2 Chinese roadblocks to India's semiconductor ambition

Two essential minerals to manufacture semiconductors and advanced electronics are gallium and germanium. China accounts for 98% of global production of raw gallium and 67% of global production of raw germanium, very cost-efficient in making their products but announced export controls earlier this month, which will come into effect from August 1, 2023. Both minerals are in India's list of 30 "critical minerals." The country produces a little gallium as a byproduct while producing alumina depends entirely on import for germanium – as the Ministry of Mine's June 2023 report "Critical Minerals for India" says.

China's action is retaliation against the US, European Union and Japan which have cut it off from export of chips and chip-making equipment. This trade logjam is likely to have serious repercussions for the semiconductor and electronics sectors worldwide. Given the border-diplomatic-trade tensions between the two, India's direct business with China is already under stress. As scarcity hits global production and supply, India would be at the receiving end from either side. A similar fate awaits India in EV and mobile phone manufacturing as China dominates the global production and supply of lithium needed for lithium-ion batteries.

How does India navigate the challenges? The India Semiconductor Mission (ISM) would have to spell that out.

ISM: Need to go back to the drawing board

Notwithstanding the brouhaha over the "Semicon India 2023" event at Gandhinagar on July 28 in which some of the world's leading semiconductor producers participated, India needs to go back to the drawing board to make the India Semiconductor Mission (ISM) a success. Two particular recent developments, including the Micron's MoU with the Gujarat government to set up a $2.75 billion facility in Gujarat, explain why.

What exactly is Micron's project?

Its June 22, 2023 announcement needs careful reading as it gives a full picture of what is to be expected. The announcement says three things: (i) Micron would be setting up a new "assembly and test facility" in Gujarat under the Centre’s "Modified Assembly, Testing, Marking and Packaging (ATMP) Scheme" (ii) the total project cost is "up to $2.75 billion" of which (iii) "Micron's investment will be up to $825 million" (30%) and the rest will come from India – "50% fiscal support for the total project cost" from the Centre and "20% of the total project cost" as "incentives" from the Gujarat government.

On June 28, 2023, the Gujarat government signed an MoU in presence of Union Minister for MeiTY Ashwini Vaishnaw. The Gujarat Chief Minister's office (@CMOGuj) tweeted that this was for "setting-up ATMP facility at Sanand". 'ATMP' stands for "Assembly, Testing, Marking and Packaging (ATMP)"– the same as the Micron's June 22 declaration – that is, an assembling facility. Vaishnaw, however, tweeted to describe this as "India's first manufacturing plant", thereby creating doubts about the exact nature of the facility.

That is because the MeiTY offers three distinct and separate schemes under the "Modified Programme for Semiconductors and Display Fab Ecosystem" for support.

· Two of these are for setting up (i) "semiconductor fabs and display fabs" (manufacturing) and (ii) "compound semiconductors/silicon photonics/sensors (including MEMS) fabs/ discrete semiconductor fabs and semiconductor ATMP/OSAT units". Under these two, the MeiTY gives "fiscal support of 50% of project cost".

· The third scheme is for (iii) "semiconductor design companies" (designing) for which the MeiTY gives "Design Linked Incentive (DLI) Scheme" of "50% of eligible expenditure" and also "product deployment linked incentive of 6%-4% on net sales for five years."

· The fourth scheme is for the "modernisation and commercialisation" of the Mohali’s "Semi-conductor Laboratory (SCL)" for which the MeiTY “will take requisite steps".

Clearly, Micron's facility falls in the second scheme (ATMP) – which is not "semiconductor fabs and display fab" or manufacturing nor the DLI-support for "design companies" or designing. Besides, Micron's June 22 statement makes it very clear that its Sanand facility "will enable assembly and test manufacturing for both DRAM and NAND products and address demand from domestic and international markets" in two phases. Phase I "will include 50,0000 square feet of planed cleanroom space" and Phase II "will ramp capacity" and "would include construction of a facility similar in scale to Phase 1."

So, neither phase I, nor phase II of the Micron’s facility will either manufacture or design chips.

However, in future, India may sign an MoU for manufacturing or designing chips with Micron or any other manufacturer. But that is for the future, although not unlikely. Remember, India’s automobile sector (both cars and bikes) came up first as assembling facilities and then expanded to manufacturing.

