Why fabless semiconductor manufacturing has not taken off in India

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While the demand for semiconductors is on the rise in India, the supply is being met predominantly by imports. The Indian semiconductor manufacturing industry is just not taking off in spite of various policy initiatives by the Indian government. The reasons are many, the big one being the lack of a complete ecosystem.

By Nijhum Rudra

Semiconductors are the lifeblood of the electronics system design and manufacturing (ESDM) industry. This industry has witnessed tremendous growth over the past few years because the products that use chipsets are in high demand. Automobiles, industrial machinery, telecommunications, information technology and office automation, as well as IoT devices have diverse computing applications. Hence, the demand for fabless semiconductors has escalated. India now requires chipsets on a large scale as the domestic demand for mobiles and connected devices is on the rise. Yet, in spite of the huge investments and policies initiated by the government for domestic manufacturing, India still relies on imports in this sector. There is also a huge skills gap and a lack of sophisticated R&D units within the country.
According to telecommunication experts, though India has scores of chip design units, the lack of proper decision making and implementation of the various initiatives announced by the government is making semiconductor manufacturing a difficult task. The Ministry of Electronics and Information Technology (MeitY) has mentioned that across India, about 20,000 engineers are working on various aspects of chipsets, including verification and design, and about 2000 SoCs (System-on-Chip) are designed every year.

The Indian semiconductor industry offers high growth potential as the industries that source semiconductors as inputs are witnessing high demand. “With the concepts of Internet of Things (IoT) and Artificial Intelligence (AI) picking up momentum, the next generation of interconnected devices will further increase the demand for intelligent computing, thereby creating sustainable demand for semiconductors,” says Anku Jain, MD, MediaTek.

What the experts say
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—Anku Jain, managing director, MediaTek
“There is no semiconductor manufacturing ecosystem in the country. This prevents both potential and experienced SoC manufacturers or budding entrepreneurs from seeing any future in the SoC sector. A strong ecosystem will help to promote domestic companies, as there will be funding for R&D, incubation centres will be set up by the government, and subsidies provided for the prototypes of ICs. The Ministry of Electronics and Information Technology (MeitY) is also revising its policy framework in order to make India a global semiconductor hub, which will see the government taking a more active role, including initial investments, in a bid to attract private sector players.”

—Rajesh Ram Mishra, president, IESA
“Semiconductor manufacturing is not a standalone initiative. There are elements that need to be in place, like ancillary industries, a large talent pool, industry readiness, size of the market, export potential, ease of setting up the facilities, and incentives. We are doing a few things in this regard to help the cause. We are in discussions with the Ministry of Electronics and IT to work on building a readiness index for the industry. We are also working on sharing the global best practices with the industry.
The government has come out with various policies to enhance both manufacturing and ease of doing business in India, which has helped many large manufacturing projects enter India. Semiconductor design and manufacturing is a highly competitive landscape, as countries around the world vie for global talent and investments.”

An overview of the Indian semiconductor market
According to a report from NOVONOUS, a market research firm, the consumption of semiconductors in India, mostly imported, is estimated to rise at a CAGR of 26.72 per cent, from US$ 10.02 billion in 2013 to US$ 52.58 billion by 2020. The report estimates that the consumption of mobile devices will grow at a CAGR of 33.4 per cent between 2013 and 2020, driving the share of mobile devices in semiconductor revenues up from 35.4 per cent in 2013 to 50.7 per cent in 2020. Moreover, the telecom segment is also expected to grow at a CAGR of 26.8 per cent during the same period (2013-20). Sources at India Electronics and Semiconductor Association (IESA) have told IBEF (India Brand Equity Foundation) that by 2020, the Indian ESDM sector is expected to have a turnover of US$ 400 billion.

“The Indian SoC sector is growing very rapidly in terms of technology and production volumes. It is expected to be worth US$ 32.35 billion by 2025, growing at a CAGR of 10.1 per cent between 2018 and 2025. While growing at this pace, the sector is still facing certain challenges, which are inevitable when any sector is evolving and is expected to play a major role in the nation’s economy,” adds Jain.

However, when compared to China and other global players, India is still far behind in semiconductor and electronics manufacturing. China had a 44 per cent share in the global chipset revenue of US$ 339 billion a couple of years back. China is also said to have acquired lots of semiconductor companies in the US, thereby posing a great threat in the US market too. On the other hand, foreign companies have a dominant share of over 90 per cent in India’s semiconductor market.

