It sounds like 'fab'ulous news indeed—the government's announcement of Rs 76,000 crore to entice semiconductor fab (fabrication) units in the country. This, even as the world and its auto, smartphone and electronic industry reels from an acute chip shortage.
Let wishes be horses, but don't let them gallop away on mere illusion. Perhaps.
On paper, it does sound like the right cure at the perfect time—a series of unfortunate events early this year saw fab units making semiconductor chips tumble down like dominoes—Taiwan, the world's leader in chip-making saw climate change causing water scarcity (chip making requires huge amounts of water) while a blizzard in Texas, America's semiconductor hub, saw fab plants lose electricity. And to round up the perfect storm, a fire hit one of Japan's top fab factories.
The result was a sudden global shortage in chips, which as technology has progressed, is today required in anything from your phone to TV to car—virtually every electronic appliance in today's increasingly digitised world. Many premium smartphone models went off the shelves (and e-commerce menus) while carmakers like Maruti Suzuki were forced to cut down factory production due to chip shortage. That this scarcity hit just as the global economy was recovering from the devastating second wave proved to be a sting in the tail.
However, India's plans to incentivise businesses to set up semiconductor fabs, design facilities and testing facilities, aimed as part of the larger 'Atmanirbhar Bharat' narrative to push local production and boost the country to be self-reliant in electronics (and export the leftover while at it) is based on a foible—a well-intentioned insular step forward but one that does not take into account practical realities.
First is the very nature of semiconductor manufacturing. Not only does it involve mindboggling costs, it is a business with long gestation that will require not just deep pockets but a global vision and mindset to succeed. For example, Taiwan's TSMC, the world's biggest chipmaker, is setting up a first fab unit in the US—its first outside of the country in over two decades. The cost? Around Rs 88,000 crore. In September this year, Intel announced two new units in the US at a cost of around Rs 1.4 lakh crore.
Suddenly, India's 'ambitious' Rs 76,000 crore amount doesn't look that spectacular anymore, does it? And we are not even getting into the requirement for a highly skilled workforce, not to mention the fact that setting up a business on this scale will require a bare minimum of at least three years or so.
That is also the reason why almost all of the semiconductor manufacturing in the world is concentrated in just five countries, with Taiwan alone accounting for more than half, followed by South Korea at nearly 20%. The skew is even more glaring when you consider that this market share—about 75 per cent, is purely between just two companies—TSMC and Samsung.
Throw in the US, China and Japan, and that covers virtually the entire chip-making ecosystem on planet Earth. A high-entry-cost club that India is gingerly knocking on the doors at.
Not that there is an opportunity. Taiwan's drought and worries over future climate change issues, not to mention the geopolitical uncertainty and threats the island faces from mainland China, has made the world look at newer alternatives. This includes ensuring that chip-making is distributed in more locations to avoid the kind of domino-effect disaster that befell the industry earlier this year. But these are increasingly likely to be in the US as well as places like Israel and Ireland (where Intel is also investing). President Biden's Chips for America Act offers about Rs 4 lakh crore worth of incentives compared to India's Rs 76,000 crores, and benefits from the much better-evolved tech ecosystem already in place. This could boost up the US's play in being a hub for this crucial component—all three biggies, TSMC, Samsung and Intel are investing in American states like Texas and Arizona.
The giant scale of the business would mean it would be out of reach for most Indian businesses—back in 2013, the Indian government had permitted two companies, one of them Jaypee, to set up fab plants, but coughing up the required big bucks proved to be tricky. Even in the run-up to the present announcement of Rs 76,000 crore (which is equivalent to a grand-sounding $10 billion), talks were held with leading firms, including TSMC, Intel and Hynix, though no assurance of investments has been forthcoming so far. The government is said to be pushing a couple of South Korean companies that have a major presence in the Indian market to expand into fab units, while it is hoped that domestic biggies like Tata or Vedanta might venture forth. The cost-benefit of 'Make in India' would be India's only USP as of now.
