Rising FDI investments expediting the Semiconductor industry in India

The Indian semiconductor market is expected to reach US$ 55 billion by 2026, with smartphones and wearables, automotive components, and computers and data storage accounting for more than 60% of the market. India represents 1% of the international semiconductor trade and 0.5% of global semiconductor sales. Currently, the Indian semiconductor industry accounts for roughly US$ 2.3 trillion of the global GDP. In 2020, the top 3 global companies, Intel, Samsung, and TSMC, collectively generated US$ 188 billion in revenue. India is a leading chip designer, with over 30,000 experts working in this space. In 2020, the Indian semiconductor design market was valued at more than US$ 33 billion. India accounts for 20% of the entire worldwide design workforce, a testament to the highly skilled pool of Indian engineers. The Indian semiconductor design industry is expected to increase at a CAGR of 29.4% between 2015 and 2020, from US$ 14.5 billion to US$ 52.6 billion. Moreover, India's semiconductor market was worth US$ 15 billion in 2020 and is presently estimated at US$ 27 billion in  2022, while India's display panel market is estimated to be US$ 7 billion and is likely to expand to US$ 15 billion by 2025. Semiconductors serve as a foundational technology for developments in other vital and developing technologies. The Government of India has introduced a sustainable semiconductor ecosystem, being developed through the US$ 10.2 billion Semicon India Program (Program for Development of Semiconductors and Display Manufacturing Environment in India).

Semiconductor Industry
A semiconductor is a material that is used in electronic equipment and devices to manage and control the flow of electricity. Semiconductors are the "brains" of modern electronics, ranging from consumer items like smartphones and smart TVs to more advanced equipment used in industrial applications, defence, and aerospace. It is typically made from silicon, germanium, or other pure elements. The element's conductance or inductance is determined by the type and the intensity of impurities added. As a result of advancements in semiconductor technology, electronic devices are becoming smaller, faster, more reliable, and more efficient; thus, chip manufacturers are competing to produce the smallest chips possible. Modern high-tech chips can be as small as 5 nanometres (10 million nanometres (nm) = 1 centimetre(cm)). From 22 nm in 2012 to 5 nm in 2020, the size of a conventional semiconductor has continuously decreased by roughly 18% annually. The standard semiconductor size is expected to be around 3 nm in 2022 and 2 nm after 2023, according to experts.

Moore's Law, proposed by engineer and Intel co-founder Gordon Moore in 1965, states that the number of transistors on a silicon microchip should double every 18 to 24 months, even while computer costs reduce by half. However, as chips become smaller and more sophisticated, it becomes harder and more expensive for manufacturers to improve at the historical rate indefinitely.  Semiconductors are classified into four types: integrated circuits (for example, a Qualcomm Snapdragon chip), optoelectronics (for example, LEDs), discrete components (for example, single transistors), and sensors (e.g. CMOS image sensors for cameras). Integrated circuits (ICs) comprise 83% of the entire economic value of the four. These ICs are further broken down into four groups: memory, logic, analogue, and micro.

Significance
India Electronics and Semiconductor Association (IESA) estimates that India's semiconductor consumption surpassed US$ 21 billion in 2019 and grew at a rate of 15.1%. India imports 100% of its semiconductors, spending approximately US$ 24 billion each year. After overtaking China as the world's second-largest manufacturer of smartphones, India's reliance on imported processors is concerning. While the domestic opportunity is enormous, the manufacturing of semiconductors is a complicated operation.

Additionally, according to the United Nations Comtrade database, yearly Integrated Circuit (IC) imports into India increased by 218% in 2018 to US$ 8 billion, up from typically small annual imports ranging from US$ 1.5-2 billion from 2014 to 2017. India's IC imports increased to US$ 12 billion in 2021. India generates value through design, accounting for US$ 2 billion, whereas Taiwan, China, and Korea produce products from Indian design worth US$ 20 billion. This industry's research and development, which encompasses electronic devices and embedded systems, produced approximately US$ 2.5 billion in revenue.

Thus, the Indian government has committed (Rs. 2,30,000 crore) US$ 30 billion to this effort in order to establish India as a global powerhouse for electronics production, with semiconductors serving as the foundational building block.

Segments
There are eight different kinds of companies in the semiconductor sector.

• Chip Intellectual Property (IP) Cores

A single business might own the design of a chip, or some companies license their chip designs for public usage as software building blocks, called IP Cores. For instance, Apple uses ARM's IP Cores as the foundation for the microprocessors in its computers and iPhones.

• Electronic Design Automation (EDA) Tools

Using specialist Electronic Design Automation (EDA) software, engineers create chips by building their own designs on top of any IP cores they have purchased. Currently, all Electronic Design Automation businesses are starting to incorporate AI tools to automate and speed up the process as logic chips continue to get more complicated.

