New Delhi: Sanctions and trade restrictions imposed by the US are slowing down China’s giant leaps to becoming a semiconductor superpower, presenting India with an opportune moment to realise its own aspirations to become a chip manufacturing hub, according to sector analysts.
As geopolitical tensions increase between the US and China, the Modi government has been trying to pitch India as a place that semiconductor (chip) companies can invest in to avoid getting in any political crosshairs that may harm them, ThePrint has learnt.
“India is fully aware of the chip war and China’s slipping position, accelerated by the devastating Covid wave in that country,” Kanchan Gupta, senior adviser in the Ministry of Information & Broadcasting, told ThePrint.
“The Modi Government is working towards seizing the moment. Work has already begun and will gather pace as companies increasingly find India a preferred location for chip manufacturing to ensure disruption free supply lines,” he added.
The semiconductor market is poised for growth over the next decade. “The global semiconductor market is around $600 billion and will become a trillion-dollar industry by 2030,” said Parv Sharma, a senior analyst at tech market research firm Counterpoint Research.
Here in India, the semiconductor component market will see revenues climb to $300 billion during 2021-2026, according to research by Counterpoint and India Electronics & Semiconductor Association (IESA), a domestic chip industry body.
However, while private sector players are optimistic about India’s semiconductor manufacturing prospects in the current geopolitical climate, they also point out that there are numerous challenges to overcome, ranging from lack of infrastructure to skill gaps.
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Plans afoot for ancillary industries, ‘manufacturing hub’
The Indian government is not only looking to attract major chip makers from China, but is also trying to encourage ancillary industries to set up operations here, said a government official on condition of anonymity.
“This is an area the IT ministry is working on, discussing and meeting with various electronic manufacturers to shift some of their facilities to India,” the official told ThePrint. “Currently we see the PLI (Production Linked Incentive) scheme for electronics attracting companies to India… this is now a reality, it’s not just on paper.”
This official added that India stood to benefit if chip giants reduced their capacity in China.
“[Let’s say] Foxconn is reducing its capacity in China from 95 per cent to 75 per cent,” the official said. “So that difference of 20 per cent can flow to India and that’s a significant amount.”
This would be just the beginning, the official said, adding that a move like this would have several knock-on effects to encourage the development of ancillary industries.
“When a major manufacturer shifts or increases presence, the supporting service providers, like design companies, chip makers and other component makers, software makers also move and the entire ecosystem slowly builds itself out,” he explained.
ThePrint has learnt that the IT ministry is in discussions with semiconductor manufacturers to invest in India as chip fabrication businesses increasingly shift to South Asia this year.
“In such a troubled environment, if a ‘fab’ facility wants to expand outside Taiwan, India, which remains neutral, becomes a good option,” the official said. “Even cost-wise, India becomes a more efficient option than the US. So yes, this is a good time for India to capitalise to establish itself as a manufacturing hub.”
Towards this end, in 2021 the government announced Rs 76,000 crore worth of investments to develop sectors like the domestic semiconductor manufacturing ecosystem, along with a program — India Semiconductor Mission (ISM) — to drive the sector.
The government also plans to modernise India’s only available place to fabricate chips — Semi-conductor Laboratory (SCL) in Punjab — which has so far been unable to realise its full potential following a crippling fire in 1989.
China’s growth trajectory — and gaps
China’s chip sector has seen remarkable growth over the past few years. “Just five years ago, China’s semiconductor device sales were $13 billion, accounting for only 3.8 per cent of global chip sales,” said a January 2022 blog by Washington DC-based Semiconductor Industry Association (SIA), the self-proclaimed “Voice of the U.S. Semiconductor Industry”.
“In 2020, however, the Chinese semiconductor industry registered an unprecedented annual growth rate of 30.6 per cent to reach $39.8 billion in total annual sales, according to an SIA analysis. The jump in growth helped China capture 9 per cent of the global semiconductor market in 2020, surpassing Taiwan for two consecutive years and closely following Japan and the European Union, each of which having a market share of ten per cent,” the blog added.
