semiconductor: India’s semiconductor future: Choosing the right development model for the industry is essential

As the second phase of the semiconductor policy, Semicon 2.0, approaches, the first phase has already proven successful in raising awareness about market potential, workforce scalability and deep engineering talent, leading to significant investments and policy reforms in semiconductor manufacturing. Now, the focus should shift to execution, which is crucial for success. This phase demands a robust strategy, effective execution and a passionate commitment to thrive.
In the next couple of years, India should aim to establish at least two semiconductor companies among the global top 10 and attain self-sufficiency in critical infrastructure across power, communications, space and defence sectors. To realise these ambitious goals, India must carefully select a development model for its semiconductor industry.

One approach is to support multinational companies (MNCs) that dominate the global semiconductor market. Backing these large semiconductor companies that already control the lion’s share of the sector and boosting them with subsidies will aid manufacturing and make them competitive. It is crucial to note that we are not only subsidising their manufacturing, but also granting them access to our market. This model closely resembles the IT business model of servicing global companies, which has been widely adopted in the past.

Changing track

The alternative is another time-tested model —The Taiwan model — that focuses on building a global semiconductor industry by empowering local MSMEs and creating job opportunities on a massive scale. This model enabled Taiwanese companies to dominate the semiconductor sector by creating a strong ecosystem supported by thousands of MSMEs and driving job creation.

Culturally, India is well-suited for the second model. We possess a unique depth of talent in design that no other country can match. Adopting this model will also ensure that Indian chip companies primarily benefit from government subsidies, fostering local innovation and sustainable economic growth.

The semiconductor ecosystem is built on a vertically integrated foundation laid 60 years ago. It is now evolving into hundreds of autonomous companies that collectively contribute to the production of a single chip. However, this has led to a ‘too big to fail’ syndrome, where a few dominant players control each segment of the industry.

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This traditional model has skewed investments and profitability in their favour, forcing smaller companies to rely on government subsidies. Hence, India should adopt a smaller, agile model that allows for experimentation and customisation. For instance, this can be achieved by establishing small captive fab for specific products and a strategically integrated business model where product companies drive the capacity creation and not vice versa. Today, despite massive capital investments, low utilisation remains a persisting challenge.

Helping hand

India’s semiconductor dreams should also allow for setting up of fabless chip companies. Despite possessing the skilled manpower, lack of experience and monetary investments hinders chip development in India. While the government’s Design Linked Incentive (DLI) is a commendable policy, long term sustainability in the sector requires additional partnerships from private players to productise software and get designed into systems. The private sector can step up to provide support and drive success.

Hence, instead of subsidising thousands of crores to established firms, the government can leverage the MSME sector, which, with capital investments in the range of `50 crore to `100 crore, can play a vital role in semiconductor manufacturing equipment, consumables and materials while making a significant contribution to the country’s GDP. There are global players eager to partner with Indian companies, and this collaboration can drive significant job creation.
Unlike larger MNCs, which tend to have higher profit margins primarily for investor returns, MSMEs operate on thinner margins, ensuring that their earnings are reinvested into the economy.

Semiconductor companies employ more software engineers than chip designers, giving India a significant advantage in software scalability and expertise. NASSCOM’s role would also be instrumental in shaping the ‘Indian model’.

The author is founder of iVP Semi. Views expressed are personal

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