Is semiconductor war raging in India?

Asoke K Laha, President & MD, Interra Information Technologies

Who is the winner and who is the loser in the semiconductor war today? I am sure my esteemed readers would know the context that I am referring to. I am talking about the ongoing controversy around the recent announcement of the Vedanta - an oil-to-metals conglomerate, and Taiwanese electronics manufacturing giant -Foxconn -to manufacture chips in India, which grabbed the headlines in India.  They come together under the umbrella of a joint venture to  invest Rs 1.54 lakh crore (US$20 Billion) in setting up India’s first semiconductor plant in Gujarat. The proposed plant will come up in a sprawling 1000 acres in a 60:40 ratio of equity. This perhaps, is the biggest deal in the ICT sector in the country. Reports indicate that out of the total investment of Rs 1,54,000 crore, Rs 94,000 crore will go into setting up the display manufacturing unit and  Rs 60,000 crore will be invested in the semiconductor manufacturing facility.  The Gujarat government will be obtaining necessary permissions and clearances from the state departments concerned.

It augurs well for Gujarat since the joint venture can turn the state into a major semiconductor hub and that way will create a significant number of  gainful employment and other avenues of income to  the people. The political undercurrents of the proposed investment apart, the project is the first organized effort of two world-renowned organizations handholding to manufacture semiconductors. The capital outlay needed is huge and the risk factor involved in the investment is very high. The question then boils down to: why have they  gone for a tie-up? The rationale is sound:  when world-wide there is an increased awareness of acquiring semiconductors from  their own reliable sources rather than importing from other countries, why should India play a different game. 

If Gujarat is a winner, who is the loser? The quick answer is Maharashtra, where the project was initially to come up. The state is making hue and cry about the late decision of the joint venture to relocate. But the company sources are  waiving an olive branch to the state that it  is still contemplating a second plant and assures the loser state -Maharashtra – to fulfil its development aspirations. Whether it is an appeasement or otherwise, only time can tell. 

I try to see the move of setting up the large chip making plant from another angle, or so to say,  from multiple angles. Foremost, it is bringing a new momentum in the electronics sector in India. India made several attempts to invite investments from global majors time and again. They went flat all the time because of several reasons. Foremost was that nobody came forward to invest in spite of the huge capital subsidy and other incentives extended. A few companies came forward and their interest lasted only for a limited time. Some projects were put on the backburner because of the huge cost involved in setting up the production unit, risk factors like availability of expertise, water, clean environment and a host of other issues. A few companies even suspected whether there would be adequate demand for chips once their production unit comes into stream. 

What fascinated me in this tussle between Maharashtra and Gujarat is the stiff competition between two states to attract investments. That is why Vedanta people said that they had not abandoned the proposal of setting up another unit in Maharashtra. 

I have a different take on apportioning proposals to various states. Should we not localize such units in one place so that the cost towards building an external ecosystem can be minimised? The advantage of localizing production is that it would give unlimited access to Indian electronic manufacturers to source chips at lesser cost. Presently, they are subjected to the vagaries of constrained supply. As more and more electronic units are coming up due to increased digitization, focus on smart cities, automation etc. demand for chips will be exponential, not necessarily domestically but in the world market. If India has excess chip production of quality  conforming to world standards, it could give a boost to chip export from the country, taking its contributions similar to that of the software. 

India is not a manufacturer of chips; but has huge capabilities for chip designing. As I understand, we net US$30 Billion or so annually  by way of exporting chip designs to various parts of the globe. Indian chip designers are in great demand and create the most difficult designs. That way the proliferation of chip manufacturing units in the country can create a string of designers and other related staff in the country. Our IITs, IIITs and engineering colleges etc should give a lot more  importance to reorienting the curricula for building a team of high calibre chip professionals and developers. Presently, the manufacturing base in India is zero and chips are imported mainly from countries like Taiwan, China and Japan. Made in India semiconductors could drastically reduce the prices of finished products. For instance, today a good laptop costs Rs 1 lakh.  Once the glass as well as the semiconductor chips are available, the same can be priced at Rs 40,000 or  even less. This is what the experts claim. 

As of now, there is a widening gap between the demand and supply. That is why Chinese companies are diffident in supplying the chips to outside countries. Also, it has unveiled a policy to heavily invest in chip manufacturing spending over trillion of dollars over the next 10 years. Countries like Taiwan, Japan, the Netherlands, South Korea, Vietnam, Russia  etc are focusing on chip making to meet their growing domestic demand. What does it mean? The limited rare earth that is available in the world will be split among a few countries making its availability difficult and erratic. Can India put in place a strategy that can source the rare earth from countries where it is available, especially from Africa,  Latin America or Myanmar, where such things are available, but mostly controlled by the Chinese. 

 Most of the joint ventures that are coming up in chip making are with global companies, which have access to rare earth and their expertise and experience would become handy in sourcing the materials. In that bargain, the joint venture partner will have an upper hand in running the company, though the equity participation will be more tilted towards the Indian company. One plus point is that most of the companies, whether they are Tata, Reliance, Vedanta etc. have a strong base and sufficiently capital infused to withstand the pressure exerted by the joint venture partner. 

There is a saying that when we act, we should not see only the negative sides. There can be a number of stumbling blocks on the way. That should not deter us from our goal. There is an old business dictum; no risks; no profits. That also holds good for chips making. We should not remain all the time as importers and passive onlookers of development scripted by technology. We must change tracks and bite the bullet. There are examples of dividends when we have taken risk. Car manufacturing for instance. I remember when the first Maruti car rolled out of its assembling centre, the whole body had come completely knocked down. We followed a policy of gradual localization. The results are there to see. There are other domains also that give us the courage to plunge into manufacturing with initial handicaps. Let us hope that chip manufacturing is another avenue where we should not lag whatever may be the hiccup. Let us strive, take risks and reap the benefits. That is the dynamics of growth. The other way, I am afraid, is a defeatist one.