Why no country can be 'aatmanirbhar' in semiconductor sector

Pranay Kotasthane

FROM ARTIFICIAL INTELLIGENCE to electric vehicles, nearly every breakthrough technology relies on semiconductor advancements. As AI and machine learning push computational limits, they require cutting-edge chips. Also, the future of autonomous vehicles, quantum computing and advanced communication networks will be shaped by semiconductor innovations.

Semiconductors have become critical as three major streams―geopolitical, geo-economic and technological―have converged, making them a top priority for nations. They have begun treating semiconductor development as a strategic imperative.

The pandemic highlighted the fragility of the global supply chain. During the pandemic, demand for automotive chips plummeted, and manufacturers reallocated production capacity to consumer electronics like laptops and data centres, whose demands skyrocketed because of the growing remote working culture during the pandemic. When the auto industry rebounded, it found itself in a severe chip shortage, disrupting global production.

China-Taiwan tensions have heightened the geopolitical importance of semiconductors. Taiwan, producing over 60 per cent of advanced chips, is vital to global supply chains. A Chinese invasion could disrupt industries worldwide, forcing the US and allies to react. Meanwhile, worsening US-China ties drive nations like India to build independent semiconductor ecosystems.

But India cannot aim for complete self-sufficiency in semiconductors―no country can. India’s goal should be to secure a strong presence across multiple stages of the supply chain to ensure strategic leverage.

India’s strength lies in semiconductor design. Approximately 20 per cent of the global semiconductor design workforce is based in India. But most Indian engineers work for foreign multinational companies, and very few semiconductor products are designed by Indian firms.

To address this, the Indian government has introduced an incentive scheme to encourage domestic semiconductor design. These incentives cover prototyping, software licensing, and chip design support. However, the programme is currently managed by the Centre for Development of Advanced Computing (C-DAC), a government-run entity with limited capacity to drive innovation at the required scale.

India currently lacks a commercial semiconductor fabrication industry, but the Tata-PSMC partnership aims to change that with a 28nm chip manufacturing plant capable of producing 50,000 wafers per month. This facility is expected to pave the way for more advanced fabrication, eventually reaching 14nm and 12nm chip production.

However, setting up a semiconductor fabrication plant is a massive challenge. It will take at least four years before production begins. Initially, the defect rate for manufactured chips will be high, increasing costs. The success of the Tata-PSMC fab will depend on how quickly it can achieve high yield rates and compete in the global market.

Unlike fabrication, chip assembly and packaging are more labour-intensive, making India well-suited for this segment due to inexpensive workforce. Encouragingly, India has announced four new ATMP (assembly, testing, marking and packaging) plants, with Micron leading the way. If Micron’s project succeeds, India could attract significant investments in chip packaging.

India must cultivate homegrown semiconductor startups. This requires a supportive regulatory environment, improved access to capital, and policies that encourage innovation. A thriving startup ecosystem will ensure that India not only manufactures chips, but also designs and innovates new semiconductor technologies.

To stay competitive, India must avoid restrictive policies like limiting domestically made chips to the local market, which would stifle innovation and global expansion. ATMP plants depend on imported chip wafers and materials, but high tariffs and exclusion from the World Trade Organisation’s Information Technology Agreement 3 (ITA-3) could make Indian assembly facilities uncompetitive. Unless import duties are lowered, Indian chip assemblers will struggle against global competitors who can source raw materials more cheaply. Even today, Taiwan relies on photolithography machines from the Netherlands and customers from the US and Europe.

A successful semiconductor strategy must be built over decades. It has taken Taiwan over three decades of consistent investment to reach its current dominance. India must take a similar long-term approach.

Kotasthane is deputy director and chairperson, high-tech geopolitics programme, Takshashila Institution.