• Specialized Materials and Chemicals

The chips in the software needs to be turned into something tangible, and in order to do so companies have to physically produce it in a chip factory called a “fab”. The factories use specialized materials and chemicals like silicon wafers, over 100 gases, fluids, photomasks, wafer handling equipment, dicing, RF generators, etc.

• Wafer Fab Equipment (WFE)

These machines are responsible for the physical fabrication of the chips. The industry is dominated by Applied Materials, KLA, LAM, Tokyo Electron, and ASML.

• “Fabless” Chip Companies

Systems companies (Apple, Qualcomm, etc.) that previously used off-the-shelf chips now design their own chips. They produce chip designs (using their own and IP Cores) and send them to "foundries" with "fabs" that produce them. They might just use the chips in their own gadgets (e.g., Apple, Google, Amazon). They may also sell the chips to anyone e.g., AMD, Nvidia.

• Integrated Device Manufacturers (IDMs)

IDMs are companies that design, produce (in their own fabs), and market their own chips. IDMs fall into one of three categories: Analog, Logic, and Memory (e.g., Intel, Micron, SK Hynix) (TI, Analog Devices).

• Chip Foundries

They purchase and integrate machinery from various producers. With this machinery, they create original designs to create the chips, but they don't create chips. Taiwan's TSMC is the market leader in logic, with Samsung coming in second.

• Outsourced Semiconductor Assembly and Test (OSAT)

The wafer produced by foundries is diced (cut) into individual chips, tested, and then packaged and shipped to the consumer by OSAT companies that package and test chips made by foundries and IDMs.

The Global Semiconductor Supply Chain

Key Pillars

• Free and Open Markets

The first stage to becoming more integrated with the world's semiconductor supply chain is to maintain a free and open market. The development of the sector depends on open, consensus-based, and voluntary global standards being used, open and fair competition without discriminating regulatory limitations, and open trade in goods with few restrictions (tariffs or non-tariff barriers) on trade in semiconductors.

• Intellectual Property Protection

The semiconductor industry's lifeblood is intellectual property. The success and competitiveness of the sector depend on the effective enforcement of Intellectual rights. The semiconductor industry invests much in research and development, producing valuable intellectual property (IP) such as patents, trade secrets, trademarks, copyright, trade secrets, source code, etc. Strong protection and enforcement of this IP are essential to the success of this business.

• Supply Chain Integration

The development of special economic zones and science parks that provide access to land, electricity, and water, as well as space for other supply chain companies to integrate into a sizable design and manufacturing ecosystem, is one way to support the ecosystems of the domestic semiconductor industry. Finding and offering convenient sites, streamlining or accelerating processes, and relaxing rules all aid in accelerating production capacities while upholding expectations for a sustainable global supply chain.

• Research and Development

One of the industries with the highest R&D expenditures worldwide is the semiconductor sector. This calls for significant funding and backing for fundamental research in materials, new process technologies, and other areas that spur breakthroughs and innovation in semiconductor design and production, both in the public and private sectors.

• Workforce Development

To be a leader in semiconductor research, design, and production, one must have access to the world's top engineers and scientists.

• Market-Based Government Incentives

The investments required for new semiconductor manufacturing and design investments must be supported by targeted, market-based, and World Trade Organization (WTO)-compliant government incentives, such as advantageous loans, tax credits, and manufacturing and design subsidies.

Stakeholders
As depicted in the graphs below, end-use semiconductor sales increased significantly across almost all categories in 2021, as the industry fought relentlessly to meet the rising demand for semiconductors. As more jobs switched to remote work and school from home, sales in end-use categories such as computer systems increased significantly. Other areas, such as automotive, had significant growth during the year, eventually gaining market share in 2021 and becoming the third largest end-use market for semiconductors.

Source: Semiconductor Industry Association (SIA)

Government Initiatives
On December 15, 2021, the Union Cabinet approved a comprehensive plan for the growth of a sustainable semiconductor and display ecosystem in India. This programme aims to offer an attractive incentive support system to companies involved in silicon semiconductor fabs, displays, compound semiconductors, silicon photonics, sensors (including MEMS) fabs, semiconductor packaging (ATMP/OSAT), and semiconductor design.

The Government of India has allocated a financial outlay of US$ 30 billion to make India a global hub for electronics manufacturing.  Out of which, the government has allocated ~US$ 10 billion towards Support for Semiconductor and Display Ecosystem, ~US$ 7 billion towards Support for Electronics Manufacturing and ~US$ 13 billion towards Support for Allied Sectors.

Under the Program for Development of Semiconductors and Display Manufacturing Ecosystem, an outlay of US$ 9.23 billion (Rs. 760 billion) has been allocated to develop a sustainable semiconductor and display manufacturing ecosystem.

Present Scenario

• The US Semiconductor Industry Association (SIA) and the India Electronics and Semiconductor Association (IESA) announced in January 2023 to organise a private sector task force to strengthen bilateral engagement in the global semiconductor ecosystem.
• Presently, the federal government provides a 50% subsidy for fab units, and the state governments provide an additional 10-25% subsidy.

