India is betting $18 billion to build a chip powerhouse. This is what it means

India wants to become a global chip major, but the odds are steep. The competition is fierce and India is late in the race to make cutting-edge chips.

In 2022, a global competition for semiconductor independence began in order for the US to restrict exports of advanced AI chips to China and curb access to Beijing’s cutting-edge technology.

For India, it provided an opportunity. The country wants to reduce its dependence on imports, secure chips in the strategic sector, and gain a larger share of the global electronics market moving from China.

India is one of the world’s largest e-consumers, but there is no local chip industry and plays a minimal role in the global supply chain. New Delhi’s “Semiconductor Mission” aims to change that.

The ambition is bold. We want to create a complete supply chain in Indian soil, from design to manufacturing, testing and packaging.

As of this month, the country has approved 10 semiconductor projects with a total investment of 1.6 trillion Rs ($18.2 billion). These include two semiconductor manufacturing plants and multiple test and packaging plants.

India also has a pool of engineering talent already employed by global chip design companies.

But so far progress has been uneven and there is not enough investment and talent pool to make India’s chip ambitions a reality, experts say.

“India requires several fab or ATP facilities (i.e., some ‘shiny objects’). We need a dynamic, deep, long-term ecosystem,” said Stephen Ezel, vice president of Global Innovation Policy at the Information Technology and Innovation Foundation, a think tank for science and technology policies.

According to Ezell, major semiconductor manufacturers are considering “500 individual factors” before setting up multi-billion dollar fab investments. These include human resources, taxes, trade, technology policy, labor rates, law and customs policy. This is all areas India has to do.

In May, the Indian government added a new element to Chip’s ambitions. This is a scheme that supports the manufacture of electronic components that address critical bottlenecks.

Until now, chip makers have had little local demand for their products as there are few electronic component manufacturers, such as Indian telephone camera companies.

However, the new policy will provide financial support to companies that produce active, passive electronic components, creating a potential domestic buyer supplier base that chip manufacturers can plug in.

In 2022, the country also pivoted from a strategy that provides excellent incentives for manufacturing units that make chips below 28nm. As for chips, the smaller the size, the better the performance is when energy efficiency increases. These chips can be used in new technologies such as advanced AI and quantum computing by packing more transistors in the same space.

However, this approach was not supporting India’s early semiconductor industry development, so New Delhi now covers 50% of the project cost of all manufacturing units, regardless of chip size or chip testing and packaging units.

Fab companies in Taiwan and UK, as well as semiconductor packaging companies in the US and South Korea, all have expressed interest in supporting Indian semiconductor ambitions.

“The Indian government has eliminated generous incentives to attract semiconductor manufacturers to India,” Ezel said, but emphasized that “these types of investments are not sustainable forever.”

Currently, India’s largest chip project is Taiwan’s PowerChip Semiconductor Manufacturing Corp.

The unit creates chips for power management integrated circuits, display drivers, microcontrollers and high-performance computing logic, according to TATA Electronics, which can be used in the AI, automotive, computing and data storage industries.

The UK’s CLAS-SIC Wafer Fab is linked with SICSEM in India to establish the country’s first commercial compound fab in eastern Odisha.

According to a government press release, these composite semiconductors can be used in missiles, defense equipment, electric vehicles, consumer equipment and solar cell inverters.

“The next three to four years will be crucial to advance Indian semiconductor goals,” said Sujay Shetty, managing director of semiconductors at PWC India.

Establishing an operational silicon manufacturing facility and overcoming technical and infrastructure hurdles beyond incentives will be an important milestone, according to Shetty.

The production site must meet strict requirements, such as being in flood-free and vibration-free areas with reliable road connections.

India also needs specialized chemical suppliers who meet “ultra-high purity standards essential for advanced semiconductor manufacturing.”

Beyond chip manufacturing plants, many medium-sized companies in India have expressed interest in chip testing and packaging unit setup. Several Indian groups are also in the segment, attracting their high margins and lower capital strength compared to FABS.

“Outsourced semiconductor assemblies and testing (OSAT) represent important opportunities for India, but clarifying market access and demand channels is critical for sustainable growth,” Shetty says.

While success in this field will lead India to enter the global chip industry, New Delhi still has a long way from the development and manufacturing of 2nm semiconductors, cutting-edge chip technology.

These 2NM chips have smaller transistor sizes, which improve performance and power efficiency. According to a report from FT, Taiwan Semiconductor Manufacturing Corporation will mass-produce cutting-edge 2NM chips later this year.

Last week, Indian Ashwini Vaishno, who was in Bengaluru, said that in order to open a new office for a semiconductor design company, the UK company will design the “most advanced chip” with “AI servers, drones and 2 nm mobile phone chips from cities in South India.”

However, experts say that the core intellectual property of chip design is often maintained in places like the US and Singapore where established IP systems support such activities, so the role of local talent is likely to be limited to testing and validation of non-core designs.

“India is well-talked about the design field, because design has been around since the 1990s, unlike the manufacturing and testing of semiconductors that have appeared in the last two years,” says Jayanth BR, a recruiter with over 15 years of experience for Indian global semiconductor companies.

He said that global companies typically outsource “block-level” design verification work to India.

Beyond this is something the Indian government needs to resolve if it wants to fulfill its semiconductor ambitions.

“India may consider updating its IP law to address new forms of IP, such as digital content and software. Of course, improving the enforcement mechanism will go a long way in protecting IP rights,” said Sajai Singh, partner at Mumbai-based JSA Advocates & Solicitors.

“Our competition comes from countries like the US, Europe, Taiwan and more, with strong IP laws as well as more established ecosystems for chip design.”