India ranks 3rd in global semicon backend index

Barely three years after the Government of India announced the semiconductor and display manufacturing scheme with a financial outlay of ₹76,000 crore, India has been ranked third in the Backend Semiconductor Manufacturing Attractiveness Index by the US-based management consulting firm Kearney. While Taiwan leads the index, followed by Malaysia, Mainland China ranks fourth, Korea ninth, Vietnam tenth, Singapore 12th, and Japan 13th.

“The semiconductor making process is broadly classified into two – frontend and backend. Frontend specifically means making of wafers and engraving circuits on them. Backend processes refer to testing and packaging.  Frontend comprises CMOS or Complementary Metal-Oxide-Semiconductor making, while back-end processes include testing of wafer, packaging of wafer and the package testing,” explains Faisal Kawoosa, Chief Analyst & Founder, Techarc. These processes are performed either by an Integrated Device Manufacturer (such as Intel, Micron) as a step in their manufacturing value chain or by Outsourced Semiconductor Assembly and Testing (OSAT) providers (such as ASE) that specialise in this. 

Thirty countries and regions were evaluated on the attractiveness of locations for back-end semiconductor manufacturing, based on 28 parameters across business environment (30%), capital incentives (20%), and operational costs and incentives (50%), generating a standardised score for each country. “The primary factors driving India’s ranking include the Comprehensive incentive package and favourable policies (e.g., $10 Billion incentive corpus, income tax holidays for five years, import duty exemption, 25% incentive on equipment spending), low labour costs (and ample availability of skilled labour) and low utility costs (water and electricity). These make India very competitive vs. other nations,” explains P.S. Subramaniam, partner in the Strategic Operations and Performance, Kearney. Leading the index, Taiwan scored 6.0, followed by Malaysia at 5.7, with India closing the gap at 5.5, and Mainland China just a few points behind with 5.5.

“India’s strong ranking is driven by factors such as ease of doing business, government incentives, supportive labour laws, a growing talent pool and the availability of willing Indian JV partners. Additionally, India's rapidly increasing demand for semiconductors also enhances its attractiveness as a key player in the global market,” says Ashok Chandak, President, India Electronics & Semiconductor Association (IESA).

Contributing 20% to the overall score, the capital/capex incentives include land cost incentives, construction and facility cost incentives, equipment cost incentives, and semiconductor-specific incentive budgets. In India, the central government is offering a 50% incentive on the project value on a pari-passu basis, and state governments such as Gujarat, Uttar Pradesh, and Odisha, among others, are offering an additional 20-25% incentive over the central government’s incentive. “India sports overall 70% capex (land, construction, facilities, equipment etc.) incentives while Taiwan from a capex incentive point of view does not even come close to India Semiconductor Mission policy. Hands down, in the 7 decades long history of the Semiconductor industry, India is by far the best world region for subsidising Assembly-Test-Packaging (ATP)/ Assembly, Testing, Marking, and Packaging (ATMP)/ OSAT units. When we combine India’s central government supported Capex Linked Incentives scheme incentives with individual state incentives for ATP/ATMP/OSAT units we are looking at around 70% subsidy for all capex cost structures involved in OSAT/ATMP site economics based on the TCO (Total Cost of Ownership) metrics,” explains Danish Faruqi, CEO of Fab Economics - a boutique semiconductor Fab/OSAT Greenfield Projects advisory and implementation practice firm.

The parameters within the operational costs and incentives, which contribute 50% to the overall index score, include factors such as labour costs and incentives, utilities (electricity and water prices), and taxes and duties. States are also contributing to areas such as utilities, taxes, duties, and incentives. For instance, Uttar Pradesh is offering a 100% exemption on electricity duty for 10 years with a dual grid network, a 50% exemption on intrastate power purchase, transmission, and wheeling charges for 25 years, among other incentives.

The business environment, which contributes 30% to the index, includes factors such as ease of doing business and government support, country infrastructure and innovation focus, as well as the availability and skills of the workforce, including graduates in science and engineering, PISA scores in reading, mathematics, and science, and research talent. For instance, on the skills and talent front, Parv Sharma, Senior Analyst, Counterpoint Research explains, “In terms of STEM India has >2.5 million graduates after China. This is key for the semiconductor industry; with proper skill this enables semiconductor sector growth. The government is also running many training programs to prepare students for the industry. One such program is the “Chips to Startup” initiative, which aims to train approximately 85,000 qualified and high-quality engineers in the fields of Very Large-Scale Integration and Embedded System Design over the next five years. This program will be a significant step forward in instilling chip and system-level design skills in engineering and technical students. This type of government’s support on infrastructure and skill development is critical in creating a comprehensive ecosystem that supports innovation and growth in the country.”

