India's Semiconductor Dream: A Brief Introduction Of The Industry, Its Role, And Importance

The government is offering $10 billion in incentives for the development of a sustainable semiconductor and display manufacturing ecosystem in India. We explore the reasons

The Centre wants to make India a hub for the semiconductor industry. The Narendra Modi-led government is focused on bringing in the global players of the chip industry to India. Just a week ago, Prime Minister Narendra Modi meet with NXP Semiconductors’ CEO Kurt Sievers. NXP Semiconductors is a Dutch semiconductor designer and manufacturer and one of the key players in the semiconductor manufacturing ecosystem. 

In March 2023, India signed an MoU with the US on establishing a chip supply chain and innovation partnership under the framework of India – US Commercial Dialogue. To show India's commitment to the industry, the government is offering $10 billion in incentives for the development of a sustainable semiconductor and display manufacturing ecosystem in India.

This incentive proposed by the government in 2021 has started to show some results. Foxconn and Vedanta, two giants from tech and mining sector, have proposed to establish a semiconductor and display manufacturing facility in a joint venture in Gujrat. But the government wants more industry players to come forward. A report by the Economic Times (ET) published in February this year showed that the government is said to be in 'advanced talks' with four global chipmakers to set up fab unit in India. But, why is the government so passionate about this industry? Let's discuss.

What Are Semiconductors

As it is taught in school textbook, semiconductors are materials that have electrical conductivity between conductors (generally metals) and non-conductors or insulators (such as ceramics). They are typically crystalline in structure and are made of materials such as silicon, germanium, or gallium arsenide. The unique electrical properties of the materials make them essential in the production of electronic devices, such as transistors, diodes, and integrated circuits (ICs), which are used in everything from computers and smartphones to automobiles and medical equipment. In a semiconductor, the ability of electrons to move through the material and conduct electricity is influenced by the presence of impurities, called dopants, which are intentionally added to the material during the manufacturing process. 

As mentioned above, the semiconductor's ability can be engineered and controlled during the manufacturing process. This has led to the development of new technologies such as light-emitting diodes (LEDs), solar cells, and sensors. These materials also play an important role in advanced technologies such as renewable energy, medical devices, and aerospace systems.

In addition, the semiconductor industry is a major contributor to the global economy, employing millions of people and generating billions of dollars in revenue each year. It is also a highly innovative space, with new breakthroughs and advancements being made all the time.

Electronic Chips

It is not difficult to find tiny but ever-so-present electronic chips in today's world. From smartphones to government IDs chips are being used in everything tech. To name a few, microprocessors, memory chips (Random Access Memory (RAM), Read-Only Memory (ROM), Flash Memory),  microcontrollers, Digital Signal Processors (DSPs), Application-Specific Integrated Circuits (ASICs), Field-Programmable Gate Arrays (FPGAs), Graphics Processing Units (GPUs), System-on-Chip (SoC) devices, Radio-Frequency Identification (RFID) chips, Power Management ICs (PMICs), Sensors and Actuators, Voltage Regulators and Switching regulators are some of the most utilised semiconductor chips being today. 

With functions, the complexity and sizes of the chips can vary. From electronics to Healthcare multiple industries are dependent on these chips. Smartphones, tablets, laptops, televisions, gaming consoles, and other personal devices that require semiconductors for processing, memory, and connectivity. The aerospace and defense industries rely on semiconductors for avionics, navigation systems, radar, communication systems, and other critical applications. Medical devices such as MRI machines, pacemakers, insulin pumps, and digital thermometers all use semiconductors for their processing, memory, and sensors. Semiconductors are also used in a wide range of industrial applications, including robotics, automation, sensors, and control systems. Communication networks, including wireless and wired networks, use semiconductors in their infrastructure and in devices such as routers, modems, and switches. Tiny tech has become a critical item for the functioning of modern society. 

How Much Is The Industry Worth

Even as uncertainties around the globe caused every sector to downgrade its growth, the semiconductor industry has been showing potential for fast-paced growth. According to Fortune business insights, the global semiconductor market was projected to grow from $573.44 billion in 2022 to $1,380.79 billion by 2029, at a compound annual growth rate (CAGR) of 12.2 per cent in the forecast period, 2022-2029. 

Another estimate by the International Data Corporation (IDC), worldwide semiconductor revenue in 2022 to cross $661 billion. 

