In today's Finshots, we look at India's efforts at establishing itself as a significant player in semiconductor manufacturing and the challenges along its way.

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The Story

Recently, Zoho, a software-as-a-service company based in Chennai, announced plans to launch a commercial semiconductor manufacturing unit in Tamil Nadu. Almost immediately, every news media company picked up on this with many noting that this initiative lines very neatly with India’s ambition of becoming one of the top five semiconductor chip producers globally by 2029, reflecting a broader trend towards enhancing the country’s capabilities in this critical sector.

But it got us thinking.

What has been holding India back so far? And why is it so difficult to set up massive chip manufacturing facilities like Taiwan?

Well, before we get there, let’s look at how semiconductor chips are made.

First, you have to settle on a design. Not all chips are made equal. You need skilled engineers, extensive R&D and access to intellectual property to come up with designs that meet your specifications. For instance, Intel spent several years designing the Pentium Processor. During this time, they had to conceptualise and design the architecture of the chip, figure out the layout for all the logic gates, and memory cells and extensively test it to see if it performs as intended.

All of this is just design. You can’t mass produce these chips unless you have access to a Fabrication unit.

The Fabrication unit (or Fab as it’s commonly called) is where the magic happens. Plain silicon, not very different from common sand, is transformed through precise techniques of photolithography, etching, deposition, and doping, to create a modern-day miracle — a chip.

This is what drives the digital revolution. And while this may look fairly straightforward, it is anything but. There are only a few companies that have the know-how and the resources to design complicated chips. And even fewer that can manufacture them at scale.

So why can’t India be among the select few?

Well, they could. But we will have to overcome a few practical difficulties. For starters, chip manufacturing is expensive. Very very expensive. Setting up a fabrication unit can cost you anywhere between $10 billion — $20 billion. That isn’t exactly spare change. And even when you do have the resources, you’ll need a lot of time before you can manufacture state-of-the-art microchips.

For instance, consider TSMC (Taiwan Semiconductor Manufacturing Company Limited) — a company that produces an estimated 90% of the world’s super-advanced semiconductor chips. They will soon be producing 3 nm chips. Now that may not mean much to you. But these are some of the tiniest, most advanced chips humans have ever designed. It took them over 3 decades to go from 3 micrometres to 3 nanometres. And this is a journey every fabrication unit will have to make.

Source: Taiwan Semiconductor Manufacturing Company Limited

Granted you no longer have to start at 3 micrometres. But you will have to start somewhere, and that mark is anywhere between 28 and 180 nanometers. Don't get us wrong. These chips with larger design features are still popular by the way and used in display drivers, audio chips and automotives, but we can’t become a world beater on day 1. So start big and work your way downwards.

Also, we need help. Semiconductor manufacturing processes are highly intricate. You need machines manufactured by a select few companies. You need advanced quality control processes. You need clean rooms — highly controlled environments with extremely low levels of environmental pollutants. You need ultra-pure water, chemicals and gases. And you need highly skilled engineers. Government support can go a long way here as well. If the state can bear some of these costs or incentivise private players to set up a fab, we could realise this dream sooner than later.

So when will India get here, you ask?

Well, hopefully soon enough.

In March 2024, India took a significant stride towards its semiconductor manufacturing goal. It laid the foundation for three semiconductor plants: a chip fabrication plant in Dholera, Gujarat, and two ATMP (assembly, testing, marking, and packaging) facilities in Sanand, Gujarat, and Morigaon, Assam. The first chip from the Dholera facility will roll off the factory line by December 2026, marking a milestone in India’s manufacturing history.

India will likely spend upwards of $10 billion dollars on the fab alone. And it will be a joint venture between Tata Electronics and PSMC. PSMC or the Powerchip Semiconductor Manufacturing Corporation is a Taiwanese semiconductor company, primarily known for its expertise in manufacturing memory chips and they will likely provide the know-how when it comes to setting up and operating a fab that is expected to churn out 28 nm chips.

Sure, these aren’t the super advanced chips powering AI applications. But it’s a start. And who knows — Maybe with a few more investments from billionaire entrepreneurs in India we could soon start producing 22 nm chips or even 20 nm chips.

We will just have to wait and see.

Until then…

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