manufacturing capacity.

According to the India Electronics and Semiconductor Association (IESA), semiconductor consumption in India was worth US$21 billion in 2019, growing at the rate of 15.1 percent. Research and development in this industry, which includes electronic products and embedded systems, generated about US$2.5 billion in revenue.

Yet, India lags in the establishment of semiconductor wafer fabrication (FAB) units – due to a weak ecosystem and shortage of resources as compared to more competitive bases like China and Vietnam.

Semiconductor FAB units require huge investments, gallons of water for production, uninterrupted electricity supply, high operating costs, and the need for frequent technology replacement.

This is why India’s contribution to the industry has focused on its technical competencies in R&D, design, etc. due to its talent pool in IT design and R&D engineers. The Indian semiconductor design market was projected to grow by a CAGR of 29.4 percent from US$14.5 billion in 2015 to US$52.6 billion in 2020.

As per the Ministry of Electronics and Information Technology (MeitY), R&D capabilities in very large-scale integration (VLSI) and chip design are showcased by the Centre of Excellence in Nanoelectronics at Indian Institute of Science, Bangalore and the Indian Institute of Technology, Bombay. India is setting up commercial semiconductor wafer fab units and two consortia have initiated work in this regard. The proposed location is Greater Noida in Uttar Pradesh (about 40 kms from New Delhi) and in Prantij in Gujarat (about 50 kms) from Gandhinagar.

In order to overcome the capital intensive hurdles, the Indian government is actively seeking foreign capital to set up semiconductor manufacturing facilities in the country.

Earlier this year, the Indian government sought proposals from interested applicants to either setup (and/or expand) semiconductor wafer/device fabrication plants (FABs) in India or their acquisition outside India.

The notification about the Expression of Interest is available in Korean, Japanese, Hebrew, and Chinese – an indication of the expected investment interest from foreign players.

The deadline for these proposals (Expression of Interest) was extended from March 31, 2021 to April 30, 2021.

Investment trends in the industry

Between April 2000 and December 2020, India’s electronics sector received FDI worth US$3 billion, and the Indian government has allowed 100 percent FDI under the automatic route for the electronics sector.

The following lists notable developments in the semiconductor industry:

• Growth stage investor Next Orbit Ventures has planned to invest US$100 million in a semiconductor fabrication project based in Gujarat.
• Californian product engineering company INVECAS has planned to invest between US$15-20 million for the setup of design centers in Bengaluru and Hyderabad over the next few years.
• German semiconductor firm Infineon Technologies has partnered with the non-profit National Skill Development Corporation (NSDC) to impart education and training regarding semiconductors to young talents for the purpose of developing India’s electronics manufacturing ecosystem.
• US semiconductor company Freescale merged into ‘NXP Semiconductors’ in 2015.
• US engineering firm Aricent acquired Bengaluru’s chip design services company SmartPlay for US$163 million, making this the largest acquisition of semiconductors in India.
• For the development of trade and technical cooperation in the semiconductor industries between India and Singapore, IESA and the Singapore Semiconductor Industry Association (SSIA) have signed a memorandum of understanding (MoU).

Initiatives of the government

Notable initiatives undertaken by the Indian government for the development of the semiconductor industry include:

• To ensure a boost in the semiconductor industry, the Union Budget of 2017-18 increased the allocation for incentive schemes, such as the Modified Special Incentive Package Scheme (M-SIPS) and the Electronic Department Fund (EDF), to US$111 million.
• To ensure further investments in the industry, create employment opportunities, and reduce dependence on imports by 2020, the government amended the M-SIPS by approving new incentives for investors, worth US$1.47 billion.
• The MeitY has planned to revise its policy framework, to develop the industry by providing initial capital that is meant to attract more private players and push India to become a global hub for semiconductors.
• The government of Telangana has planned to launch T works, India’s largest prototyping center, in Hyderabad for the purpose of acting as a prototyping center for semiconductors.
• The government of Gujarat has planned to set up a new electronics manufacturing hub in the state, following the launch of its electronics policy in 2016, and is expected to generate around 500,000 jobs in the electronics sector in the next five years.
• The federal government has set up an empowered committee for manufacturing in high technology areas, which will be headed by the minister of Commerce and Industry, and notable people from the Indian industry, including Tata Sons chairman N Chandrasekaran, Bharat Forge Chairman Baba Kalyani, Mahindra Group managing director and CEO Pawan Goenka, Zoho Corp CEO Sidhar Vembu, and semiconductor expert Anshuman Tripathi.
• In 2016, an electropreneur park was inaugurated at the University of Delhi’s (DU) South Campus to incubate 50 early stage start-ups and lead to the creation of at least five global companies over a period of five years.
• The government has approved a Scheme for the Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) and a Production Linked Incentive (PLI) scheme for 13 critical sectors like telecom, automobiles, etc.

