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Budget needs to create a long-term roadmap to succeed in the semiconductor manufacturing


Semiconductors have become an integral part of our way of life, almost every appliance has a plethora of chips making our lives easier. Automobile industry, pretty much like all industries, is heavily reliant on semiconductors. Cars are increasingly becoming more and more computerized, especially hybrids & electric vehicles. Drive assist features (auto headlights, Auto-Emergency Braking, parking sensors, etc.) & other car safety features rely on semiconductor technology to interact with drivers.

Structural imbalances & fundamental supply chain mismatch caused due to Covid-19 pandemic has left a huge gap between semiconductor demand and supply, leaving manufacturer inventories at their lowest levels in years. Overall demand is increasing by about 17% to 20% per annum, compared to roughly 6% to 7% p.a. increase in manufacturing capacity between 2020 and 2022.

The automotive industry is one of the worst hit. Firstly, with auto demand picking up after lockdowns and the nature of just-in-time model of the automotive sector, the chipmakers could not cope up with the demand.

Secondly, semiconductor mix in vehicles is undergoing a profound change, as the automotive industry transitions to new electronic architectures (Domain-centralized and zonal architectures). The shift to these high-performance units means the share of leading-edge and advanced logic chips in cars are rapidly increasing. Advanced semiconductors (and their manufacturers) are therefore contributing a higher share of value. This in turn is leading to a change in supply chain dynamics, with more direct collaboration between OEMs and traditional tier-2 semiconductor suppliers.

Automotive and industrial companies are simultaneously executing a set of proactive actions to get back to pre-crisis production levels. Key actions include the faster switch to centralized/zonal E/E architectures and direct, long-term supply contracts with semiconductor companies including mutual capacity commitments over several years. For example, Ford, Stellantis & BMW are having signed agreements with chip manufacturers to secure chip supplies. Whereas companies like Tesla & BMW are releasing products with excluded features, which can be included later.

Currently, almost all the semiconductor demand in India is met by imports from countries like the USA, Japan, and Taiwan. In this sector, India has a significant human-capital pool which is currently concentrated in design, in the absence of an end-to-end manufacturing base.

The government’s focus on boosting semiconductor production in India could go a long way in establishing the country as a global hub for electronics goods, besides creating jobs and attracting investments from top firms around the world.

In December 2021, the government approved a Rs 76,000 crore production-linked incentive (PLI) scheme to boost semiconductor and display manufacturing — a move that will benefit India strategically, especially at a time when the entire world is facing a shortage of semiconductors. While India has expressed interest in boosting semiconductor production in the country in the past, this is the first time a scheme has been approved to boost manufacturing and reduce import dependency.

All stocks that deal with automobiles, power electronics, railways engines, telecom towers, electronic items, etc. will be positively impacted by the government’s scheme. Also, this scheme is likely to provide incentive support to peripheral companies engaged in semiconductor packaging, design, fabs, technology, etc.

Though, setting up of even a small-scale fabrication facility costs many billions of dollars. When factoring in the introduction of the more recent technological developments, the cost will shoot up even more. Even if the PLI scheme gives a fiscal support of 50% of the cost of establishing at least 2 greenfield fabrication units, not much of the current scheme’s outlay would be left out for other aspects like display fabrication units, testing facilities, packaging facilities, chip design centers, etc. In addition to this, fabrication units consume enormous quantities of clean water and require very stable power supply.

Auditing the origins of the chips that form the core of key defense equipment, auto sector & critical infrastructure is very crucial. After this vulnerability assessment, the government needs to ensure that such equipment should have chips produced end-to-end within the trusted semiconductor ecosystem over time.

There is a need to sequence initiatives depending on the government’s financial capability. For instance, focusing on getting a leading chip assembly player to India can be considered, at a lower monetary and opportunity cost. Then, co-investing in a chip production unit at a trailing-edge, specialty chip fab unit can become the government’s next big step. Also, the government can fund new semiconductor materials research, new design architectures for critical equipment, intellectual property protection, and technical standards. Over the long period, this can well give the confidence to global investors to co-invest in a leading-edge fab here.

India needs to push for a multi-nation Supply Chain Resilience Fund to immunize the supply chain from geopolitical and geographic risks. For instance, while the United States restarts manufacturing at leading-edge nodes (

Over the past few years, the Centre has been increasing import duties. Such policies have significant implications for the semiconductor industry’s prospects. Reduction of import taxes could also go a long way in building a strong plurilateral semiconductor ecosystem, as a fab in India will still be deeply connected with the world — buying equipment from some countries and selling chips to others.

In summary, a long-term roadmap is essential for India to succeed in the semiconductor sector. While India has brilliant R&D talent in chip design, manufacturing is the key to move up the value chain. Apart from investments, the government also needs to ensure reducing barriers for technology exchange, joint product development, visitation & research participation. This could help India play the long game.

(Rajeev Singh is Partner; and Abhishek Malik is Director with Deloitte Touche Tohmatsu India LLP)



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