Need a fresh start

Policy for making semiconductors should be reviewed

The dissolution of the Foxconn-Vedanta joint venture is a setback for India’s ambitions to become a semiconductor manufacturing hub. The $19.5 billion project was supposed to manufacture 28 nanometre chips at a facility in Gujarat. It was the flagship of the efforts to encourage domestic research & development and semiconductor manufacturing. Both Vedanta and Foxconn have reiterated their commitment to the sector and are reported to be looking for a fresh start. It is unknown exactly why the joint venture was dissolved. It is believed attempts to involve European chipmaker STMicroelectronics were a point of contention besides financial difficulties. Vedanta-Foxconn was trying to license STM’s technology, but the government reportedly wished to have a financial commitment from STM as well.

STM possessed the know-how. Vedanta doesn’t have any expertise in this area. It was assumed that its familiarity with the Indian ecosystem would help the joint venture navigate bureaucratic complications and legal fine print. Foxconn is a contract-manufacturing giant, which means ample experience in assembling chips, but it was entering semiconductor manufacturing. Two other semiconductor proposals for India’s $10 billion subsidy scheme for the sector are said to be in trouble. ISMC, backed by Abu Dhabi’s Next Orbit and Israel’s Tower Semiconductor, has asked the Centre to hold back on considering its proposal owing to a pending merger between Intel and Tower. The consortium said it would set up a $3 billion fab in Karnataka but will wait until the merger, which has been pending for over a year. The other proposal by Singapore’s IGSS Ventures is awaiting clearance.

These adverse developments mean that while India is an acknowledged centre for semiconductor design, its efforts to become a manufacturing centre by offering incentives have hit roadblocks. In terms of policy, developing manufacturing capacity makes a lot of strategic sense. Chips are embedded in almost everything manufactured in the 21st century. There was a major supply crunch during the pandemic because China’s production was affected. The Russia-Ukraine War led to another cycle of shortages since Ukraine is a key supplier of neon, which is a crucial input. As a result, India, along with many other countries, is looking to diversify its supply chain. There could be yet another round of shortages because of the EU and the US refusing to sell sophisticated manufacturing gear to China, and China setting export controls on gallium and germanium — both key inputs — in retaliation.

However, while it’s sensible to set up manufacturing facilities, it presents an enormous challenge. Chip manufacturers require a huge scale to be cost-effective. This means large investments, often in the $20 billion range. The manufacturing process needs quantities of absolutely pure water, which places constraints on locations and requires setting up expensive water purification facilities. High-end chip manufacturing requires sophisticated technology, which very few corporations possess. Moreover, since such chips are dual-use, countries can place curbs on their export as the US and the Netherlands have done. Navigating this requires deft diplomacy. India would do well to keep trying to gain a foothold in this area, given that even domestic demand could exceed $60 billion by 2030. But it may have to reset the timelines and review its policy to attract another round of proposals after this setback.