Semiconductor Dream Gets Real

SITUATED 124 KILOMETRES away from Ahmedabad’s Sardar Vallabhbhai Patel International Airport, the town of Dholera began attracting real estate developers in March this year. At that time, the landscape was mostly barren, marked by a few structures such as the Dholera office and the ReNew solar cell plant. Despite the sparse surroundings, developers were travelling from Ahmedabad with potential buyers, drawn by the promise of future townships complete with schools, hospitals, and even an airport.

What sparked this sudden wave of interest? The catalyst was Tata Electronics’ plan to build a mega semiconductor fabrication plant with an investment of ₹91,000 crore, expected to create over 20,000 direct and indirect jobs in the region. Unlike the verticals Tata Group companies have traditionally operated in, this marks the conglomerate’s foray into the global semiconductor ecosystem.

Tata isn’t the only Indian company looking to enter the complex semiconductor industry. Over the past three years, leading business houses, including Adani Group, Larsen & Toubro (L&T), Murugappa Group, HCL Group, Hiranandani, and Zoho have had teams working behind the scenes to realise India’s vision for the sector, one that remains a largely unfamiliar territory.

The opportunity is immense, given that the semiconductor industry operates as a truly global ecosystem. On an average, each segment of the semiconductor value chain involves 25 countries in its direct supply chain and 23 in supporting market functions. According to an Accenture GSA report, a semiconductor product can cross international borders 70 times or more before reaching the end customer. Furthermore, with semiconductors powering everything electronic — from devices on earth to equipment in space — globally the industry is projected to reach $1 trillion by 2030, from $600 billion in 2021, according to McKinsey. In India, the semiconductor market is expected to hit $110 billion by 2030, from $22 billion in 2019, as per a report by IESA and Counterpoint Research.

Other than the immense growth potential, incentives offered by the government under the ‘India Semiconductor Mission’ are making the industry even more attractive. “The semiconductor and electronics supply chain is truly global but concentrated in China, Taiwan, and Europe. However, post-Covid, there has been a dramatic shift where semiconductor players are diversifying their supply chains from being Taiwan-centric to different regions. The India opportunity is seen as a reflection of this shift, and Indian companies will essentially be participants in the global semiconductor electronics value chain,” says Rajeev Chandrasekhar, former minister of state for electronics & IT, under whose tenure the scheme was introduced.

However, it is easier said than done. Unlike electronics assembly, the semiconductor manufacturing ecosystem is a complex one, demanding specialised technology, advanced skills, and precise execution.

India Inc. Chips In

Despite being incredibly small, about the size of an adult thumbnail, the process of making semiconductors is highly complex. It involves multiple stages, beginning with design and moving through fabrication, testing, and packaging, and multiple steps in between, before the chip is ready for use in devices. Since it involves more than one company, India Inc. is also focusing on fabless (which solely designs chip but outsource manufacturing), foundry or chip fabrication (which use advanced facilities to produce the chips) and final stage of the semiconductor process, such as packaging the chips and testing them for quality assurance in the form of OSAT (outsourced semiconductor assembly and test) or ATMP (assembly, testing, marking, and packaging) companies.

Under Anil Agarwal’s leadership, Vedanta was the first Indian company to express interest in both semiconductor and display fabrication under the government’s incentive scheme introduced in December 2021. However, due to challenges in securing a technology partner, the company is focusing primarily on display fabrication.

Other industry leaders, meanwhile, have embarked on semiconductor ventures. Tata Electronics, under Tata Sons chairman N. Chandrasekaran, has secured government approval to establish a semiconductor foundry in Dholera, Gujarat, in partnership with Taiwan’s Powerchip Semiconductor Manufacturing Corp. (PSMC). The ₹91,000 crore project is part of Tatas’ broader semiconductor expansion strategy. Additionally, the company is investing ₹27,000 crore in a testing and packaging facility in Assam.

Murugappa Group’s CG Power has also commenced construction of the OSAT plant in Sanand, Gujarat, following project approval. CG Power has established a JV with Japan’s Renesas and Thailand’s Stars Microelectronics, with each holding equity stakes of 6.8% and 0.9%, respectively. The JV will invest ₹7,600 crore over the next five years.

Several more are in the pipeline. Adani Group plans to set up an analog fabrication plant in Maharashtra at an investment of ₹83,947 crore in tie-up with Israel’s Tower Semiconductor. Zoho has applied for a compound silicon fab. Real estate developer Hiranandani Group, via its subsidiary TARQ Semiconductors, has submitted applications for both OSAT and compound silicon fab facilities.

L&T Semiconductor Technologies (LTSCT), meanwhile, has adopted a fabless approach, concentrating on chip design, with an investment of ₹830 crore. The company plans to enter chip manufacturing only after achieving significant success and scale.

With the current proposals, including Micron’s ATMP facility, the government has already approved projects worth ₹1.5 lakh crore. The ₹76,000 crore allocated under the Semicon India Programme incentive has nearly exhausted. Centre will have to announce another round of incentives to attract additional investments and approve the proposals in the pipeline. “We are at a stage where the first phase of the Semicon India programme is practically completed. We are formulating Semicon 2.0, which will be a much-expanded version of Semicon 1.0,” says Ashwini Vaishnaw, minister of electronics and IT.

Seizing The Moment

The pandemic exposed a major semiconductor supply chain crisis in 2020, affecting numerous industries. For instance, production of $10,000 cars was halted due to a shortage of a $2 semiconductor, underscoring the vital role chips play in modern technology and manufacturing, and forcing both governments and businesses to recognise the potential for severe impacts on their operations. For some, it was a strategic move to vertically integrate their businesses, while others saw incentives as a compelling opportunity to invest.

