What’s Behind India’s US$10 Billion Recipe for Chips?


The recently announced Rs.76000 Crore (about US$10 billion) Production-Linked (PLI) package by Government of India to boost semiconductor production is a significant strategic step in positioning India as a global hub for semiconductor chips. This arguably has been one of the best news headlines in a country which reeled under the second wave of covid in the first half of 2021.

While the nation’s previous attempts at being a global production powerhouse for semiconductor chips were not successful, the current attempt to focus on attracting large foundries to set up shop in India is being seen as a key strategy-linked step in creating the necessary eco system towards being a global hub for production.

Oops, We Ran out of Chips!!! – Production Woes at the Forefront of Supply Constraints...

The latter part of 2020 and almost all of 2021 witnessed a severe global shortage of semiconductor chips, those ubiquitous circuits which power almost all of our modern electronic gadgets, from automobiles, phones, medical devices, to automated machines.

Globally, lead times for semiconductor chips (time gap between order and supply) have averaged over 18-23 weeks of late, while the wait for a few specific and advanced types such as chips for Artificial Intelligence and Cryptomining could be more, given the demand-supply gap.

The gaping supply-demand imbalance has been the result of multiple factors, prominent of which is the digital revolution, further exacerbated by the covid which pushed the world into mandated remote work and learning routine. Crippled raw material supply chains across the world meant a steep rise in costs, besides erratic delivery schedules. Trade war restrictions by US on China’s largest chip manufacturer also meant that US companies were forced to source chips from leading players such as Samsung and Taiwan Semiconductor Manufacturing Company (TSMC). Severe weather in the US along with a couple of fire-related incidents at leading Japanese players only added to the widening supply-demand gap.

While the shortage impacted multiple business sectors, automotive industry was among the worst hit, with global players such as Jaguar Land Rover, General Motors and Ford having to cut their sales and production forecasts. Indian automobile industry took the hit as well with Maruti Suzuki, the country’s top automobile player cutting its output by about 60% in September 2021. Lead time for consumer electronics has also been significant with documented instances of lead times of about 120 days for smart TVs, significantly up from an average of about 30 days.

Multiple Nations in the fray for a share of Semiconductor Production Pie

Given the current dominance of Taiwan and South Korea as the world’s suppliers of semiconductor chips, the challenging supply gaps because of covid-induced supply chain disruptions and political policy challenges of the West with China, multiple nations are planning or have already initiated concrete steps towards localizing production.

While United States, with a proposed US$52 billion financing for localized chip production leads the bandwagon, Europe is not far behind with its European chips act which is aimed at expansion of advanced semiconductor chip research and production within the EU member nations.

India’s PLI Package – From Design Powerhouse to Global Manufacturing Hub

While having a strong presence in the semiconductor design stage, featuring R&D hubs of key leaders including Samsung, Intel and Micron, India currently solely relies on imports to cater to its US$24 billion demand for semiconductors. The PLI scheme is aimed at positioning India as a global electronics manufacturing hub of US$250-300 billion by 2024-25. The scheme is being viewed as a significant prop towards Government of India’s target of being a US$5 trillion economy by 2025.

Key Offerings within the PLI package include:

  • Extension of policy support of up to 50% of project cost towards execution of capital- and resource-intensive projects for semiconductor fabs and display fabs.
  • Extension of policy support of 30% to approved units for compound semiconductors/silicon photonics/sensors (including MEMS) fabs and semiconductor ATMP/OSAT units
  • Design-Linked Incentive scheme – Incentive of up to 50% of eligible expenditure, and product deployment-linked incentive of 6% to 4% of net sales for 5 years
  • Program to train 85,000 engineers for semiconductor ecosystem

(Source : Press Information Bureau)

Investments Galore, But Brace for Continued Shortage in 2022

While there was a cautious optimism that wait times would ease over the second half of 2022, let’s understand that expansion of existing foundries and setting up new ones do take time. While leading foundries have initiated expansion plans and processes, “It just takes time to build this capacity to respond to the spike” (in demand), as explained by Intel’s CEO Pat Gelsinger. Besides high investments, challenges exist in the form of building an eco-system without disruption to resources such as water, power, and technically-skilled resources, and long lead time to install complex and highly sophisticated production lines.

It’s a long-time investment requiring significant active involvement of governments, electronic majors and of course dedicated and sustained investment in creating the eco system for semiconductor production.  Thus, a real global time frame for ease of lead times would be second half of 2023 for advanced chipsets, even though it would be late 2022 for most commonly used and legacy-based ones.