Will India be next semiconductor manufacturing facilities hub?

The government has notified setting up of two semiconductor fabrication (fab) units in the country. In a statement released Thursday night, industry lobby The India Electronics and Semiconductor Association (IESA) lauded the notification saying it is "a highly strategic game changer for India".

Although details are awaited, the body's members say the government is expected to subsidise chip manufacturing proposals submitted by two consortiums - the government can either pick up equity, provide a grant or a subsidy in financial terms.    

Chips go into all electronic devices from mobile phones and tablets to cars and servers. Most of the chips used in devices Indians use are either from Taiwan or China.

The government approval is good news for the Indian semiconductor industry that has been lobbying hard for local chip manufacturing since 2005. India saw some false starts in this area. In 2006, for instance, SemIndia, a consortium, wanted to set up a chip manufacturing facility in Andhra Pradesh on the back of growing demand for electronics in the country. But by 2008, the company junked its original plans and instead focussed on assembly, testing, and packaging activities.
 
Setting up a chip manufacturing plant isn't easy. It is a capital intensive affair - an advanced fab that makes chips for cell phones can require initial investments of upto $5 billion. A less advanced fab that makes chips for automotive and radio applications can cost $1 billion to start off. Huge additional investments in technology need to be made as the fab matures.

While the lure of subsidy had attracted many large consortiums since 2011 when the government set up an empowered committee for identifying technology and investors for a fab, several questions still need answering.
 
Why must India have a fab? India is strong in semiconductor design - according to The Department of Electronics and IT, nearly 2000 chips are being designed every year in India and more than 20, 000 engineers are working on various aspects of chip design and verification. Shouldn't India continue to improve on this domain rather than focus energies on the high-risk fab game where Taiwan and China have huge leads? And does it make sense to replicate expertise already available in the rest of the world?

It is also not clear who will buy the Made-in-India chips. Sure, India has a growing number of consumer electronics companies but there is no guarantee that they will not be seduced by lower priced chips from Taiwan. The average selling prices of chips tend to decrease over time but fabs usually have fixed expenses or rising ones because of capacity additions. For instance, the average selling price at UMC, Taiwan's oldest foundry, decreased 3.2 per cent in 2012 compared to 2011. The average selling price of wafers at the Chinese foundry SMIC decreased by one per cent in 2012. In the absence of volumes, profitability could be a tall order.
 
Satya Gupta, an advisor to the IESA says that investors who have shown interest in building fabs in India are smart people and they have a business plan. "Indian companies may use their chips but they would still need a global market to be successful," he told Business Today.
 
Creating a global market may take years for Indian semiconductor manufacturing. Let's hope the indigenous fabs, whenever they come up, are successful for the strategic reason IESA cites. It may reduce India's huge electronics import bill. The country, according to the lobby body, consumes close to $7 billion worth of semiconductor products every year. By 2020, this consumption can rise to $55 billion. "With the location of a fab in India, the country could achieve a degree of self-sufficiency in electronics, and partially reduce the very high supply chain risks that India is exposed to, without an alternate source for procurement," the body noted in a statement.