India needs chipset manufacturers — lots of them. Here is why.

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India needs chipset manufacturers — lots of them. Here is why.
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  • The global $450 billion semiconductors industry got blindsided — due to the global pandemic — after a massive demand for semiconductors.
  • The crunch led to supply chain issues as the industry relied on a few giant players.
  • Ford, Nissan, Volkswagen, Fiat Chrysler and Toyota were some of the top automakers that curtailed production amid a global semiconductor shortage.
  • Operations of mobile manufacturers Lava and Micromax were almost stuttered to a halt after its chipset supplier, MediaTek, ran out of stock.
A few months back, when the companies worldwide started recovering from the pandemic-hit lows, they had no idea that another challenge was waiting for them. From electronic appliance makers to car manufacturers and mobile makers — all had to hold back the production after the $450 billion industry for semiconductors got ravaged by the after effects of the Covid-19 pandemic.

A massive surge in demand for consumer electronics, globally, due to work from home practices adopted by firms and a sharp uptick in personal vehicle sales amid the virus fear caused the crisis.

The semiconductors form the DNA of a wide variety of new-age gadgets like smartphones, computers, industrial equipment and cars. They are also sought for emerging markets of AI, computing and advanced wireless networks.

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Manufacturers had to shut production plants



This could not have come at a worse time for the beleaguered businesses — which just began to show the signs of recovery, and the sales were beginning to rebound after a torrid first half.

In December, India's largest automotive components maker Robert Bosch was grappled with challenges after a severe shortage of imported components, hampering its ability to cater to the automotive market demand in the fifth largest automobile market worldwide. Just days after Bosch, One of India's largest automakers Mahindra & Mahindra, said it was bracing itself after the recent disruption caused by the industry's semiconductors shortage.

"Operations of the company in the automotive sector will be affected by global supply shortage of micro-processors (semiconductors) used in electronic control units (ECUs) which are supplied by Bosch," automaker Mahindra said in a statement.
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Ford, Nissan, Volkswagen, Fiat Chrysler and Toyota were some of the top automakers that curtailed production amid a global semiconductor shortage.

The shortage impacted production in other industries too, such as smartphones and electronics. Operations at mobile manufacturer Lava and Micromax were almost stuttered to a halt after its chipset supplier MediaTek ran out of stock. The chip shortages also forced Apple to push back the rollout of its latest lineup of iPhones until early November.

What are semiconductors, and why did companies run out of them in 2020?



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Semiconductors are typically silicon chips that perform control and memory functions in products ranging from computers and cellphones to vehicles and microwave ovens.

The world saw an unprecedented demand for servers, internet connectivity and cloud usage as online collaboration grew massively during work from home. And according to the EY report, the semiconductors industry was already facing a demand-supply crisis and the delay in imports from China after the Indo-China clash at the Galwan Valley added fuel to the fire. The OEM’s faced massive supply chain issues after the government implemented curbs on imports from china.

The industry also relied on a few global players — which led to the crisis after a huge demand surge. China and Taiwan own a significant portion of the semiconductor manufacturing market in the world.

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“Semiconductor manufacturing is a complex global intertwined ecosystem, which has led to a supply chain that is vulnerable to macroeconomics, geopolitics and natural disasters,” the report added.

The auto industry is using more semiconductors than ever before in new vehicles with electronic features such as Bluetooth connectivity and driver-assist, navigation and hybrid-electric systems. According to data research firm International Data Corporation (IDC) forecasts that globally, the mobile phone semiconductor revenues will grow by 11.4% in 2021 to $128 billion.

Here’s how the demand for semiconductor stacks up around industries in India

CategoryDemand ShareTotal Value
Communication33%$136 billion
Computer28.50%$117 billion
Consumer13.30%$54.7 billion
Automotive12.20%$50.2 billion
Industrial11.90%$48.9 billion
Government1.30%$5.2 billion
Source: Semiconductor Industry Association, 2020
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Can you set up a chipset business in India?



The EY report highlighted that the semiconductor manufacturing process requires unique and sometimes scarce raw materials and chemical substances. Due to their unique and specialised character, these tend not to be widely available and can sometimes only be mined in conflict areas.

The scarcity of semiconductors in the past few months brutally exposed India's original equipment manufacturers' soft underbelly — their heavy reliance on imported components. The government has also introduced an ambitious production-linked incentive (PLI) schemes to encourage in-house production. The most important here is semiconductors or chips that form the central component of items from auto to laptops and mobile phones — as the current disruptions showed, it is an area where we can ill-afford to depend on others.

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India needs chipset manufacturers — lots of them. Here is why.
Ernst & Young

Although the country has developed expertise in chip designing, it still lacks fabrication facilities, requiring huge investments. Microprocessor chips are produced in high technology facilities called semiconductor fabrication units or simply FAB units. India currently has a limited number of fabless startups and companies with state-of-the-art R&D centres focusing on chip design.

Reports indicate that semiconductor fabs have investments starting around $8 billion, and the numbers climb rapidly. The business also requires hefty running costs, and technology needs to be upgraded typically every 3-4 years.

This wouldn’t be the first time India would try to build semiconductors fabrication units. Earlier in 2006, a Bangalore-based SemIndia signed a contract with the Andhra Pradesh government to set up a wafer manufacturing unit. For which, it was allocated 1,200 acres of land, but the $3 billion project could not take off. The government suffered a loss of ₹300 crore.
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