The Hindu Editorial Analysis- 1st April 2023 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

India’s semiconductor mission might need a compass

Why in News?

The United States Department of Commerce and its Indian counterpart have recently concluded a memorandum of understanding in March 2023 to ensure that subsidies by each country do not come in the way of India’s semiconductor dreams, as espoused by the much publicised semiconductor policy launched in December 2021. 

India Semiconductor Mission

• India Semiconductor Mission (ISM) has been setup as an Independent Business Division within Digital India Corporation.
• The Corporation has administrative and financial autonomy to formulate and drive India’s long term strategies for developing semiconductors and display manufacturing facilities and semiconductor design ecosystem.
• ISM will serve as the nodal agency for efficient, coherent and smooth implementation of the schemes.

Sub-schemes

Following four schemes have been introduced under the India Semiconductor Mission (ISM):

• Scheme for setting up of Semiconductor Fabs in India
  • It provides fiscal support to eligible applicants for setting up of Semiconductor Fabs which is aimed at attracting large investments for setting up semiconductor wafer fabrication facilities in the country.
• Scheme for setting up of Display Fabs in India
  • It provides fiscal support to eligible applicants for setting up of Display Fabs which is aimed at attracting large investments for setting up TFT LCD / AMOLED based display fabrication facilities in the country.
  • The Scheme provides fiscal support of up to 50% of Project Cost subject to a ceiling of INR 12,000 crore per Fab.
• Scheme for setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab and Semiconductor Assembly, Testing, Marking and Packaging (ATMP) / OSAT facilities in India:
  • The Scheme provides a fiscal support of 30% of the Capital Expenditure to the eligible applicants for setting up of Compound Semiconductors / Silicon Photonics (SiPh) / Sensors (including MEMS) Fab and Semiconductor ATMP / OSAT facilities in India.
• Design Linked Incentive (DLI) Scheme
  • It offers financial incentives, design infrastructure support across various stages of development and deployment of semiconductor design for Integrated Circuits (ICs), Chipsets, System on Chips (SoCs), Systems & IP Cores and semiconductor linked design.
  • The scheme provides “Product Design Linked Incentive” of up to 50% of the eligible expenditure subject to a ceiling of Rs 15 Crore per application and “Deployment Linked Incentive” of 6% to 4% of net sales turnover over 5 years subject to a ceiling of Rs 30 Crore per application.

Importance of ISM

• The Vision of ISM is to build a vibrant semiconductor and display design and innovation ecosystem to enable India’s emergence as a global hub for electronics manufacturing and design.
• It will formulate a comprehensive long-term strategy for developing semiconductors & display manufacturing facilities and semiconductor design ecosystem in the country in consultation with Government ministries / departments / agencies, industry, and academia.
• It will facilitate the adoption of trusted electronics through secure semiconductors and display supply chain, including raw materials, specialty chemicals, gases, and manufacturing equipment.
• It will enable a multi-fold growth of Indian semiconductor design industry by providing requisite support in the form of Electronic Design Automation (EDA) tools, foundry services and other suitable mechanisms for early-stage startups.
• It will also promote and facilitate indigenous Intellectual Property (IP) generation and encoura
• ge, enable and incentivize Transfer of Technologies (ToT).
• ISM will also enable collaborations and partnership programs with national and international agencies, industries and institutions for catalyzing collaborative research, commercialization and skill development.

Semiconductor

• Semiconductors, or chips, have properties that are somewhere between conductors and insulators.
• Usually made of silicon, they are used to power a wide range of devices - cars, laptops, smart-phones, household appliances and gaming consoles.
• These tiny objects perform a host of functions such as powering displays and transferring data.
• So, a supply crunch has a consequent impact on sales of cars, fridges, laptops, TVs and other electronic devices.

How difficult is it to manufacture Chips?

• Manufacturing advanced logic chips requires extraordinary precision, along with huge long-term bets in a field subject to rapid change.
• Manufacturing a chip typically takes more than three months and involves giant factories, dust-free rooms, multi-million-dollar machines, molten tin and lasers.
• Plants cost billions of dollars to build and equip, and they have to run flat-out 24/7 to recoup the investment.
• A factory also gobbles up enormous amounts of water and electricity and is vulnerable to even the tiniest disruptions, whether from dust particles or distant earthquakes.

Challenges faced by the semi-conductor Industry

The world's top chipmakers still can't manufacture chips fast enough to satisfy the market's insatiable appetite.

