In today’s Finshots, we look at India’s history with semiconductors and how even the latest incentive scheme to promote its production might be stuttering. Just a bit.

The Story

In the 1970s, India made quite a visionary bet — on chips!

We’re talking about semiconductors, of course. We realized that almost everything in the world would rely on electronic components in the future. And it would all need these complex chips to power them. So we set up a government-owned entity called the Semiconductor Complex Ltd (SCL) in Mohali in 1983. We’d design chips. We’d manufacture them. Maybe even export them to the world.

We were chipmakers on a mission.

But in 1989, the dream was shattered. A massive fire broke out at SCL and it burnt down almost everything. We lost ₹60 crores worth of imported equipment. We were still a young nation grappling with a lot of other internal issues. So fixing this took a backseat. And it took us 8 years to put the pieces back together again.

Now you can imagine that the world did not wait for us. The need for chips was rising quickly as electronics made their way into every household. And while we were struggling to recover, an unlikely contender had emerged — Taiwan.

How did that happen, you ask?

Well, back then the US and Japan were vying for the top spot in the semiconductor business. And in order to cut costs, they turned to Asia. They wanted cheaper labour. And Taiwan already had a few things going for it — good roads, railways, and reliable electricity. More importantly, they welcomed foreign investment unlike India and some other emerging markets.

We missed out. And the end result is that today, Taiwan produces over 90% of the world’s most advanced semiconductors. It’s a virtual monopoly. And it’s all pretty much in the hands of one entity — Taiwan Semiconductor Manufacturing Corporation (TSMC).

But then came the pandemic. Chips were in short supply due to a multitude of reasons. And suddenly everyone realised how dependent they were on Taiwan. They worried that Chinese interference in the area would mean that China could seize control of all these important manufacturing on their own whims and fancies.

India smelt an opportunity. We wanted to bring back semiconductor manufacturing to the country. And this time, it would be different. We’re an open economy. Our infrastructure has greatly improved. Lots of foreign companies already have all sorts of manufacturing plants in the country too.

So in December 2021, we announced a massive $10 billion incentive for the semiconductor industry. We told manufacturers that if they made and exported a certain number of chips from the country, they’d be eligible for a payout from the government. We’d bear nearly 50% of the setup costs.

It was quite exciting.

But it doesn’t seem to be panning out the way we expected.

For starters, none of the chipmaking names such as Intel, TSMC, Samsung, Global Foundries, and Micron applied for these incentives.

Secondly, even though a consortium of Vedanta and Taiwan’s Hon Hai Precision Industries (known as Foxconn) won the bid, their credentials didn’t exactly scream ‘chip kings’. See, Hon Hai has expertise in making iPhones, not chips. And Vedanta’s a metals and mining player. It can set up manufacturing but not much else.

And the thing is, advanced chips aren’t very easy to make. You need some real expertise and specialisation to set up these manufacturing facilities called ‘fabs’. There’s the complexity of printing really tiny circuits from the chip design to the silicon wafers. And as per a report by Credit Suisse, depending on what kind of chip it is, there could be anywhere between 400 to 1,400 steps in the manufacturing process.

So this joint venture needs a tech partner with the know-how. And apparently, they’ve had some hiccups on this front too.

And the end result is that the government isn’t quite happy with how things have turned out. They’re not twiddling their thumbs and waiting. The rumour is that they’re going to reopen the scheme. Try and lure in more applicants. After all, they have $10 billion in incentives to dole out.

But, it’s still not going to be easy. Because other countries want to become semiconductor giants too. They’re doling out incentives and tax benefits. Just because everyone knows how crucial this segment is.

For instance, last year, the US passed the CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act with $50 billion in government subsidies. And they’re seeing results already. In December, TSMC committed to spending $40 billion to set up a fab in Arizona. And plans to launch one more in 2026 to create the most advanced chips ever.

In 2021, South Korea, which is home to Samsung, announced a massive $450 billion plan to push chip manufacturing. And this year, even announced the “K-Chips Act” to nearly double the tax benefits for companies that wanted to manufacture in the country.

Even the EU has its own Chips Act with nearly $40 billion of subsidies.

Yup, things look tough. But we’re also not giving up that easily.

India’s Electronics & IT minister Ashwini Vaishnaw spent 3 days in the US last week just with the intention of convincing chip makers to invest in India. And while that’s happening, we’re thinking that even if we don’t become a manufacturing superpower, we could still make our mark somewhere in the value chain.

Remember our old friend SCL in Mohali?

Well, on Friday, the government announced that they’d splash a massive $2 billion into SCL to concentrate on chip designing. We’re even going to set up an India Semiconductor Research Institute. Some big moves are happening.

So yeah, with our semiconductor market expected to balloon from just $22 billion in 2019 to $64 billion by 2026, you can see why we’re quite eager to spruce up our domestic play one way or the other.

But as to whether it will all bear fruit or not, we’ll just have to wait and watch. Fingers crossed.

Until then…

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