India-US Semiconductor Cooperation

Recent Features

Features | Economy | South Asia

India-US Semiconductor Cooperation

Can India insert itself into the pantheon of global chipmakers with a little help from Washington?

India-US Semiconductor Cooperation
Credit: Depositphotos

The United States, in a quest to insulate critical technology supply chains from China, wants to expand its partnerships on building semiconductors with like-minded countries like India and Taiwan. Washington has pledged to assist India in the building of this sector. India is expecting to bring in a total investment of around $25 billion as a result of its incentive scheme, which will aim at boosting the local manufacturing of semiconductors. The goal is to make India a major player in the global supply chain.

How can India make the most of out of this opportunity?

The Modi government has ambitions to make India a leader in cutting-edge technology, with semiconductors as the “foundational building block” of that goal. In December 2021 the government passed a program to spend $10 billion developing the semiconductor industry in the country. With the United States as the world leader in that regard – and with both countries uneasy about China’s growing influence in the semiconductor sector – the India-U.S. partnership seems like a natural step.

Indian industry is largely optimistic about the India-U.S. deal. Sunil G. Acharya, vice president at India Electronics & Semiconductor Association (IESA) says that most American semiconductor majors, including Intel, Texas Instruments, Micron, and others already have a good presence in India. The Indian units of these majors are involved in semiconductor design and validation and other support services. Additionally, there are several established fabless domestic players who offer design services to global companies across industry segments. 

Indian academics have some interesting points to make in this regard. Dr. Abhinav Kumar Sharma, a professor of operations and data science at NMIMS University in Mumbai, feels that there are still too many unknowns to predict the scope and future of this India-U.S. semiconductor partnership. “India is currently nascent in the semiconductor manufacturing industry,” Sharma said. “The government of India is focused on providing impetus to the manufacturing sector through Production-Linked Incentives (PLI) scheme.”

Acharya believes that when American semiconductor companies, incentivized by the CHIPS and Science Act, look to expand or establish semiconductor manufacturing in the United States, there is a good possibility that they will consider expanding their design, R&D, and support services footprint in India.  This will help overall innovation in the industry.

It is true that many global giants are adopting a “China Plus One” policy to reduce their dependency on China for manufacturing. India is becoming one of the key beneficiaries of this policy, particularly in the semiconductor and allied industries. The Indian semiconductor industry has received pledges of multimillion-dollar investments from domestic conglomerates such as Tata Group and Adani. Further, in recent years, world-class academic institutes in India have increased their focus on research in the field of advanced semiconductor technologies. An outcome of this was SHAKTI, an open-source processor developed by IIT Madras. 

Having been worth $27.2 billion in 2021, the Indian semiconductor industry is projected to grow to $64 billion by 2026, representing a compound annual growth rate of 19 percent. But none of these chips are manufactured end-to-end in India so far. And though American companies have shown a lot of hope for India, there still seems to be a disparity between what has been assured in rhetoric and what has been committed to on paper. 

Critics of the collaboration in India state that in the last seven to eight years, India seems to be lost in the global market. It is just attempting to mimic the West without understanding the differences between the two. 

When it comes to semiconductors specifically, India has not been able to commit the needed capital to such a complex and capital intensive industry. As a sign of continued weakness in the domestic sector, in 2019, India’s semiconductor imports were at $21 billion, and that figure has grown by an average of 15 percent every year.

The Indian National Congress, India’s main opposition party, feels that the MOU signed between industry representatives of the United States and India looks like a step in the right direction, but falls short of delivering anything of substance.  

“This government might have big ambitions; however it does not have the competence to fulfill them,” said Pawan Khera, national spokesperson of the Indian National Congress. 

“On the face of it, this deal seems to be more of a geopolitical game rather than a trade deal,” Khera added. 

The opposition feels that the United States just wants to undercut the Chinese dominance on semiconductor manufacturing and is luring India to play the role of a regional proxy in this game. India has unwisely agreed to a deal that offers them nothing other than assurances. The right way for India to emerge as a global supplier of semiconductors is to strengthen its own industry. “We must assist, protect, and preserve our semiconductor industry,” concluded Khera.

The United States has always focused on developing its own industry. India must not lose focus while dealing with big players. India’s political opposition points out that the country must focus on building an independent industry of its own rather than being a junior partner in insubstantial MOUs and one-sided deals. They believe that if India allows this deal to go forward, it will cause a major breakdown in its own semiconductor industry, which will have a major repercussion for the country’s small and medium enterprises in the sector. 

This is India’s chance to be a global player in the semiconductor sector, but success is not guaranteed. India’s government must provide its homegrown industry with the needed help, both financially and material-wise, and strike the right balance between accepting U.S. partnership while not letting Washington dictate terms. 