However, heading into 2023, global macroeconomic and geopolitical factors emerged as the dominant forces shaping the semiconductor industry, said an insight report by Deloitte. "Rising interest rates, high inflation, lower consumer confidence, and tech-led stock market retreats have led to a dramatic loss in market capitalization," it said.   

The top 10 global chip companies’ combined market cap is down 34 per cent from $2.9 trillion in November 2021 to US$1.9 trillion in November 2022, the report added. However, still, a very significant size compared to other sectors. 

Moore's Law

The term "Moore's Law" refers to a prediction made by Gordon Moore, the co-founder of Intel, in 1965. He observed that the number of transistors on a microchip was doubling every two years, while the cost of manufacturing these chips was decreasing. This prediction became known as "Moore's Law," and it has proven to be remarkably accurate over the past several decades.

Moore's Law has driven the rapid advancement of computer technology, leading to smaller, faster, and more powerful devices. It has also had a significant impact on a wide range of industries, from consumer electronics to medical devices to transportation systems.

The semiconductor industry continues to invest heavily in research and development to find new ways to increase the performance and functionality of microchips. Whether or not Moore's Law continues to hold true, it is clear that semiconductor technology will continue to be a critical driver of innovation and progress in the digital age.

How The Semiconductor Industry Works

From mining to manufacturing, the industry involves multiple sectors in its ecosystem. The semiconductor value chain is long and involves many specialised fields. To name a few, equipment, Electronic Design Automation software (EDA), Intellectual Property core (IP), Integrated Device Manufacturer (IDM and fabless), foundry, and Outsourced Semiconductor Assembly & Test (OSAT).

The most used semiconductor materials are silicon, germanium, and gallium arsenide. According to a report by IEEE Transactions on semiconductor manufacturing, while some semiconductor materials are both cheap and abundant, silicon being the most obvious example, the Rare Earth Elements (REE) used in the production of high-κ dielectrics and chemical-mechanical polishing can be costly. The difficulty of extracting REEs from raw materials has led many mining companies to choose not to pursue REE profits.

China is one of the few nations to focus on REE mining and refining, resulting in the nation producing 85 per cent of the world’s supply of tungsten and molybdenum, IEEE says adding that China’s stranglehold on REE production allows it to not only set prices but also wield the valuable semiconductor material as a political weapon. 

Electronic Design Automation (EDA) is the industry that commercialises the tools, methodologies, and flows associated with the fabrication of electronic systems. The industry produces tools that assist in the specification, design, verification, implementation, and testing of electronic systems. ICs and various systems installed on printed circuit boards can be created using these techniques. According to Grand View Research, the global electronic design automation software market size was valued at $11.10 billion in 2022 and is projected to expand at a compound annual growth rate (CAGR) of 9.1 per cent from 2023 to 2030.

An Intellectual Property (IP) core in Semiconductors is a reusable unit of logic or functionality or a cell or a layout design that is normally developed with the idea of licensing to multiple vendors for use as building blocks in different chip designs. In modern ICs, an increasing number of system functionalities are integrated into single chips. This type of design is known as a system-on-a-chip (SOC) design. Most SOC chips incorporate a standard microprocessor and standardized functionalities, accommodating design reuse across multiple ICs by multiple vendors on a licensing basis. In these systems, pre-designed IP cores play a key role. According to ResearchAndMarkets.com, the global semiconductor IP market size is expected to grow from $5.5 billion in 2021 to $7.2 billion by 2026. 

A semiconductor company that designs, manufactures, and sells integrated circuits (ICs) is an integrated device manufacturer (IDM). A traditional IDM owns its own branded chips and does the design in-house and has a fabrication plant where it manufactures its ICs. Intel, Infineon, and Texas Instruments (TI) are examples of IDMs. Samsung is an example of an IDM that also provides design and foundry services to other semiconductor companies. On the other hand, some pure-play foundries are GlobalFoundries, TSMC, and UMC.

Three major business models in the semiconductor industry, namely integrated device manufacturers (IDMs), fabless, and foundry models. IDMs design and manufacture integrated circuits (ICs), fabless companies focus only on IC design, and foundry companies are concerned only with IC manufacturing. According to a research report by IEEE Transactions on Semiconductor Manufacturing the revenue growth rate of the fabless–foundry model has been considerably higher than that of IDM. This raises the question of whether the fabless–foundry model will ultimately dominate the semiconductor industry or grow only to a certain extent. 

