Building Digital Muscle: India needs a world-class chip-making ecosystem

July 15, 2021 5:30 AM

This will serve as a strategic moat to maintain the country’s position as a digital power

Creating a world-class chip fabrication ecosystem from the current state necessitates a great leap forward.Creating a world-class chip fabrication ecosystem from the current state necessitates a great leap forward.

By TV Mohandas Pai & Nisha Holla

In the 21st century, every nation must protect its sovereign digital territory as rigorously as its physical territory. During the border conflict with China in 2020, India woke up to the uncomfortable reality that Chinese apps like TikTok dominated 60% of its digital territory. The extensive data-sets generated by Indian users on these apps formed an easy conduit for a foreign, non-democratic power to dominate valuable digital territory. To protect the sovereign rights of the Indian citizenry, the government prudently decided to ban close to 200 Chinese apps and regulate the flow of Chinese investment capital into Indian start-ups and venture capital funds.

India was already a prodigious producer of apps. The ban led to a further explosion of indigenous apps like Mitron TV, Chingari, and Koo, an alternative to Twitter. These apps are rapidly onboarding millions of new users, catering to Indians’ digital demands, and providing impetus to the atmanirbharta policy of the government. Open competition has led to the development and expansion of exceptional apps. Unlike many countries that are mere app-consumers, India stands out as both a massive producer and consumer. It is also a pioneer of large-scale multi-platform digital utilities like India Stack. As a result, India is one of three global Digital Powers, along with the US and China.

The accelerating trend of India’s digital ecosystem, along with new communication architectures like 5G and 6G and heavily-connected IoT device frameworks, is racking up massive demand for electronics in India. The core component for all these devices is the silicon chip. As India rapidly on-boards significant parts of people’s lives onto the digital world, a new phenomenon is becoming apparent—the looming shortage of silicon chips worldwide. With the uncompromising need to be self-reliant, India must figure out how to ensure a steady supply of cutting-edge electronics and devices to citizens without depending on foreign players like China. This is an integral component of protecting Indian digital territory.

Ever since the dawn of electronics in the 20th century, India has been a major importer. Inadequate policy and investment decisions over the last forty years have destroyed the electronics manufacturing industry. Electronics imports are currently at $40 billion, and are expected to increase to $200 billion soon—surpassing even oil imports. This is an economic and strategic handicap. India is a massive market for electronics and devices; it makes absolutely no sense to remain import-dependent.

The NDA government realised this handicap early and launched the Production Linked Incentive (PLI) scheme with incentives based on production and value addition. This scheme has paid dividends. India is now the second-largest manufacturer of mobile phones in the world—250+ million, while actively exporting $5-6 billion worth, which is expected to increase. These incentives have led to the creation of electronic component industries all over the country. Large MNCs like Samsung from South Korea and Xiaomi from China are now setting up factories in India.

The success of the PLI scheme demonstrates the value of good governance in advancing India’s digital ecosystem. The next step to digital self-reliance is chip fabrication. Though India lacks a chip fabrication ecosystem, it abounds with human capital. The country has amongst the highest concentration of chip-designers and testers in the world—approximately 250,000. They are primarily centred in Bengaluru, where 300+ chip-design and testing companies are located, many of which are R&D centres of MNCs. This unique abundance of human capital must be converted into a competitive advantage for the country.

Creating a world-class chip fabrication ecosystem from the current state necessitates a great leap forward. It requires extensive indigenous investment and physical infrastructure to complement the abundance of human capital. And strategic international partnerships.

Neither Japan nor the US has any notable chip manufacturing left. On the other hand, China has realised that high-end chip manufacturing is its Achilles heel; $50 billion worth of state-sponsored subsidies is driving the development of an ecosystem to address this gap. The only company that stands against end-to-end Chinese domination of the electronics industry is the Taiwan Semiconductor Manufacturing Company (TSMC). TSMC is at the cutting-edge of chip manufacturing. It is to India’s benefit to invite the best in the world to jointly set up a world-class chip fabrication ecosystem.

India requires its most prominent companies and business leaders like Reliance, the Tatas and Azim Premji to take leadership. Suppose they were to invest $5 billion towards setting up large-scale chip fabrication plants as a joint venture with, say, TSMC. It will create the perfect base to have a world-class chip fabrication ecosystem in India. The benefit to TSMC is inroads into an increasingly massive market away from its home base of Taiwan.

Undoubtedly, India must support the installation of several generations of chip fabrication plants and the intentional development of a total ecosystem. Governance and government incentives are as crucial to the success of this venture as the private capital. It is satisfying to note that the government has finally realised that incentive programmes based on production and exports, and driven by transparency, are essential to fostering industries and advancing manufacturing capabilities. Now, it must extend the success of the PLI scheme to create a cutting-edge chip fabrication ecosystem that will serve as a strategic moat for Indian electronics.

Pai is chairman, Aarin Capital, and Holla is Technology Fellow, C-CAMP

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