• The pandemic disrupted semiconductor shipments as global demand for new mobile devices, PCs, and data center upgrades surged in response to remote work, online learning, and other stay-at-home trends.
• Lockdowns across the world forced chip-making facilities to shut in countries like Japan, South Korea, China and the US.

 Declining memory chip prices

• Memory chip prices soared in 2017 and 2018, but declined in 2019 and 2020 amid sluggish demand from the PC and smartphone markets.

• The tech war between the U.S. and China, which intensified under President Donald Trump and is continuing under President Joe Biden, is another pressing issue.
• The U.S. has already levied sanctions against several big Chinese companies, including SMIC and Huawei, amid national security concerns.
• Those sanctions are exacerbating the shortage of advanced chips in China.
• They're also spurring the Chinese government to aggressively invest in its domestic chipmakers to reduce its overall dependence on overseas technologies -- which could cause a messy decoupling of the U.S. and Chinese markets.

• Automakers that cut back drastically early in the pandemic underestimated how quickly car sales would rebound.
• They rushed to re-up orders late in 2020, only to get turned away because chipmakers were stretched supplying computing and smartphone giants like Apple Inc.

• Chinese companies began building up inventory to ensure it could survive U.S. sanctions that were set to cut it off from its primary suppliers.

• Several recent setbacks -- including a power outage at TSMC, a production pause at Samsung, and a fire at the Japanese auto chipmaker Renesas -- all highlight the fragility of the semiconductor supply chain .

 How is the Russia-Ukraine crisis protracting this shortage?

• Palladium and neon are two resources that are key to the production of semiconductor chips.
• Now that Russia supplies over 40 per cent of world’s palladium and Ukraine produces 70 per cent of neon, there can be global chip shortage to worsen if the military conflict persiss.
• During the 2014-15 Crimea invasion, neon prices went up several times over, serving an indication of the seriousness of the current crisis for the semiconductor industry.

Impact

• The semiconductor shortage severely disrupts the supply chain and constrains the production of many electronic equipment types.
• Production of laptops, tablets, smartphones and other electronic devices are impacted by the shortage of semiconductors.

 Increasing Prices

• Foundries are increasing wafer prices, and in turn, chip companies are increasing device prices.

• Domestic and global automobile manufacturers cut output and halt production due to the semiconductor shortage.
• According to data from Society of Indian Automobile Manufacturers (SIAM), automobile wholesales in India declined 11 percent year-on-year in August 2021.
• Chip shortages are expected to wipe out $210 billion of sales for carmakers in 2022, with production of 7.7 million vehicles lost.

Challenges specific to India

• It is difficult to compete with neighbouring countries like China and Vietnam which have been favourite destinations for global chip manufacturers due to better cost-efficiency.

• In addition to the huge cost, running in billions of dollars, manufacturing even a single chip requires hundreds of gallons of pure water, which may also be hard to find in India in the required quantities.

• ‌There have been challenges in setting up of Semiconductor Wafer Fabrication (FAB) units in India.
• India is still not unto the par in terms of the basic infrastructure needed.

• An uninterrupted power supply is another major hurdle.
• The heart of the issue is that India is still not unto the par in terms of the basic infrastructure needed to pursue endeavours in the chip manufacturing space.

• There is also constant price pressure from other global players, particularly China which is also building a homegrown chip program for the adoption of local semiconductors in 70% of its products by 2025.

• ‌India imports 100% of its semiconductors.
• Around 40 percent of India’s demand is met through imports from China, despite the frequent geopolitical impasse that the two nations find themselves in.

Way Ahead

• As 5G mobile networks proliferate with many people working from home, the need for more powerful, energy-efficient chips is only going to grow.
• The rise of artificial intelligence is another force pushing innovation, since AI relies on massive data processing.
• Indian semiconductor industry is set for a stable upsurge with bright prospects provided India's generic obstacles like redtape-ism, fund crunch and infrastructural deficits are adequately addressed.
• Steps needed to be taken:

1. Land Acquisition by the government: acquire the land and develop a special economic zone (SEZ) which would encompass a complete semiconductor manufacturing ecosystem.
2. Cover all ancillaries: The monetary benefits being extended for setting up a fab should be made available for all the ancillary units manufacturing specialty chemicals to clean room apparel.
3. Focus on simple technology: The requirements are less stringent and the fabs less expensive. These companies typically operate at much lower gross margins as opposed to the large fabs and Original Equipment Manufacturer (OEMs).

• ‌With the implementation of fabrication capabilities in India, the country could achieve a degree of self-sufficiency in the sector of semiconductors.
• Building a strong semiconductor industry would put an end to the country’s reliance on imports to meet its semiconductor needs and will help in the creation of jobs.