The recent semiconductor manufacturing incentives rolled out by the government of India offer an opportunity for American companies to expand their capacities in India and also de-risk their supply chains. It also allows American companies to leverage the skilled workforce in India to build capacity and invest in catalyzing R&D in the semiconductor and related industries. “Both the government of India and the governments in [Indian] states have instituted policies to help assist in ease of doing business for American companies,” said Acharya.

“Historically, the electronic manufacturing sector in India suffered because of a lack of adequate infrastructure, domestic supply chain and logistics, high cost of finance, and limited focus on R&D by corporate[s],” said Sharma. “With the Production-Linked Incentive scheme and national policy on the electronics manufacturing industry, the government is encouraging the industries to develop core components and compete globally. The PLI scheme aims to encourage local manufacturing and make India self-reliant. The Indian government is trying to position India as one of the most appealing destinations in Asia for electronics and semiconductors.”

India seems to be on the right path with its PLI scheme, which extends an incentive of 4 percent to 6 percent on incremental sales (over the base year) of goods produced in India for a period of five years following the base year. A separate Design-Linked Incentive (DLI) scheme offers monetary incentives and design infrastructure support across various stages of development and deployment of semiconductor and chip designs for a period of five years.

Khera feels that the future is bright if India plays its cards right. “We must not fold under pressure and agree to deals that do more harm than good. The collaboration between the U.S. and India makes sense if both are equal players, which is not the case in this deal,” he argued.

“India must choose the independent path, build its industry, make it strong and bulletproof and then we can sit on the table for a deal where the interests of India are furthered along with the United States’, rather than India being merely fodder for a geopolitical supply chain war.”

India-U.S. cooperation cannot be perceived as restricted to any particular field. India is expected to be a hotbed of semiconductor industry innovation, which will help advance technologies in many different fields, including construction, logistics, etc. Sharma said that the current logistics cost vis-à-vis the GDP is around 16 percent in India, which will significantly go down with the improvements expected due to the expansion of this field. The United States can be a significant partner for India in ensuring smoother supply chains. This is evident from their current logistics cost as compared to the GDP, which is close to 7.5 percent. 

“Any economy prospers with efficient supply chains and the industrial development that comes along with it,” Sharma said. “The bottom line here is that our government has proactively taken steps in the direction that will evidently bring prosperity to our people through development.”  

The atmosphere looks positive and India is hopeful of building the right supply chains worldwide in the future. Semiconductors are more of a necessity than a mere ambition and the government looks set to deal with all kinds of challenges that will come in the way. India has made it clear – it wants homegrown semiconductors that will allow it to end its reliance on other nations for chips.

But it won’t all be smooth sailing. Sharma pointed out that “the Russia-Ukraine war resulted in an acute shortage of inert gas, which is critical to manufacturing a semiconductor chip. The Indo-U.S. cooperation has a great scope in mitigating the exacerbating problems arising from such volatile global conditions.”

With the war not showing any signs of stopping, the collaboration and its expected output may be adversely affected. How does India plan to deal with it?

Acharya thinks the nascent state of India’s industry might actually be a strength in this regard. “These materials are used primarily in semiconductor manufacturing and here we don’t manufacture semiconductors, except for what happens at SCL [the Semi-Conductor Laboratory]. So, from an Indian perspective, we are not directly impacted by this shortage as we do not consume these chemicals for semiconductor production.”

India claims that they had evaluated this right when the war began, and that the shortage of neon and other gases is greatly going to affect countries like the United States and South Korea that manufacture semiconductors. If the war continues there could be an impact on manufacturing in the long term, and not just due to shortages on inert gases. 

One must note that more than 60 percent of the raw materials needed for this industry – chemicals, minerals, and gases – go through China. 

India claims to have a core interest group comprising various leaders who are already focusing on this space to see if they can develop a policy to end dependency on China for sourcing. “I think India can play a vital role in the supply of raw materials. It is a long process but we need to start working on it,” Acharya said. 

According to sources, the Indian government has had meetings with the country’s major steel plants and is trying to come up with a solution to the shortage of raw materials, though right now, there is no immediate dearth. Plans to deal with a potential shortage are going to be rolled out soon.

Overall, the industry looks to be highly satisfied with the way the India-U.S. semiconductor partnership is being acted out. The opposition has raised some pertinent concerns, which the government is also aware of. Now the proof will be in the results. India wants to build its own raw materials industry and remain firm on its China-Plus-One strategy. The action has begun and huge investments are being made to help India become self-reliant in the chips industry. If the United States stays true to its promise, India may become a big player in the semiconductor arena.