A global chip shortage, sparked by the Covid-19 pandemic in early 2020, severely impacted manufacturing around the world. Automobile, consumer and industrial electronics, computing and data storage, and wireless communication were among the worst-hit sectors. Global auto production slumped by 26% due to acute chip shortage during the first three quarters of 2021. Automakers in India were forced to cut output by up to 40% during this period.
Production of electronic goods and other chip-dependent sectors were also affected. The global chip shortage lingered for almost three years forcing chip-dependent industries to cut production leading to job losses. The chip supplies normalised in 2023. However, apprehension about China’s military aggression against Taiwan and continued geopolitical tensions in West Asia led to some supply disruptions and shortages this year as well.
One of the key reasons for the global chip shortages is the overdependence on a few countries. Only a handful of countries manufacture chips. It is dominated by Taiwan, China, South Korea, and the United States. More than half of the global supply comes from Taiwan and China. Any disruption in supply from this region would cripple manufacturing in several sectors, especially automotive and electronics, around the world.
To lessen this vulnerability, Prime Minister Narendra Modi’s government has come up with incentive schemes to attract global semiconductor manufacturers to set up units in India. At the height of the global chip shortage and the Covid-19 pandemic, an initiative called ‘Programme for Development of Semiconductors and Display Manufacturing Ecosystem in India’ was notified in 2021 with an outlay of Rs 76,000 crore. Under this initiative, the government provides a fiscal incentive of 50% of the project cost for setting up semiconductor manufacturing facilities in India.
“Chips are never down in 21st century India. Today’s India gives the world the confidence that when the chips are down, you can bet on India,” Modi said at the SEMICON India 2024 this week, rolling out the red carpet for global semiconductor firms.
So far, five semiconductor units with a combined investment of around Rs 1.5 lakh crore have been approved under the government’s incentive scheme. “I think within the next decade, India can be a leader on the world scale," said Bob Pragada, CEO of engineering services company Jacobs.
In June 2023, the first project was approved. The project being run by US-based Micron Technology is expected to roll out the first batch of chips packaged at its Sanand unit in Gujarat early next year. The total investment in the project is pegged at $2.75 billion, of which Micron has committed $825 million.
Three semiconductor units with an investment of Rs 1.26 lakh crore were approved in February. Another unit with an investment of Rs 3,300 crore was approved early this month.
Out of the five semiconductor projects approved by the union cabinet so far, four are to be set up in Gujarat, while one will be in Assam. These five projects have exhausted almost the entire Rs 76,000 crore incentive outlay announced by the government in 2021.
Akash Tripathi, CEO of India Semiconductor Mission, recently indicated that the government may come out with additional incentive plans to attract more semiconductor projects in the country. According to Tripathi, the target is to increase the number of semiconductor plants in India to 10 in the next 10 years.
“India alone consumes more than a billion chips annually and global consumption may be as high as a hundred billion,” said Shashwath T R, CEO of Mindgrove Technologies.
Semiconductor manufacturing is a very complex and technology-intensive sector. It is highly capital intensive with long gestation and payback periods. While India already accounts for around 20% of the global workforce in chip design, full-fledged manufacturing units need different skill sets. The supply chain is another issue where India needs to get its act together. Rapid changes in technology require significant and sustained investments. As government incentives seem to be the key driver of the investments in the sector so far, it would be interesting to see how it is sustained.
The use of semiconductors or chips is widening with the advancement in technology. It plays a critical part in the manufacturing of electronic products like smartphones, cameras, and computers. In cars, functions like power steering and entertainment systems are dependent on chips. The increasing adoption of artificial intelligence (AI) will further widen the use of chips in almost all sectors of the economy.