In order to promote and develop semiconductor and ESDM manufacturing in India, in 2012, the government along with what was then the Department of Electronics and Information Technology or DeitY (subsequently upgraded to a ministry, i.e., MeitY), had released the first draft of the National Policy on Electronics (NPE). This aimed to draw investments of US$ 100 billion and to create employment for 28 million in the electronics industry by 2020. This policy was revised after extensive stakeholder consultation, and NPE 2.0 envisages positioning India as a global hub for ESDM with a thrust on exports. The government plans to build local capabilities for developing core components, including chipsets, and creating an enabling environment for the industry to compete globally.

Challenges that semiconductor manufacturers in India face
Due to low domestic manufacturing capabilities, the demand-supply gap in the Indian semiconductor industry is likely to reach US$ 300 billion by 2020. As compared to global leaders, India is lagging far behind in the field of semiconductors and electronics, sources at MediaTek report.

The lack of collaboration between industry and academia creates a serious human resources problem. The curriculum of technical courses is not designed to fulfill the needs of hiring companies, which means engineering graduates do not have the skills the industry needs. This implies higher training costs and a longer period before a fresh engineer becomes productive for the hiring company.

Then, there is tough competition from countries like China, Taiwan and other established nations in the electronics manufacturing and design domain. These countries already have an established ecosystem, which has been developed over the last three decades, with the structured base of original equipment manufacturers, original design manufacturers, strong government support, effective policies to protect investments, world class infrastructure, uninterrupted power supply, etc.

A few investments that have already been made in the Indian semiconductor industry

  • Cyient Ltd has signed an agreement to acquire a 74 per cent equity stake in Rangsons Electronics Pvt Ltd, a Mysuru based ESDM service provider.
  • A US based product engineering firm, Aricent, has acquired the Bengaluru based chip design services company SmartPlay for
  • US$ 180 million.
  • Altran Technologies SA, a French technology consulting multinational, plans to acquire SiConTech, a Bengaluru based startup that designs semiconductor chips.
  • ARM has expanded its VLSI operations in India. Apart from its Bengaluru office, it has set up a new design centre at Noida in Uttar Pradesh, to work on planar and FinFET CMOS technologies under its physical IP division.
  • Taiwan based mobile phone chipmaker MediaTek has opened a VLSI and embedded software design centre in Bengaluru. It plans to invest US$ 200 million and employ up to 500 engineers over the next few years to work on the mobile communications, wireless connectivity and the home entertainment segments.

Another major challenge is that semiconductor fabrication requires huge investments, with a lot of expensive equipment. According to Taiwan based semiconductor firm, TSMC, the estimated cost of setting up a fab plant is almost US$ 1 billion. Semiconductor manufacturing also requires a lot of skilled and cheap labour. In India, the labour is not a problem, but the skills may be.

Most importantly, the market in this country is really uncertain and there could be financial constraints at any time. The fabrication units cannot solely depend on Indian consumers for their sales. They need to have a large customer base overseas to balance the uncertainties in the Indian market that are caused by government policies and changing market trends.
On several occasions, the government has attempted to carry out semiconductor manufacturing domestically, but many such initiatives have failed, while some are still in limbo.

Gujarat was supposed to get one of the biggest fabless semiconductor plants in the country, in the state’s Sabarkantha district. This was expected to be set up by the Hindustan Semiconductor Manufacturing Corporation (HSMC), providing employment to 25,000 people. But nothing came of this plan.

Government initiatives
The Indian government is working on policies that will give a push to the semiconductor and electronics industries. Some of these are listed below.

  • The Union Cabinet has approved incentives up to US$ 1.47 billion for investors by amending the MSIPS scheme, in order to further incentivise investments in the electronics sector, create employment opportunities and reduce India’s dependence on imports by 2020. Some of these steps include the imposition of basic custom duty on certain items falling outside the purview of the IT Agreement, exemption from SAD (Special Additional Duty) on inputs/components for PC manufacturing, imposition of an education cess on imported electronic products for parity, etc.
  • The Ministry of Electronics and Information Technology (MeitY) plans to revise its policy framework, which will involve the government taking a more active role in developing the sector by providing initial capital, with the aim of attracting more private players and making India a global semiconductor hub.
  • The Union Cabinet has reconstituted an empowered committee to set up semiconductor wafer fabrication manufacturing facilities in the country.
  • In the Union Budget 2017-18, the government of India increased the allocation for incentive schemes like the Modified Special Incentive Package Scheme (MSIPS) and the Electronic Development Fund (EDF) to US$ 111 million, providing a boost to the semiconductor as well as the electronics manufacturing industry. But the schemes are yet to be implemented and there are still many uncertainties about them.
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