Investment Trends in the Indian Semiconductor Industry

• The Vedanta-Foxconn Joint Venture has decided to locate its semiconductor and display manufacturing facilities in the Dholera Special Investment Area [next to Ahmedabad city, Gujarat] as of February 20, 2023. Foxconn and Vedanta are seeking to bring STMicroelectronics, a European chipmaker, to be their technology partner in their planned India manufacturing site. In Ahmedabad, Gujarat, Vedanta and Foxconn will establish India's first semiconductor production plant, a display fab unit, and a semiconductor assembling and testing unit in a 60-40 joint venture. The plant will begin production in two years, with Foxconn serving as a technical partner and Vedanta providing financial support. The investment is valued at more than US$ 20 billion (Rs. 1.54 trillion), and semiconductor manufacturing will be handled by the holding firm, Volcan Investments Limited.
• Reliance Industries and HCL Technologies are "independently 'considering' plans to buy a 30% equity investment each in semiconductor wafer fab applicant ISMC Analog."
• ISMC's proposed US$ 3 billion semiconductor fab in Karnataka could start construction in February 2023. It will take 4-5 years for ISMC's plant to become operational.
• The first chip manufacturer in India, Polymatech, has started producing and selling memory modules and opto-semiconductors. The company's opto-semiconductors are utilised in lighting, medicinal, and food sanitization applications and are powered by Japanese technology. 400,000 chips are produced each day at Polymatech's primary manufacturing facility in Kancheepuram, Tamil Nadu. This manufacturing capacity will be increased to 300 million chips annually, or 1 million chips each day. In July 2023,  it would invest over US$ 1 billion in the production of semiconductor chips.
• The Ministry of Electronics and Information Technology intends to invest US$ 1.25 billion to US$ 1.30 billion to rebuild and upgrade its semiconductor laboratory (SCL) in Mohali. This investment will also help to enhance intellectual property rights in India's semiconductor industry.
• Multinational consortium ISMC (US$ 3 billion investment) and Singapore-based IGSS (US$ 3.11 billion (Rs. 256 billion)) will establish semiconductor facilities in Karnataka and Tamil Nadu.
• The Indian government acknowledged that it has received proposals from five companies to develop electronic chip and display manufacturing factories with an investment of US$ 20.5 billion (Rs. 1.53 trillion).
• An MoU was signed by IGSS Ventures, a group of businesses, and the Tamil Nadu Guidance Bureau early in July to establish a 300-acre high-tech semiconductor park. The investment, including incentives, is expected to reach US$ 3.11 billion (Rs. 256 billion), with around 5000 jobs created over a five-year period. A candidate for the Indian Semiconductor Mission is the IGSS semiconductor fab Project Suria. The high-tech park may potentially generate additional employment of 25,000 people with a projected investment of roughly US$ 9.24 billion (Rs.76,000 crore).
• The first chip-making factory in India will be built by ISMC, a joint venture between Israel's Tower Semiconductor and Abu Dhabi's Next Orbit Investments, with an investment of US$ 3 billion. The company has requested a 150-acre land tract in Mysuru's Kochanahalli industrial region for the unit.
• A Gujarat-based initiative for the manufacture of semiconductors will receive a US$ 100 million investment from growth stage investor Next Orbit Investments.
• Aricent, a US engineering firm, paid US$ 163 million for Bengaluru's SmartPlay chip design services company, making it India's largest semiconductor acquisition.
• Vedanta and Elest have submitted applications to establish projects for display fabs with an investment of US$ 6.7 billion and seek help worth US$ 2.7 billion. They have proposed setting a Gen 8.6 TFT LCD Display Fab and a 6th Generation Display FAB for the production of cutting-edge AMOLED display panels that are used in cutting-edge smartphones.
• With an estimated investment of US$ 2.91 billion (Rs. 24,000 crore), Rajesh Exports will build Telangana's first display fabrication plant.

The Road Ahead
Semiconductors and displays are the core of modern electronics, driving the next phase of the digital revolution under Industry 4.0. As semiconductor innovation and global chip demand continue to climb inexorably, the government and industry must collaborate to put India on the global map. The Semiconductor Fabless Accelerator Lab (SFAL) in Karnataka is one of the new government-industry projects that is lowering entrance barriers for fabless businesses. The development of the semiconductor value chain will be the backbone of electronic manufacturing's growth. Such favourable government injections will usher in a new era in electronics manufacturing by providing enterprises with a globally competitive incentive package to companies in the semiconductors space. This will pave the path for India's technological leadership in key sectors of strategic importance and economic self-sufficiency. With deeper integration into the global value chain, the development of the semiconductor and display ecosystem will have a multiplier effect across many sectors of the economy. The programme will encourage increased domestic value addition in electronics manufacturing and will make a substantial contribution to reaching a US$ 1 trillion digital economy and a US$ 5 trillion GDP by 2025.