Supply Chain Connect July India Enters The Race 6491bf22f36e8

India Enters the Race to Become the Next Semiconductor Powerhouse—Will it Succeed?

June 23, 2023
Significant challenges lie ahead, but the country remains in a strong position.

India is vying to become the next powerhouse in electronic component manufacturing. With its economy steadily marching towards $5 trillion GDP, the country is well positioned to develop a new domestic semiconductor industry. Having previously failed to do so, it appears determined to try again to establish itself in the market—and it has plenty going for it. 

India already has a strong research and design base supported by established partnerships between its top engineering schools and universities across the globe. This base has designed  more than 2,000 ICs and chips in the last several years. With India's consumption of semiconductors expected to exceed  $80 billion in 2026, it seems natural that it wants to become a chip exporter. 

So, what’s the catch? Though India is no doubt primed for expansion, there are still three central challenges the country must address to enable successful domestic semiconductor production.  

Strengthening Energy Infrastructure
To become a global player in electronic component manufacturing, India needs a robust energy infrastructure. Despite having the world’s third-highest coal reserves, India still imports around a quarter of its consumption. As such—like all coal-reliant economies—it felt the pain of price rises following Russia’s invasion of Ukraine

This was compounded by an unseasonable heat wave, which pushed demand for electricity to record levels and further depleted stores. As a result, the country has struggled to find ways to restock its supply and has been plagued by  power outages

However, India does hope to change its energy industry and prevent costly stoppages. Ashwini Vaishnaw, the union minister of Electronics and Information Technology, announced that all new semiconductor manufacturing plants would run on green energy. It’s worth noting that around  42% of India's energy already comes from renewable sources, a figure that’s steadily growing.    

How much strain fabs would put on the power grid remains unknown, since plans are very much in the early stages. However, if India wants its semiconductor industry to succeed long-term, it must ensure that power outages won’t be an issue.  

Building Strategic Partnerships
Control of rare earth elements (REEs) is a hot-button issue, since China possesses over  90% of global production  for downstream rare earth products and technologies. REEs and metals are vital for over  200 products, including smartphones, computer hard drives, green energy and defense systems.  

India possesses  6% of the world's rare earth reserves, but developing its mining industry would require considerable investment. China is already ahead of the game, thanks in part to the recently founded  China Rare Earth Group. This firm aims to further cement its control over rare earth metals by managing 60-70% of China's rare earth production, equaling 30-40% of the global supply.    

The nature of the global supply chain is symbiotic. India's semiconductor industry will hinge on its ability to navigate geopolitical tensions and ensure the supply of necessary products like rare earth metals. India must form strategic alliances with countries like China to make production possible.   

Aligning Government Initiatives 
This isn’t India's first attempt at domestic semiconductor production. Back in 2007, Intel  planned to build a multi-billion-dollar chip factory in the country. The initial hope was that this would attract other companies like AMD, Texas Instruments and Siemens. India lost that opportunity when Intel pulled out of the deal after the government delayed the official rollout of its investment policy. Unfortunately, this had the side effect of scaring away manufacturers interested in investing.  

India's administration now wants to demonstrate that it has learned from past errors, with a flagship initiative to catalyze its semiconductor industry. The Design Linked Incentive (DLI) scheme includes financial incentives to support manufacturing and designs for integrated circuits (ICs), chipsets, system-on-chips (SoCs), systems and IP cores, and semiconductor-linked designs over the next five years. In addition, the  Production Linked Incentive (PLI) provides tax outlays worth $19 billion.

India is not alone with this plan. Other countries like the United States and its allies have also announced financial packages to bolster domestic production. Despite the competition, manufacturers are committed to diversifying their supply hubs by adding or increasing their presence in India. For instance, the  International Semiconductor Consortium is investing $3 billion to build a chip-making plant in Karnataka state. Meanwhile, Foxconn and Pegatron, manufacturers of Apple products, have been heavily invested in India since 2007 and have specified that the country will be critical to production operations moving forward. 

If India hopes to capitalize on this momentum, it must continue to make its offerings advantageous to investors and maintain clear communication on the government’s involvement at the manufacturer level.

Dream Big and Bring It Home
Building this industry will take time and further investment from manufacturers willing to bet on the country's potential. To ensure this, the Indian government must align on crucial points, acknowledge the importance of strategic partnerships with other countries and build manufacturing hubs sustainably, so they are a boon instead of a burden.  

But in spite of these challenges, India has already entered the race. Its  first semiconductor fab began construction in February 2023. Will it be the first of many? 

Voice your opinion!

To join the conversation, and become an exclusive member of Supply Chain Connect, create an account today!