Companies that offer third-party IC packaging and test services are known as OSAT (Outsourced semiconductor assembly and test). These businesses package silicon products created by foundries and test them before they are sent onto the market.

If this list of industries is hard to comprehend, let's understand this with an example - Apple is one of the biggest players in the smartphone industry. Let us take a look at its supply chain. Apple's iPhone 12 (we used an relatively older model so that its supply chain has a historic footprint), supply chain involves various suppliers and manufacturers located in different countries. Some of the components are sourced from Asia, including Taiwan, Japan, and South Korea. These components include the display, camera modules, memory chips, processors, and sensors. The assembly takes place in China, where Apple works with contract manufacturers such as Foxconn, Pegatron, and Wistron to assemble the devices. These contract manufacturers receive the components from various suppliers and assemble them into the final product. One of the key suppliers for the iPhone 12 was TSMC (Taiwan Semiconductor Manufacturing Company), which provided the A14 Bionic chip that powers the device. Another important supplier was LG Display, which supplied OLED displays for the iPhone 12 Pro models.

The process and supplier change with the need for different functionality. But in the last century, Asian countries especially East Asian countries have played a pivotal role in the supply chain. From West's perspective, this is where the faultline lies. 

Semiconductor Industry Almost Started Another Cold War. How?

According to a 2022 estimate published by InsiderMonkey, the US dominates the semiconductor market with a 46 per cent market share. South Korea came in second with a 21 per cent share and Japan and the European Union was in third place with 9 per cent market shares, each. The US firms had also commanded half of the Chinese market, which was the largest in the world and worth $192.4 billion. 

While Israel(4), Netherlands(4), Malaysia(7), the UK(12) and South Korea (12) have a significant number of Fab units, Germany (20), China (70), US (76), Taiwan (77), and Japan (107) are the leader of the semiconductor manufacturing industry. 

China's growing influence in the chip manufacturing and assembly sector has raised concern for the US. In the midst of the pandemic when the lockdown in China closed must work including the semiconductor factories, the world started facing a shortage of semiconductor chips. This showed the world China's growing influence in the chip industry. 

In October 2022, sending shockwaves throughout the global chip industry, the US restricted any advanced semiconductor, as well as the equipment, software, and blueprints used in the manufacturing of chips, that contain US technology from companies in mainland China. China was not only cut off from receiving advanced chips from their top AI component source, Nvidia, but it is also facing disruptions in getting supply from global equipment giant ASML.  

While the action has presented China with a significant obstacle, it has also had numerous knock-on repercussions for businesses across the semiconductor sector.

The ongoing trade war between the US and China that began in 2018, led to this predicament. The trade dispute progressively intensified into the tech war, moving from tariffs on products to restrictions on technology. 

The rule places a massive legal hurdle in the path of any company looking to ship these chips to China by way of its “end use” clause. Simply put, it is the responsibility of the company seeking a license to export any of the prohibited components to demonstrate to the US that the "end user" of the exports has no plans to use the chips in a manner that would jeopardise US national security interests, such as reselling the order to the Chinese military or producing high-tech goods on their behalf. 

While the move has a big impact on China, it also affects other countries including the US. A report from the Boston Consulting Group in 2020 determined that if China and the US were to completely decouple their semiconductor industries, US-based companies would see their R&D spending drop by as much as 60 per cent. This would likely be enough for the US to lose its competitive edge, and subsequently drop out of the top spot in the market. 

China has another leverage point against the US that would probably be used before an economic decoupling. China provides the majority of the US's supply of rare earth metals (REE). These materials are essential for the production of semiconductors as well as other sectors like renewable energy. 

Above all economic penalties, China's looming threat over Taiwan has the potential to fundamentally alter the semiconductor industry's landscape.

Way Forward And India's Bet

As the industry faces the growing threat of China-US tension, there are trying to diversify their manufacturing. Companies like Intel, Foxconn, TSMC, NXP, and Qualcomm are increasingly moving their units from China to elsewhere. India is trying to woe these firms to its soil. However, for the corps that have long leveraged from China's cheap labor and flexible working conditions, India's labour law can create a hurdle for them. Additionally, other middle-income countries like Vietnam are also attracting these firms. 

India wants to dominate the semiconductor market on a global scale. The government officials and politicians have acknowledged the sector's significance for India's future, with Modi saying, "It is our collective aim to establish India as one of the key partners in global semiconductor supply chains." Domestic semiconductor consumption is anticipated to surpass $80 billion in 2026.