A new book examines how India can set up new and world-class semiconductor facilities

India only has a few fabrication facilities owned and operated by the government for critical infrastructure needs in space and defence. Prior attempts to attract private investments in these fields have failed due to cost disadvantages and uncertainty of the investment climate. These challenges remain. Combining these barriers with the fact that nearly every major chip-producing country when the chips are down is aggressively trying to localise leading-edge fabrication facilities, India is on a weak wicket.

However, not all is lost. Unlike in the past, India now has a thriving fabless design market. Rising geopolitical concerns over China and Taiwan have made companies look at India favourably. Finally, while countries such as the US, Taiwan and Japan are chasing leading-edge nodes, India’s growing electronics assembly market offers a new-found opportunity for specialised trailing-edge fabs. For instance, a large volume of components in analogue mixed-signal and radio frequency chips used in phones, wireless devices, automobiles and medical equipment are made using older technology (>90 nm). Recognising these developments, the Indian government deftly changed its policy, promising up to 50 per cent upfront financial support even for trailing edge nodes

The big concern of industry players in the past was that government support for fabs should be upfront and not as a reimbursement. With the government committing to upfront capital support for 50 per cent of the project cost, it seems highly likely that India will have a semiconductor fab, although one that’s based on old technology.

However, a much more exciting stage for India should be OSAT. OSAT plants test manufactured chips for defects and ensure protective packaging for finished chips. This stage requires high capital investment, though not of the same order as fabs. Further, this stage requires large numbers of relatively low-skilled labour, whereas the manufacturing stage requires a sizeable high-skilled workforce. With low-skilled labour abundantly available in India, Taiwanese and American OSAT firms can benefit by offshoring these operations to India.

Given that India has phone assembly facilities, OSAT of chips is a natural next step in technology upgradation. In fact, one of India’s largest conglomerates, Tata Sons, plans to set up an OSAT factory. Besides, a few plants of SPEL Semiconductor, Tessolve Semiconductor, etc., are already up and running in the country.

Unlike the chip manufacturing sector, which is dominated by very few companies such as TSMC and Samsung, the OSAT market has many more players. Over time, though, there is a good chance of consolidation as this industry is getting technology-intensive. The next big thing after a system on a chip (SoC) is a system in a package (SiP), where instead of having all of the elements, a chip will be made of 3D-stacked parts one over the other. Third-party packaging companies will play a far more significant role over the coming years.

India can use its design ecosystem strength to bring OSATs to the country. Just as the chip crunch caused a scramble for fabs, there is similar thinking on OSATs because Chinese players have a significant presence in the OSAT stage. These geopolitical tailwinds could work well in India’s favour.

Recognising this potential, the Indian government modified its incentives for OSAT plants in September 2022. The promised financial support increased from 30 per cent to 50 per cent. More importantly, the original scheme allowed disbursal once a facility had begun production. Under the modified plan, the financial support would be upfront.

Despite these moves, interest from OSAT firms has been muted. Micron, a memory chipmaker from the US, was the first company to announce an OSAT facility in Gujarat. However, East Asian OSAT firms have been lukewarm. The reasons are all too familiar: a lack of policy consistency and high import tariffs

For example, Taiwanese officials have asked for tariff reductions on products that are used for making semiconductors. It makes sense because OSAT would require a lot of imports. Further, Taiwan had also filed a case against India for violation of the agreement on tariff reductions in WTO. Frequent changes in tax policies and restrictive labour laws have proven to be significant deterrents for investors.

By taking down these self-imposed barriers, India can potentially establish its presence in the OSAT stage.

Observing the government’s third attempt at developing the semiconductor sector, it is clear that semiconductors rank high on the government’s policy agenda. With a new-found commitment to developing the entire semiconductor ecosystem, finance is no longer the most significant deterrent for investors.

However, India has only one potential and indirect geopolitical lever in this domain: its semiconductor design talent. The potential lies in the hope that trained Indian semiconductor engineers will be in demand worldwide as every country in this sector is facing a massive talent shortage. At the same time, this lever is indirect because it is challenging to use talent as an instrument of statecraft in geopolitically tense situations.

What India can do is adopt policies that make Indian semiconductor engineers more critical to the functioning of every semiconductor company across all stages of the supply chain. If Indian talent becomes a dominant driver of the global semiconductor supply chain, interdependence on chips with other countries will not be a cause for concern.

Excerpted with permission from When the Chips Are Down: A Deep Dive Into a Global Crisis, Pranay Kotasthane and Abhiram Manchi, Bloomsbury India.