The global play 

Currently, from a geographic distribution perspective, the global top 10 OSAT vendors by their headquarter location are distributed across Taiwan, China and US with a total market share of 84.6 % per Fab Economics R&A across these three nations alone. ASE, PTI, KYEC, Chipbond, ChipMOS, and Sigurd are in Taiwan, JCET, TFME, and Hua Tian in China, and Amkor in the US. However, if one were to look at the geographical location of OSAT’s then 98% of global OSAT capacity is located in Asia region, and within Asia its concentrated mostly in China. 

“The 2023 exit OSAT capacity in China is 47.39% of global capacity as both Taiwan and US OSAT’s also have multiple sites in China apart from Chinese players. Clearly, China understands OSAT’s strategic importance both from the point of key product performance enabler competitive moat and gate for security of supply. China also has 3 OSAT players in the Next Generation

Advanced Packaging, 11 players in the commercial or current age Advanced Packaging and 5 players in the legacy playing architectures – a portfolio unmatchable in any geography. And China based OSAT facilities raked annual revenue of $14.68 billion in 2023, which is set to become 4x by the end of decade based on demand boost and capacity expansion within China alone,” adds Faruqui. 

While India is emerging as a very close alternative to China for a OSAT hub, but India based OSAT ecosystem build up requires strategic planning informed with China OSAT portfolio. Else, legacy OSAT being a cost-sensitive play, Indian players may face trouble commercially in the longer term, say experts. Packaging architecture portfolio selection for Indian OSATs also needs to be informed with Asia-Pacific OSAT players competitive positioning and the corresponding equipment capex need to be informed for packaging site resiliency based on India and Global decadal demand.

Raining Incentives 

Given Asia’s dominance in semiconductor backend manufacturing, recently more countries are starting to offer incentives to attract back-end semiconductor manufacturing to their shores. The latest being the US under the CHIPS ACT, the country has recently announced $1.6 billion in funding innovation across Advanced Packaging R&D areas, as outlined in the vision for the National Advanced Packaging Manufacturing Program (NAPMP).

Other countries have also made strides int enacting ATP specific semiconductor policy.

Malaysia, which per Fab Economics R&A houses ~16% of worldwide Legacy Packaging ATP capacity, has recently upped the ante by its National Semiconductor Strategy that is targeted to attract $100 billion in semiconductor investments with a starting fiscal support of $5.3 billion for semiconductor projects. Even Hungary is offering up to 34% grants for labour and capex investments. 

“India faces competition from Asian countries that offer robust ecosystems and business-friendly environments for OSATs. The US also attracts ATMPs, especially with over half of chip companies headquartered there and strong government support. However, India still holds a competitive edge,” adds Chandak of IESA. 

Changing dynamics 

Within a short timeframe, the government of India has approved four semiconductor backend projects under Semiconductor India Programme’s first phase offering ₹76,000 crore. The approved projects include US-chip maker Micron’s ATMP plant worth $2.75 billion (approved in June 2023) in Sanand, Gujarat. This was followed by Tata Electronics testing and packing plant with the investment worth ₹27,000 crores in Assam, CG Power’s ₹7,600 crore OSAT plant in a joint venture with Japan’s Renesas Electronics Corporation and Thailand’s Stars Microelectronics, and ₹3,307 crores Kaynes Semicon OSAT. There are many more in the pipeline, waiting for the government’s approval. 

However, experts say that the government might lower the incentives for backend manufacturing in the second phase of the scheme, expected to be announced later this year. P.S. Subramaniam of Kearney expresses, “In case these incentives are lowered, it will impact India’s ranking since manufacturing incentives are one of the top 5 drivers of our assessment’s ranking. However, India will still be an attractive option driven by low operating expenses (labour, utilities), and strong labour market.”  Kawoosa of Techarc says that incentives is a very big enabler helping global players to quickly decide about India as these incentives take care of a lot many disabilities that they see when comparing several other locations. He believes at least for next 10 years these incentives are crucial.

Going forward, while India’s ranking for the backend semiconductor attractiveness index would depend on various factors including the incentives offering going forward, Sumit Sadana, Chief Business Officer at Micron Technology, the only global chip player that has come to India to set up an ATMP as of now believes “all eyes are on some of these projects and it is super critical for India to make these projects successful in terms of on-time execution, efficient cost structure, high quality, very well planned and well executed ramp of output. I think to the extent that these early projects can be made successful, they can become a beacon of what is possible to be done in India and by India to the rest of the semiconductor industry. And then it could be off to the races from that point on.”