By A Damodaran

When the Taiwan Semiconductor Manufacturing Company (TSMC) came into existence in 1987, it had neither a strong talent pool of engineers nor proven R&D capabilities. The company also lacked the capital bandwidth to commission a state-of-the-art, very-large-scale integration (VLSI) semiconductor system that could rival Intel. Despite these limitations, the Taiwanese company evolved into a world-class fab for semiconductor chips by the late 1990s.

Lessons from global success

The success of TSMC lay in its focus on what it was good at . The company went for a “fab alone” approach that integrated well with the requirements of fab-less chip designers. This was complemented by a smart, inter-continental sourcing strategy.

Today, TSMC’s silicon wafer supplies are sourced from Japan and South Korea, its requirements of chip designs and lithographic machines are met from companies based in the US and the Netherlands, while for engineering talent it turns to India.

The profit margin assured by high purity silicon wafers, innovative chip designs, and “zero-defect” chip fabrication processes more than compensates for high shipping costs incurred in moving inputs around.

The complex inter-continental sourcing strategy functioned smoothly for over four decades as it was backed by the geopolitical might and the R&D prowess of the US.

Friendshoring

The recent escalation of US-China tensions over Taiwan and the passage of the US Chips Act, 2022, has re-wired the global semiconductor supply chain in two directions. While the chip design and fabrication segments are being moved back to the US, post-fab operations like assembly, testing, and packaging are being “friendshored” to strategic partners.

TSMC’s upcoming unit in Ohio is a striking instance of US’ newly adopted “onshoring” policy on fabs, while the inclusion of India as an outsourced semiconductor and assembly and test (OSAT) service provider under the International Technology Security and Innovation (ITSI) fund of the Chips Act is a notable case of friendshoring.

Despite major geographical changes, the idea of a fabless semiconductor industry has not lost its sheen.

The India Semiconductor Mission (ISM)

India has, over the years, acquired critical competencies in chip design, VLSI systems and OSAT services. The overarching objective of the ISM is to build upon these advantages by nurturing robust home-grown ventures that seek to reduce overseas dependence for chips. All the same, India has successfully nudged competent overseas semiconductor companies to establish their production base in the country.

The elements of the ISM that offer immediate outcomes include procurement schemes related to electronic design automation (EDA) tools and graphics processing unit (GPU) chips. Another equally important element of ISM is the extension of production-linked incentives (PLI) for the construction of display fabs.

Access to EDAs can generate jobs for nearly a lakh-strong contingent of engineers and technicians that replenish India’s tech workforce every year. Likewise, GPU chips procured by hyperscale data centres (like Yotta Infrastructure) can reduce capital costs incurred by India’s AI start-ups specialising in large and small language models. Display fabs, on the other hand, have the potential to contribute to the development of advanced system-on-chip (SoC) designs and OSAT capabilities through reverse multiplier effects.

India as a nearshore destination

Viewed from the lens of global semiconductor companies, India enjoys two strategic advantages, viz the country’s rapidly advancing R&D in frontier computing and its booming market for higher-end mobile phones.

The Indian Institute of Science’s work on neuromorphic chips and advanced research conducted by the Tata Institute of Fundamental Research, Indian Institutes of Technology, and the Centre for Development of Advanced Computing on high-performance computing (HPC) and quantum computing offers compelling incentives for “high-precision” fabs of Far East and Southeast Asia, to nearshore their operations to India. Apple’s recent decision to shift iPhone 16 manufacturing to India could similarly act as a major consideration for TSMC (as the fabricator of Apple’s custom A Series chips) to move in as well.

IPR regimes and a facility that absorbs project risks

India’s intellectual property system may witness new challenges as it emerges as a nearshoring destination for advanced fabs from abroad. The first challenge arises from a surge in Patent Cooperation Treaty applications that list India as a priority country. The second challenge will be to ensure that India’s contract laws robustly protect “high-stake” trade secrets held by global fab majors. A closely related matter is the need to craft licensing agreements for EDA tools that are free from painful renegotiations and costly renewals.

It is equally vital for the India’s emerging semiconductor ecosystem to address project related risks. Upcoming fab plants (viz Tata-PSMC, Keynes Semicon, and CG Power) are likely to experience chip yield related risks as they upgrade to advanced nodes. A revolving financing facility that cushions the risks of capital loss arising from chip yield failures can be an invaluable support mechanism for India’s newly emerging fabs.

Larger significance

The current global scenario offers vital lessons for India’s semiconductor industry. The country’s quest for self-reliance needs to be matched with its efforts to evolve as a nearshoring destination for vital segments of the global semiconductor value chain.

In reality, semiconductor chips line the foundations of India’s future progress in HPC, artificial intelligence, ultra-speed communication, and security. This is the larger significance of the ISM.

The author is the senior visiting professor, ICRIER, New Delhi.

Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.