Growing the indigenous semiconductor industry in the defence sphere will be a challenging endeavour
Atul Chandra
India is making a concerted push to grow its semiconductor industry to grow self-sufficiency in both the commercial and defence spheres. According to the National Investment Promotion & Facilitation Agency, the Indian semiconductor market is valued at approximately USD 23.2 billion, which it projects would grow to USD 80.3 billion by 2028, growing at a compound annual growth rate (CAGR) of 17.10 per cent during the forecast period. According to the report on India’s Semiconductor Strategy by Dr Saroj Bishoyi, Research Fellow of the Vivekananda International Foundation, “India currently imports almost 100 per cent of semiconductors. It spent USD67.637 billion on electrical machinery and equipment imports (about 9.5 per cent of India’s total import) in FY 2022-23.” He adds that demand for semiconductors will further increase as India targets to achieve US D300 billion worth of electronics manufacturing in India and USD 120 billion in exports by FY 2026-27 from USD 23.57 billion in FY 2022-23, to realize the goal of a USD 1 trillion digital economy by 2025.
Start-Up Mode
In March 2022, the Government of India announced the launch of the Semicon India programme with a total outlay of INR 76,000 crore for the development of the semiconductor and display manufacturing ecosystem in India. The India Semiconductor Mission (ISM) has been set up as an independent business division within Digital India Corporation and will drive India’s long-term strategies for developing semiconductors and display manufacturing facilities and semiconductor design ecosystem. The costs of developing a homegrown semiconductor industry are considerable.
In February 2022, the Ministry of Electronics & IT announced that three companies—Vedanta in JV (joint venture) with Foxconn, IGSS ventures pte, Singapore, ISMC had submitted applications for setting up 28 nanometre to 65 nanometre Semiconductor Fabs with a capacity of approximately 120,000 wafers per month. The companies had projected an investment of USD 13.6 billion with the expectation of nearly USD 5.6 billion in fiscal support from the Central government. Vedanta and Elest had submitted applications for display fabs at a projected investment of USD 6.7 billion with USD 2.7 billion worth of government support expected.
However, in 2023, Foxconn announced that it was pulling out of its JV, Vedanta Foxconn Semiconductors Pvt Ltd (VFSL) which had planned to invest USD 19.5 billion to set up semiconductor and display production plants in India. Rajeev Chandrasekhar, minister of state for electronics & information technology, skill development & entrepreneurship had clarified then, that VFSL had originally submitted a proposal for a 28-nanometre fab, but could not source an appropriate tech partner for that proposal. Vedanta however has moved ahead on its own for a 40-nanometre fab proposal backed by a tech licensing agreement from a global semiconductor firm.
Mixed Results
In an article in the Hindu newspaper in January, Pranay Kotasthane, Deputy Director of the Takshashila Institution and Chair of its High Tech Geopolitics Programme said that the USD 10 billion Semicon India Programme has had mixed results at best. It was meant to achieve three goals he says: the first to reduce dependence on semiconductor imports (particularly from China), especially in strategic and emerging sectors, ranging from defence applications to artificial intelligence (AI) development; the second was to build supply chain resilience by integrating into the semiconductor global value chain (GVC) and the third was to double down on India’s comparative advantage. India already plays host to the design houses of every major global semiconductor industry player and Indian chip design engineers are an indispensable part of the semiconductor GVC.
He says that an overhauled “Semiconductor Design-Linked Incentive” scheme would fortify India’s comparative advantage and augment its forays into other stages of the semiconductor global value chain. He however highlights that since its announcement, the Semiconductor Design-Linked Incentive (DLI) scheme has approved only seven start-ups, far short of its target of supporting 100 over five years.
In Kotasthane’s piece on Analysing India’s Policies v2.0 in September 2022, he noted that trailing-edge fabs (45-65 nanometre nodes*) are crucial for India, with demand for older node sizes not about to disappear anytime soon. Future applications such as 5G radios and electric vehicles will continue to require manufacturing at these nodes. Most current defence applications also require trailing-edge chips.
(*The node size is a rough measure for the size of a building block in a chip. The smaller that number, the more building blocks can be packed in the same area resulting in higher performance).
Challenges Abound
The nascent effort to grow the semiconductor industry to cater to the defence sector is also bound to face serious challenges unless the scope is clearly identified. Should India invest in developing semiconductor capability for its strategic assets such as long-range missiles, ballistic missile submarines, space-based sensors, ballistic missile defence, etc or focus on the development of cost-effective indigenous chips for dual-use equipment such as electro-optical/infra-red (EO/IR) sensors, robotics, communication devices, command and control infrastructure, etc? Challenges abound with this approach as India has a defence ecosystem that is yet to attain self-sufficiency and one that is largely predicated on license manufacture of defence equipment from abroad or development of indigenous defence equipment with high import levels related to engines, radars, avionics, weapons and communication and navigation systems. Military equipment also comes with stringent certification requirements and small order volumes relative to the commercial sector.
There is no doubt that a country as large as India should have a robust in-country semiconductor manufacturing capability. However, as compared to the United States (US), Taiwan, South Korea, Japan and China India has much lower levels of manufacturing capability and poor infrastructure and will take decades to achieve the economies of scale attained by these nations. Growing the semiconductor industry in the defence space will be particularly challenging due to the closed nature of the defence business, proprietary intellectual property (IP) of defence technology from foreign original equipment manufacturers (OEMs), cost of recertification to utilise domestically produced chips and low volumes as alluded to earlier. Despite India having a sizeable market for computer chips in the commercial domain, it is decades behind the US, Taiwan, South Korea, Japan and China with regards to having a homegrown semiconductor industry. Hence a clear focus will be needed to develop a defence semiconductor industry in the country.
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