Talks have accelerated between India and Taiwan to build a state-of-the-art semiconductor manufacturing unit in the country. Officials from both sides have met regularly to discuss the possible outcomes of Taiwan investing in a fabrication facility in India. The Taiwanese government and its major foundries, which hold the lion’s share of the world’s semiconductor manufacturing supply, have reportedly agreed to invest $7.5 billion in India to set up a long-pending fab in the country.
This comes on the back of the recently concluded Quad summit in the United States where semiconductors were recognised as one of the focus areas for the emerging and critical technologies working group which was established by the alliance. The geopolitical relevance of semiconductors has come to the forefront with each technically advanced state looking to assert itself in the global supply chain. Currently, the Taiwan Semiconductor Manufacturing Company (TSMC) remains the biggest foundry in the country accounting for almost 54% of the global revenue for global semiconductor manufacturing. India’s effort to build an indigenous semiconductor manufacturing facility is not new with multiple attempts facilitated by the state from the early 1980s itself.
The Semiconductor Complex Limited (SCL), which was set up by the Indian government at Mohali was the state’s attempt to create India’s own TSMC. SCL had the investment and the state support but a major fire in 1989 derailed its progress and it could not recover hence. Similar attempts were made with AMD’s ‘FabCity’ project in 2006 with an investment of $3 billion which succumbed to bad industry conditions. The most recent attempt was when two investor groups made separate proposals worth $10 billion, both of which were accepted by the government in 2014 but both eventually failed to achieve the desired outcome. This shows that there is both institutional support and private investment to make the fabrication facility a reality but has failed so far.
What are these deep-rooted issues that have caused repeated failures that the state needs to address this time around?
The Business Ecosystem
A semiconductor fabrication plant requires an uninterrupted supply of power and water to function efficiently. Water is absolutely critical for ensuring the smooth running of the fabrication process. For context, TSMC alone uses 156,000 tonnes of water per day to run their manufacturing plant as per their latest sustainability report. Such figures alone are enough to dishearten any state government in the country to pledge its support to build a comparable facility. There has to be a Centre-state alignment in providing surplus water and electricity in a country like India to drive the project through. This has been a thorn in India’s attempt to attract potential investors to build the plant. Acute droughts, constant power cuts and unreliable state machinery to ensure a constant supply of electricity and water to industries have discouraged anyone looking to construct the manufacturing facility.
The semiconductor manufacturing process has a critical negative externality in the form of its impact on the environment. High pollution levels, emission of toxic gases, and a massive amount of industrial effluents are all by-products of the fabrication process. With pollution levels in the country already reaching all-time highs, there is a definite need for assessing the potential impact of a fabrication plant on the environment and the local population. Considering the growth of the semiconductor manufacturing industry, the environmental degradation due to fabrication has substantially reduced in recent years. However, a fabrication facility project might have to ensure adhering to environmental regulations and its sustainability before starting large-scale operations.
International companies have constantly complained of the highly complex process of land acquisition in the country. For a semiconductor manufacturing project, access to a large amount of land is essential. Delay in the acquisition of land and the failure to streamline this process can still hamper India’s ambition to achieve its dream of becoming a major player in the semiconductor manufacturing industry.
The ease of doing business in the country has to be overhauled for achieving desired results and the fabrication facility will provide the perfect opportunity for India to relook at how the ecosystem can be changed for the better.
One of the main reasons that Taiwan became a semiconductor manufacturing powerhouse is the benefit of a technology transfer deal that they inked with the Radio Corporation of America (RCA) in the 1970s. Older technology processes were taught to Taiwanese engineers who then managed to implement them in their own foundries. India still lacks the technology that’s needed to manufacture any leading or even trailing edge technology nodes. While semiconductor design still remains a strong suit for the state, its expertise in manufacturing processes remains in its infancy. It is essential that technology transfers occur between Indian stakeholders and foreign entities before any plant starts its operation.
There is also the question of the presence of skilled labour in the manufacturing sector. Semiconductor manufacturing, unlike other manufacturing units, consists of a large variety of advanced equipment to be used. They need skilled workers who are trained in handling and operating these machines. With the entire manufacturing sector in India still not able to reach the heights of global powerhouses, it is necessary to provide basic training to individuals who might be employed in the foundry. Fabrication of semiconductors still remains a complicated process and will need expertise personnel in the domain to succeed.
Earlier attempts at building a semiconductor fabrication facility in India never took off due to the country’s protectionist trade policy. The equipment for the manufacturing process such as photolithography tools and chip testing tools had to be imported from technically advanced states such as those in Europe and Japan. But high import duties which were levied on such goods further prevented these countries from exporting their manufacturing equipment to India. The non-availability of domestically procurable semiconductor-grade materials also made the country heavily dependent on imports to get into the manufacturing field.
Taiwan, during the talks held, has called for a trade deal with India that would effectively lower import tariffs on specific semiconductor manufacturing materials and equipment. This would provide the Taiwanese government, and whoever is involved in the project, the incentive to pump in investments and carry the project forward to its completion rather than abandoning it midway due to increased costs. The Taiwan semiconductor industry has blossomed and managed to dominate the sector due to its liberal trade policies in the 1970s slashing custom duties and tariffs on specific goods or materials which helped them grow the domestic semiconductor industry.
India must look at this as an opportunity to build a robust semiconductor supply chain in the country and grant certain custom duties concessions to both the Taiwan government and companies who are willing to invest capital here. Upfront economic incentives like capital expenditure support and tax exemptions rather than reimbursements can increase support and investments for setting up the fab. The government under its Industrial Policy of 2020 can also provide monetary support to those expressing interest in driving forward the project.
The semiconductor manufacturing industry is a highly capital-intensive field that would require a continuous inflow of money to keep it competitive on the global stage. Leading-edge nodes such as the digital 5nm and 3nm technology are the future but India with its institutional capacity must focus on manufacturing other trailing edge nodes like the analog 65nm technology which is less capital intensive but provides equal leverage on the global market.
While some critics have argued for India to focus on playing to its comparative advantage of semiconductor design only, a fabrication facility in the country is going to benefit the overall progress of the industry in the long run. But just inking deals of investment for setting up the fab will continue the historical trend of pulling the plug on similar projects. The inherent issues that prevented India from getting a world-class semiconductor fabrication facility in the past must be resolved for any progress in the future.
DISCLAIMER: Arjun Gargeyas is a research analyst and Pranay Kotasthane is deputy director at the Takshashila Institution
(The views expressed in this article are those of the author and do not represent the stand of this publication.)