For instance, shortly after the pandemic, L&T encountered the strategic challenge the complete dependence on imported semiconductors created for its defence vertical. Sandeep Kumar, a semiconductor veteran with over 40 years of experience in the industry, received a call from the then head of L&T Defence, who was also Kumar’s batch mate at IIT Delhi, suggesting setting up a semiconductor company in India. Within a month, Kumar met L&T’s board members and presented his ideas. The result: LTSCT was set up in 2023 with a capital outlay of ₹830 crore for a fabless chip design company. “All of L&T’s semiconductors were sourced from abroad. About 80% of the semiconductors we consume in India come from China — though not necessarily Chinese-made, but manufactured there — and if we include Taiwan, nearly all of our semiconductors originate from that region. In defence, there has always been a drive to achieve some level of independence from the global supply chain. That’s how L&T’s journey with semiconductors began,” explains Sandeep Kumar, who assumed the role of LTSCT chief executive in November last year.

But semiconductors is a business that requires large investment. For instance, setting up a semiconductor fab costs anywhere between $2 billion and $30 billion, and, therefore, it requires big markets to make it financially viable. Defence procurement, although strategic in nature, does not have sufficient volumes to justify a standalone plant. So instead of just getting into semiconductor manufacturing, L&T’s vision evolved to “let’s bring semiconductor capability and capacity into India, and once that is there on a product level, and we have that knowledge to build it here, and the talent, experience and the business wherewithal, then you can also build solutions for defence,” adds Kumar.

Unlike Tata Electronics, which is foraying into both chip manufacturing and testing and packaging, LTSCT has adopted a fabless approach — focusing solely on designing chips and outsourcing their manufacturing. The company will first develop its IPs and products, and only after achieving sufficient order volumes consider setting up its own factory for manufacturing. “It’s a trade-off between gross margins and profitability and having your own factory can help in achieving a more aggressive pricing or higher gross margins,” says Kumar.

No wonder then that the Tatas, Murugappa Group, and HCL have adopted vertical integration as a strategic approach to semiconductor manufacturing and packaging investments in India. “CG’s entry into semiconductor manufacturing marks a strategic diversification for us,” says S. Vellayan, chairman, CG Power and Industrial Solutions, in a press release.

“CG Power mainly serves end markets like automotives, industrial and transport & logistics. Therefore, it makes sense for them to extend their value chain by vertically integrating the most important and strategic component of power electronics — semiconductor chipsets, thereby enabling extension of the value chain and higher value capture for each product sold,” says Danish Faruqui, CEO, Fab Economics, a U.S.-based advisory.

HCLTech, on the other hand, boasts of a two-decade-old track record of serving the semiconductor industry. The company has partnered with numerous 200mm and 300mm fabs and OSATs, enhancing their operational efficiency, productivity, and processes by tackling complex challenges in equipment automation, data management, and process control. HCL Group has tied up with Taiwan’s Hon Hai (Foxconn) to establish OSAT operations in India.

Tata Electronics, a greenfield venture established in 2020 which specialises in manufacturing precision components, aims to enhance its global customer service through integrated offerings. “Tata Group has taken a holistic view, uniquely positioning itself in the entire value chain of the electronics ecosystem,” Chandrasekharan had said earlier. “We started by setting up a very strong manufacturing capability in Tamil Nadu, followed by a strong packaging unit in Karnataka. We are also setting up an advanced chip manufacturing facility in Gujarat and advanced chip test and assembly facility in Assam. Different types of packaging and assembly and advanced capability will happen at this facility.

Compelling Incentives

Establishing a semiconductor manufacturing plant is capital-intensive and has a lengthy payback period, a reason why governments across the world offer incentives to attract such facilities. Under the India Semiconductor Mission, the Centre is offering a 50% fiscal subsidy on a pari-passu basis for fabs, display fabs, compound semiconductors, silicon photonics, sensor fabs, and semiconductor ATMP/OSAT facilities. State governments, too, are providing 20-25% subsidies to attract investments.

With up to 70% capex subsidies offered by governments, the semiconductor sector presents a lucrative investment opportunity, which explains why groups such as Hiranandani are interested in the sector. “It has the capital to invest, and because of the schemes, it’s a good time to begin,” explains V. Veerappan, chairman, Indian Electronics and Semiconductor Association.

Zoho’s CEO and founder, Sridhar Vembu, on the other hand, is committed to creating products in India that serve global markets. Vembu views semiconductors as a crucial technology for the nation and advocates investment in industrial R&D. “Zoho is going for a silicon carbide fab, which requires lower initial investment and is more feasible compared to high-capital logic fabs,” says Veerappan.

High Stakes

In semiconductors, companies have to allocate significant funds towards fabrication and testing and packaging facilities, precision equipment, and R&D to stay competitive. “It requires an investment of $3-30 billion, and four-five years to construct a silicon fab, and another 5-10 to break-even,” says industry analyst Arun Mampazhy. In case of a compound semiconductor fab, investments can vary from a few 100 millions to a few billions with four-six years to break-even after the fab goes operational. Timelines and investments are similar for a testing and packaging plant, he adds.

The initial cost may be high, but the potential for substantial returns is just as compelling. Globally, semiconductor firms typically return 13-15%,” says P.S. Easwaran, partner and supply chain leader, Deloitte Asia-Pacific. “But the sector has short technology lifecycles for products and hence the need to refresh the portfolio and capex on an on-going basis. This means unlike in other sectors, firms cannot have a strategy of sweating assets over a long period of time. In addition, most materials, chemicals and equipment need to be imported, the efficiencies of which will be scale dependent, which could be a constraint for smaller companies,” he adds.

Semiconductors are the cornerstone of modern technology, offering both immense potential and significant risks. As demand continues to skyrocket, those who can capitalise on the opportunity will not only reap substantial rewards but also shape the future of tech innovation.