Explained: India's Bid To Be a Semiconductor Superpower During a Chip Shortage

Why don't we already make semiconductor chips? Why is there a global chip shortage? Here's all you need to know.

All elements of modern life are dependent on semiconductor chips.

(Photo: The Quint)

Semiconductor chips, also known as microchips or integrated circuits, are a vital component in nearly every industry, from consumer electronics to healthcare. However, because of their limited supply, the world is currently facing a chip shortage.

Enter India. The government, in December 2021, rolled out an incentive scheme worth Rs 76,000 crore (roughly $10 billion) to attract international semiconductor and display manufacturers in a bid to establish the country as a global chip manufacturing hub.

Why don't we already make semiconductors? Why is there a global chip shortage? Here's all you need to know.

What Is a Semiconductor Chip? How Are They Made?

Conductors conduct electricity, while resistors do the opposite. Semiconductors, as the name suggests, are substances that have properties somewhere in between.

A semiconductor chip is an electric circuit with many components like transistors and wiring formed on a semiconductor wafer. They act as tiny brains for most modern electronics.

To make these chips, silicon is extracted from sand and melted into solid cylinders called ingots. These ingots are then sliced into very thin wafers and polished, after which intricate circuits are printed on them.

Finally, the wafers are cut into individual semiconductors and packaged into finished chips, which can then be placed on a circuit board.

Manufacturing these chips is a complex process that takes over three months.

Why Is There a Global Chip Shortage?

The short answer is – because of the pandemic. Office work, social interaction, and entertainment have all shifted to screens.

COVID-19 has forced a significant portion of the population indoors, leading to a sudden increase in the demand for consumer electronics like laptops, phones, and gaming consoles.

The sudden popularity of cryptocurrencies has also led more mining operations to come up across the world, requiring more processing units.

Although demand has increased, supply has dropped.

Carmakers lowered their chip orders at the start of the pandemic, assuming that consumers wouldn't be interested in buying new vehicles, leading to a miscalculated drop in supply.

Tense relations between the United States (US) and China have played a part in throttling supply, since China is one of the biggest manufacturers of chips.

While chipmakers have now woken up to the problem, setting up new fabrication plants from scratch takes at least two years. The shortage is expected to continue well into 2023.

Why Don’t We Make Semiconductors Already?

According to government data, India imports a 100 percent of its semiconductors. This is because manufacturing semiconductors is a difficult job.

Fabrication plants (FABs) are expensive to set up (each costs at least $3-4 billion) and manufacturing equipment depreciates fairly quickly. They also take a long time to become profitable.

Apart from high costs involved in setting up a plant, there are also certain infrastructure requirements that are vital. Mainly, an uninterrupted power supply and access to millions of litres of pure water.

India is lacking in these departments: we experience frequent power cuts and our water supply treatment isn't up to the mark. Before the global chip shortage, these factors were enough to discourage foreign players from setting up shop in India.

India, however, is a strong base for semiconductor chip design, which is a more software-heavy process. According to the Ministry of Electronics and Information Technology, there is also a growing talent pool of engineers in India that are skilled in integrated chip (IC) design.

What Incentives Is the Govt Offering?

India has approved a production-linked incentive (PLI) scheme worth Rs 76,000 crore (roughly $10 billion) to attract global chipmakers to set up FABs in the country.

Under this scheme, the government will extend fiscal support of up to 50 percent of a project's cost to eligible display and semiconductor makers, offsetting the high costs of setting up a plant.

Under previous schemes, like in 2017, the government offered incentives on incremental sales, which wouldn't have cut the high initial investment for manufacturers.

Why the Big Push?

The government has said that it expects the scheme to create more than 1 lakh jobs and attract investment worth Rs 1,67,000 crore.

If successful, this scheme will help stabilise the economy during the pandemic and boost demand.

India is also uniquely poised to take advantage of the global chip shortage. This pandemic has highlighted just how limited the production capacity for such a vital component really is.

China, Taiwan, the US, Japan, and South Korea account for nearly all of the semiconductor fabrication in the world.

The US is now looking elsewhere to source its chips and India, with its low labour costs, could be a good alternative to China and Taiwan.

At present, the Tata Group, Intel, Taiwan's Foxconn and other manufacturers have expressed interest in setting up manufacturing plants in India.