Incidentally, the "modified" schemes were issued by the MeiTY on May 31, 2023 after the Vedanta-Foxconn's Gujarat project (the MoU had been signed in September 2022) failed to take off – without explaining what was modified.

Misdirected priorities

Two questions arise from the MoU with Micron.

The first is about the government's actual mission. The "India Semiconductor Mission" says[10] it "aims to build a vibrant semiconductor and display ecosystem to enable India's emergence as a global hub for electronics manufacturing and design." Micron's facility is neither. An ATMP facility comes at the bottom of the semiconductor value chain. Nevertheless, it is a welcome development.

The second is about the business model.

Since Micron will invest 30%, and India the rest 70% (50% by the Centre and 20% by the Gujarat government), will it be a CPSU, controlled and run by the government of India? Will it be a joint venture of Micron-Government of India-Gujarat government? Or will it be a private entity controlled and run by Micron? This needs to be clarified as that will determine how Micron and India share profits/dividends generated from the Sanand facility.

The other recent development (mentioned at the beginning) is about the stillborn Vedanta-Foxconn’s Gujarat project, announced in September 2022.

Foxconn pulled out of it a few days ago. But by then the project was dead because (a) neither Vedanta nor Foxconn had the technology to manufacture 28nm chips and (b) neither found a technology partner or a manufacturing-grade technology license for eight months. This led to MeiTY's "modified" schemes on May 31, 2023.

Why and how the deal was signed in the first place? Why did the Centre announce 40% "capital subsidy" and the Gujarat government a host of other incentives (subsidised land, power tariff, electricity duty, water supply, stamp duty and registration fee etc.) – as MoS for MeiTY Rajeev Chandrasekhar told in the Lok Sabha on December 7, 2022?

But these are not the only issues with the ISM.

Subsidy-filled drawing board

What policies, plans and strategies have been prepared to achieve the ISM's "aims?"

The ISM website only talks about (i) fiscal incentives of 50% of project cost and (ii) DLI incentive for which ₹76,000 crore has been kept aside, which includes "product deployment linked incentive of 6%-4% on net sales for five years".

There are two additional incentives under the Production-Linked Incentive (PLI) schemes, to develop a domestic semiconductors and display manufacturing "ecosystem" (DSDME) by promoting electronics manufacturing with semiconductors as the foundational building block.

These are: (ii) ₹55,392 crore for large scale electronics manufacturing, IT hardware, SPECS scheme and modified electronics manufacturing clusters (EMC 2.0) and (iii) ₹98,000 crore for allied sectors comprising of ACC battery, auto components, telecom and networking products, solar PV modules and white goods.

Sure, chips are indispensable in today's world and form essential components of electronic devices, enabling communications, computing, healthcare, military systems, transportation, clean energy and countless other applications (smartphones, radios, TVs, computers, automobiles, medical equipment, video games and much more). India must do whatever it takes to design and manufacture chips and also develop the "ecosystem" (DSDME).

But that calls for more than just subsidies.

Fundamental challenges to chip-making

In March 2023, senior MeiTY scientist Prashant Kumar said India possessed a big talent pool of semiconductor design engineers, but no skilled manpower to manufacture. This is known for long but the problem is, those design engineers work for multinationals like Micron, Intel, Samsung Electronics etc., not for any domestic company.

So, the first priority is clear: designing chips. Manufacturing chips should be a long-term goal.

A beginning should ideally be made to acquire and foster designing talents and then graduate to manufacturing talent. What would this take? Developing a semiconductor ecosystem is not only about technology or talent.

Assuming that India overcomes the talent and raw material problems, for any industry sector or segment to thrive also needs skilling (education and training), investment (as distinct from fiscal support/incentives) and conducive business environment – level-playing field, open competition, quick administrative and legal clearances, efficient dispute resolution mechanisms etc.

There is a yet another factor to be considered. In the short run, chips assembling may turn out to be another mobile phone sector. As Raghuram Rajan and other economists have pointed out by studying the trade data, India is assembling mobile phones, rather than manufacturing, and exporting the assembled sets. In the process, India is running up huge bills on importing the components – leading to higher and higher trade deficits in the sector.

The ISM needs to go back to the drawing board.