Setting up a semiconductor fabrication plant in India: Submitting an Expression of Interest

Besides aiding intelligent computing systems, semiconductors also play an important role in the advancement of emerging technologies, such as IoT, 5G, robotics, and autonomous vehicles. However, these technologies will not be able to advance further unless India is able to develop a sustainable semiconductor manufacturing ecosystem – a prerequisite to advance India’s online infrastructure.

As per the India Cellular and Electronics Association (ICEA), India’s semiconductor industry is capable of gaining a sizeable share of the global market by becoming a hub for laptops and tablets, which will provide a manufacturing value of US$100 billion and create 500,000 jobs.

To ensure targeted interest from foreign players, the government has invited leading international players to submit their proposals to the MeitY by March 31, 2021, if interested.

What are the types of projects encouraged?

The following types of projects have been encouraged by the government when seeking investment proposals:

Category A: Well established Integrated Device Manufacturers (IDMs)/Foundries/Indian Company or Consortia with Indian Industry Partner

1. Having state-of-the-art mainstream complementary metal-oxide-semiconductor (CMOS) technology nodes for fabricating processors, memories, analog/digital/mixed signal integrated circuits
2. Desirous of setting up/expanding existing semiconductor FABs in India (preferably with a node size of 28mn or lower, wafer size of 300mn and a capacity of 30,000 WSPM or more)

Category B: Well established Integrated Device Manufacturers (IDMs)/Foundries/Indian Company or Consortia with Indian Industry Partner

1. Having state-of-the-art compound semiconductor-based emerging technologies for fabricating high frequency/high power/optoelectronics devices
2. Desirous of setting up/expanding existing semiconductor FABs in India (preferably a wafer size of 200mn or more)

Category C: Indian Companies/Consortia interested in the acquisition of semiconductor FABs outside India

Submission of EoI proposal

The EoI proposal may be submitted in the form of a Preliminary Project Report (PPR) detailing the following:

• Category A/B/C for which the EoI is being submitted.
• Proposed location(s).
• Land, water, and power requirement.
• Technology specifications including proposed process technology(ies), node(s), wafer size(s), products (process wafers/ICs post ATMP/OSAT), provision to manufacture compound semiconductor devices, technology availability/proposed tie-ups for acquiring technology.
• Operational details including the proposed capacity in terms of wafer starts per month (WSPM), ramp-up timeline, and management structure.
• Financial details including proposed investment, sources of funding and ownership structure; projected P&L statement, and key financial indicators (IRR, ROI, ROCE, EBIDTA, and NPV with and without expected government support).
• Financial support desires from the government of India, including grant-in-aid (GIA), viability gap funding (VGF) in the form of equity and/or long-term interest free loan (LIFL), tax incentives, infrastructure support etc.
• Support desired from the state government in terms of extent, value, and nature of land; availability and cost of provisioning water; and power tariff.
• Human resources such as requirement of trained manpower and feasibility/potential modalities/support for development of talent leveraging Indian universities.
• Capital goods such as the requirement of new/refurbished capita goods (plant, machinery utilities, transfer of technology, etc.).
• Raw material, details regarding sourcing of raw materials, e.g., specialty gases and ultra-pure chemicals of semiconductor grade; road map for developing the raw material manufacturing ecosystem in India.
• R&D support, desired support for R&D and proposed mechanisms; possible Indian R&D counterpart or prospective agencies/organizations for research (if any).
• Market feasibility, availability of market for FAB output, proposal for keeping the fab loaded to work at optimum capacity to serve the market.
• Relocation, in case of category C, indicate any plan to transfer the FAB to India.