Context: 

Recently, the Ministry of Electronics and IT (MeitY) announced that it will reopen the window for applying to its Rs 76,000 crore semiconductor manufacturing plan after the first window failed to attract any major names.

What are semiconductors? 

• Semiconductors are the thumbnail-sized building blocks of almost every modern electronic device from smartphones to connected devices in the Internet of Things (IoT). 
• They help give computational power to devices.
• The basic component of a semiconductor chip is a sliver of silicon, which is etched with billions of microscopic transistors and projected to specific minerals and gases, forming patterns to control the flow of current while following different computational instructions.
• Semiconductors having higher nanometre value are applied in automobiles, consumer electronics and so on, while those with lower values are used in devices such as smartphones and laptops.

What are fabs?

• Semiconductor fabrication units, or fabs, turn raw elements such as silicon into integrated circuits that are fit to be a part of practically all electronic hardware in the world. 
• Fabs are highly capital-intensive undertakings, costing billions of dollars for large facilities.

Complexity of chip manufacturing: 

• The chip-making process is complex and highly exact, having multiple other steps in the supply chain such as chip-designing done by companies to develop new circuitry for use in appliances, designing software for chips and patenting them through core Intellectual Property (IP) rights. 
• It also involves making chip-fabrication machines; setting up fabs or factories; and ATMP (assembly, testing, marking and packaging).
• Fabs require a highly reliable and high-quality supply of water, electricity, and insulation from the elements, reflecting the high degree of precision, cost and capital needed to make the sophisticated circuits.

Should India invest in scaling up its semiconductor ecosystem?

• Oligopoly in semiconductor industry: 
  1. The chip-making industry is a highly-concentrated one, with the big players being Taiwan, South Korea and the U.S. among others. According to a New York Times estimate, 90% of 5nm (nanometre) chips are mass-produced in Taiwan, by the Taiwan Semiconductor Manufacturing Company (TSMC). 

• Supply chain disruptions: 
  1. Due to the U.S.-China tensions over Taiwan, and the supply chain blockages owing to the Russia-Ukraine conflict. 
  2. Several sectors, including auto, telecom, and medical technology suffered due to the unexpected surge leading to the scarcity of chips manufactured by only a few countries.

• Strategic value spotted by US and EU: The U.S. announcement of $52.7 billion in government funding for the CHIPS and Science Act and the EU’s Chips Act that will mobilise €43 billion for public and private investments shows importance of the sector. 
• Domestic demand: According to the Electronics and IT Ministry, semiconductor demand in India would increase to $70-$80 billion by 2026 with the growing demand for digital devices and electronic products.
• Huge size of global market: The global semiconductor industry is currently valued at $500-$600 billion and caters to the global electronics industry currently valued at about $3 trillion.

Government Initiatives:

• Production-Linked Incentive (PLI): In 2021, India announced its roughly $10 billion dollar PLI scheme to encourage semiconductor and display manufacturing in the country. 
  • It also announced fiscal support for a Design-Linked Initiative (DLI) scheme to drive global and domestic investment related to design software, IP rights etc. 
• Harmonisation of government incentives for all technology nodes of semiconductors: 
• The modified scheme provides uniform 50% fiscal support for all nodes. Besides, it will provide 50% of capital expenditure for other steps of the process as well (chip design and ATMP).
• India Semiconductor Mission: It will be led by global experts in the semiconductor and display industry. It will act as the nodal agency for efficient and smooth implementation of the schemes on semiconductors and display ecosystem.

• Chips to start-ups programme: 
  1. It would develop 85,000 well-trained engineers. 
  2. Semiconductor designers would be given the opportunity to launch start-ups. 
  3. The government would bear 50% of the expense under the design-linked incentive scheme. 

• Integrated ecosystem: All areas of chip-making are encouraged to create an integrated ecosystem in India, rather than manufacturing here and having to package and test chips elsewhere.

Challenges before India:

• Resource-intensive chip production:  
  1. Chip-making also requires gallons of ultrapure water in a single day.
  2. An uninterrupted supply of power is central to the process, with just seconds of fluctuations or spikes causing millions in losses.

• Insufficient funding: 
  1. Just the setting up of one semiconductor fab requires an investment of anywhere between $3 and $7 billion. 
  2. It is concerned that not much of the current scheme outlay could be allocated to supporting other elements including display fabs, packaging and testing facilities, and chip design centres.

• Lack of fabrication units: 
  1. In India, more than 90% of global companies already have their R&D and design centres for semiconductors but never established their fabrication units.
  2. Although India has semiconductor fabs in Mohali and Bangalore, they are purely strategic for defence and space applications only

• While facilities for assembling finished products have been growing in number steadily, fabs for making chipsets and displays, which are crucial parts of the manufacturing process for many electronics, are rarer
• Multiple clearances needed: Fabs use sub 5 nanometer technology that requires clearance from both the technology provider and the Government. 
  • So, a combination of capital and the geopolitical situation comes into play to build new fabs

Way Forward:

• Changing the focus towards OSAT: 
  1. Companies that specialise in Outsourced Semiconductor Assembly and Test (OSAT) are less expensive to set up, and generate better margins. 
  2. The OSAT set-ups take care of the less capital-intensive parts of chipmaking, such as assembling the precise components that have already been manufactured, and running specialised tests to approve them.

• Collaborative efforts: If like-minded nations each specialise in different aspects of the semiconductor and electronics manufacturing process, and work together on assembly and distribution, that still solves the geopolitical problem of Chinese dominance.
• The initial funding should focus on areas like design and R&D, for which India already has an established talent pool.

News Source: Indian Express,  The Hindu