Scaling Up the Semiconductor Slope

Semiconductors have become the invisible ‘engines’ of the world, playing a critical role in advances. They have become the fourth most traded product in the world, and thanks to geo-political headwinds have become a scarce and much sought-after commodity, making it imperative that we have our own viable semiconductor industry ecosystem, in which we lack.

The best of business is based on the best of science. The industrial revolution of the past and the rise of affluent countries has been a testament to that. In modern times, it is the technological and scientifically evolved production of ‘semiconductors’ that is ruling global trade. Semiconductors have achieved the status of the fourth most traded product. They are the invisible engines of the world. They are used to run automobiles and operate mobile phones. Semiconductors are essential components of modern electronic devices, enabling advances in communication, computing, healthcare, military systems, transportation, clean energy and countless other applications. In short, semiconductor is the mother of modern electronic equipment. “I would say that hardware is the bone of the head, the skull. The semiconductor is the brain within the head. The software is the wisdom, and data is the knowledge,” said Masayoshi Son.

Short supply

However, the irony is that the manufacture of semiconductors has been limited to only a handful of countries like Taiwan, South Korea, Japan, US and partly China. Of late, due to the short supply of semiconductors, even car manufacturers in India have been badly hit resulting in delayed production. The government of India has recently announced a booster for the manufacture of semiconductors in India by announcing an incentive package of Rs 76,000 crores. The aim of the announced policy is to create a viable design and manufacturing system for semiconductors. The objective is to capture a slice of the most important market, while pursuing the spirit of “Atmanirbhar Bharat”.

What is a semiconductor?

What is a semiconductor? It is a substance with properties of conductors like metals and insulators like gas. It is a type of material which has an electric resistance which falls between the electric resistance of a conductor and that of an insulator. Semiconductors, sometimes referred to as integrated circuits (ICs), or microchips, are made from pure elements, typically silicon or germanium or compounds such as gallium arsenide. In a process called doping, small amounts of impurities are added to the pure elements so as to cause changes in the conductivity of the material. Semiconductor devices can display a large number of useful properties such as showing variable resistance, passing current more easily in one direction than the other, and reacting to light and heat. Their actual function includes the amplification of signals, switching and energy conversion.

Semiconductor products

Broadly speaking, semiconductors fall into four main product categories:

Memory: Memory chips serve as temporary storehouses of data and pass information to and from computer device brains.

Microprocessors: These are central processing units that contain basic logic to perform tasks.

Commodity integrated circuit: Sometimes called standard chips, they are produced in huge batches for routine processing purposes.

Complex SOC: System on a chip (SOC) is essentially all about the creation of an integrated circuit chip with an entire system’s capability stacked on it.

Semiconductor ecosystem

The semiconductor industry is the aggregate of companies engaged in the design and fabrication of semiconductors and semiconductor devices, such as transistors and integrated circuits. The transistor is a semiconductor device used to amplify or switch electrical signals and power, which is composed of semiconductor material. It usually has three terminals for connection to an electronic circuit.

Design is very difficult in case of creating semiconductor devices, as the same involves placings in nanometres. One nanometre is one billionth of a metre and high quality chips have to be of less than ten nanometres. Semiconductor manufacture is unlike anything else. It is earmarked for its complexity. Its manufacturing needs at least 300 different high technology inputs.

"The manufacture of semiconductors has been limited to only a handful of countries like Taiwan, South Korea, Japan, US and partly China. Of late, due to the short supply of semiconductors, even car manufacturers in India have been badly hit resulting in delayed production"

R&D focussed

The semiconductor industry requires huge expenditure routinely, on R&D. It has been observed that roughly 65% of the generated revenue has to be ploughed back into R&D to stay in the competitive race. The race is to design cheaper and shorter nanometre chips. It has also been seen that technology becomes obsolete in roughly every four years. Intel’s Craig Barret has said that semiconductor microprocessors are the most complicated devices ever made by man.

Policy boost to semiconductors

The policy decision of the government to give incentives to semiconductor manufacturers is a step in the right direction, though it is late. Ajay Chaudhary, the co-founder and former chairman of HCL had said, “We are a colony of China.” This statement by a man whom some call the Father of Indian hardware, is in the context of over-dependence on China for electronic products along with South Korea.

Now, when the government envisages starting our own factories for semiconductors, it is desirable that state governments should also work along with the central government. If we succeed in our mission then our electronics industry will not have to depend on imports for semiconductors.

Capital intensive

We have to keep in mind that semiconductor foundries are the world’s most expensive factories. They account for roughly 60% of industry’s capital expenditure but yield only 25% of value addition. Therefore, to lower the risk of investment, India should look at specially wooing the back-end of manufacturing such as assembly, packaging and testing. Once it stabilises and an ecosystem develops, front-end manufacturing can follow. Simultaneously, efforts have to be made to have specialised engineers in chip design, the part of the chain that contributes the largest value. Hand holding start-ups of entrepreneurs-cum-engineers can produce large payoffs.

To begin with, most of the semiconductor industry was located in the US, starting from 1960 up to pre-1990. The cost pressure later led to the development of a close knit supply chain where individual firms focussed only on core activities. India needs to create its own space. Some should focus on R&D intensive activities like electronic design automation (EDA), core intelligence property (IP) and chip design. At present the US is the leader in this segment and India will have to get a part of this US controlled business. Secondly, we have to set up semiconductor fabrication facilities for advanced chips. Most Fabs are located in Taiwan, South Korea and Japan.

Carve a space

Post supply chain disruptions after corona and the strained relationship between US and China, there is a scope for new Fab units and it is here that India can enter. To begin with, India should go for medium and low-end chips, and this means, where the distance between two transistors is 20 nanometre and above. Except for high end smartphones, laptops and high end equipment, our production can be used for mass produced electronic items. This will help India to become a high-volume and low-cost original design manufacturer (ODM) for medium and low-end chips. We may gradually switch to our own brands. Then, the assembly testing and packaging (ATP) segment should attract our focus. This segment captures 10% of the value. China is the current leader. With low-cost skilled manpower, India has an edge.

We should take inspiration from Taiwan Semiconductor Manufacturing Company Limited (TSMC) which is the world’s largest dedicated independent semiconductor foundry. Though located in a small country, it is highly respected as global investors have made huge investments in its high cost factories. It is known for high quality products of less than 10 nanometre and the world’s biggest electronic companies are its clients. Intel of US is the world’s biggest company in this field revenue-wise, but TSMC has its own standing. There are some positive indications for us, as after the incentive announcement by the government, Intel has expressed its intention to open a unit in India while Tatas are in the process of talks with TSMC.

India at the moment is the sixth largest economy in the world. We are aiming for a 5 trillion US dollar economy in a short time and for that we have to do something different. Our biggest imports are crude oil and electronic items. We cannot help much in the field of crude oil import, as we do not have adequate natural oil reserves to support our requirement. But, we have the opportunity to maximise our own production of electronic equipment and for that it is in the fitness of things to start a semiconductor industry. Our engineers can be found everywhere in the Silicon Valley of the US, and it is time now that some of these highly trained engineers become semiconductor entrepreneurs. In India, subsidy by the government can serve as an added attraction.

As per the IMF forecast and statistical data of GDP so far, we may emerge as the major economy with the highest GDP growth in FY 2021-22 despite the odds due to Coronavirus. We may also continue high economic growth in FY 2022-23, much ahead of China and other big countries. Our government is trying its best by opening such industries which we did not have earlier. Let us all join hands to do our bit to nation building.