However, despite its ambitions, China is by no means a leader in chip manufacturing, and its mission to be self-reliant in semiconductors had been faltering for various reasons, including lack of technical capabilities. A March 2021 NPR article, for instance, noted that as many as six “multibillion-dollar chip projects” failed in China since 2019.
Several moves by the US have also come as huge stumbling blocks.
Since 2019, the US has been putting Chinese tech companies on a trade blacklist, making it next to impossible for Chinese companies to do business with American tech suppliers. Another big blow came in October last year, when the Biden government introduced a new set of export rules that included measures to prevent China from using certain semiconductor chips made with US equipment.
Sharma from Counterpoint Research said in the chip market the “dominant countries” are still the US, South Korea, Taiwan, EU and Japan.
“China does not have a big presence in semiconductor manufacturing but it has registered significant growth in the assembly, testing, and packaging of electronics,” he explained. “The recent US trade sanctions have delayed ‘Made in China 2025’ plans to develop the local semiconductor market,” he added.
A leading Chinese chip expert also revealed just how fragile the nation’s semiconductor ambitions have been made by US pressure.
According to a 30 December SCMP report, Wei Shaojun, vice president of the China Semiconductor Industry Association, had in a live-streamed speech outlined shortcomings in China’s strategy to beat the US in the tech war — where China wants to be self-sufficient in semiconductors and the US is trying to prevent it from happening.
One mistake. Wei said, was China’s emphasis on filling technological “gaps” rather than focusing on advantages like mature process technologies.
“It’s a strategic mistake to only fill in the gaps…In the past few years, the more we tried to make up for our deficiencies, the more passive we have become,” Wei reportedly said.
Further, although reports have emerged that the Chinese government will be pouring in 1 trillion yuan (approx US$ 144 billion) in the coming five years into its domestic chip sector, experts like Wei have claimed ignorance of any such plan.
Private players excited about India’s ‘potential’
It’s not just the government that is optimistic about India’s potential to become a chip manufacturing hub, private sector players are keen too.
“India has great potential and we have a very good chance of growing the fab industry in India… we feel that India is a very important geography from a market access point of view because it’s a promising economy and there is a favourable demographic here with skilled engineering talent,” said Anku Jain, Managing Director of MediaTek’s India unit.
MediaTek is the world’s fourth-largest fabless semiconductor company. It designs chips for devices such as smartphones and smart TVs. Jain said MediaTek’s R&D centres in India are located in Noida and Bangalore.
“India is an important talent hub and, per some reports, 20-25 per cent of the global fabless design skills are actually in India,” Jain said, adding that it is the right time for India to get up to speed on to set up chip manufacturing or fab facilities within the country.
However, private sector players are somewhat more realistic about the challenges that exist in making India a chip manufacturing global centre.
“The trade restrictions the US imposes on Chinese semiconductor companies may not directly benefit India immediately, but more importantly the geopolitical tides are currently favouring India and we see electronic manufacturers shifting some facilities to India,” IESA president K Krishna Moorthy said.
“In the same way, the semiconductor manufacturing companies will also follow, more so when the demand for semiconductors by India-manufactured products increase,” he said.
Moorthy explained that the time semiconductor sector is both capital- and time-intensive, so what starts today “may take about two years to manifest”. However, he too believes that the time is ripe for India.
“The current global geopolitical situation favours India in increasing its electronics and semiconductor manufacturing capabilities,” he said.
Nevertheless, India faces some wide-ranging challenges, experts believe.
“Near-term challenges include infrastructure, skill gaps in high-level manufacturing, policy, and getting clearances from respective agencies,” said Sharma from Counterpoint Research. He added, however, that “cheap labour, a young population, a big market for local consumption, and geopolitical relationships” will boost India’s manufacturing growth.
MediaTek’s Jain said that India has its work cut out: “For manufacturing, we have seen some progress but there is a need towards developing local tech talent and building advanced R&D capabilities with a focus on the latest technologies.”
(Edited by Geethalakshmi Ramanathan)
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