Some call it the ‘heart’, others the ‘brain’, of modern gadgets. Either description serves to illustrate the central role semiconductor chips play in making life easier, driving economic activity and furthering innovations for the digital future. But for something that the entire world relies heavily on, the semiconductor production ecosystem is surprisingly, some will say, alarmingly, constricted, with only a handful of countries with capabilities to design or manufacture them. Amid the pandemic, a shortage of chips has seen production suffer across industries, underscoring the need to diversify the production of this essential item. Looking to emerge as a major semiconductors player, India has lined up a Rs 76,000 crore package to attract knowhow and investment in the sector. Here’s all you need to know.
Why Are Semiconductors Important?
Never before has such a tiny item had so massive an influence on global business as semiconductor chips have come to exert in our digital age. Most electronic devices and new cars that are produced use it to execute their functions while everything from gym equipment to gaming consoles rely on it, not to mention most household appliances and personal devices.
In short, any device, gadget, item or product that features electronic displays, or needs to process data depends essentially on these chips. The industry, which saw total sales of USD 440.4 billion in 2020, is expected to see earnings grow by a fifth this year to touch USD 527.2 billion. This, amid a crippling shortage of chips that will see carmakers worldwide produce millions of fewer cars this year while electronics giant Apple said shortages will hurt the sales of iPads and iPhones this year.
What Is A Semiconductor?
It all boils down to electrical properties. Anything that conducts electricity is called a conductor, and one that doesn’t is called an insulator. “Semiconductors are substances with properties somewhere between them," says Japanese major Hitachi.
Such as they are, says US-based industry body Semiconductor Industry Association (SIA), “semiconductors are the brains of modern electronics… and technologies of the future such as artificial intelligence, quantum computing, and advanced wireless networks".
How Are They Made?
Semiconductors — also known as integrated circuits (ICs), or microchips — are most often made of silicon or germanium, or a compound like gallium arsenide. The process kicks off with the introduction, into these pure elements, of impurities with the goal of achieving crucial changes in the conductivity of the material. This step is known as doping.
As SIA says, most semiconductors start off as sand which, after being processed, is melted into solid cylinders called ingots. These ingots are thereafter sliced into extremely thin pieces disc, which in turn are “polished to a flawless finish". This is a blank wafer. This blank wafer, in the next step, is printed with the intricate circuit design as they move to the stage where they become separate chips, which happens through cutting them up into tiny individual semiconductors called dies.
The dies are then built into finished semiconductors and take the familiar shape in which they are finally inserted into devices.
This was the mechanical part of producing a semiconductor chip and is accomplished in what is known as a foundry. But the true art in making semiconductor chips lies in devising and designing them, involving everything how the chip should operate, how the circuit needs to be laid out to achieve that objective and including testing and verification to check that the chip does what it was meant to be.
A single firm that performs all the above steps is called an integrated device manufacturer (IDM), but the bulk of the business operates via a system where what is known as a ‘fabless firm’ designs the chip and then outsources its production to a foundry.
Fabless companies more often than not are located in the developed nations that can afford high investments in R&D while foundries are most likely to come up in countries where labour is abundant and cheap so as to keep production costs low, like Taiwan — the world’s largest chipmaker — and China.
What Caused The Shortage Of Chips?
Mainly Covid, as the pandemic it has wrought disrupted economic activity, shut down factories and businesses and froze global supply chains.
As tech major IBM pointed out, the sudden, remote work-induced increase in the sales of consumer-electronic products worked as a double whammy in combination with a slowdown in chip production. But as an article in Money Control notes, Covid-19 was not the only factor behind the shortage and “the tense relationship between the US and China" also played a part. As the US blacklisted Chinese companies, American firms had to look elsewhere for chips, something that also served to trigger shortages.
The sudden chip crunch and the debilitating impact it had on all kinds of industries — The Washington Post said that a company in Illinois in US that makes electronic dog-washing booths, too, was hit by the shortage — sent a shudder down strategic and policy circles, sparking efforts to resolve supply chain issues and bottlenecks. The idea was to ensure that no one country played an outsize role in the semiconductor business.
With China’s increasingly assertive stance vis-a-vis Taiwan, which Beijing considers part of its territory, there was an added push to diversify chip production. So much so that one of the stated goals of the Quad alliance of the US, Japan, Australia and India is to “launch a joint initiative to map capacity, identify vulnerabilities, and bolster supply-chain security for semiconductors and their vital components".
Where Does India Stand On Semiconductor Chip Production?
According to a March 2021 article on indiaai.gov.in, an initiative of the Ministry of Electronics and Information Technology (MeitY) and Nasscom, “semiconductors are a 100 per cent import sector" in India. However, it noted that India “has a distinct advantage in chip design" with several global IDMs having established design centres in India. It cites MeitY to add that “India produces nearly 2,000 chips every year and more than 20,000 engineers in the country are involved in chip design".
But India is nowhere yet on the global semiconductor radar. As SIA notes, the US is the worldwide leader in semiconductors with about “half of global market share and sales of USD 208 billion in 2020". As IEEE notes, the world’s leading semiconductor manufacturers are located in the US — which has four of the five global leaders: Intel, NVIDIA, Broadcom, Texas Instruments Inc. (not in that order) — and the Asia-Pacific region, where South Korea is home to a top-five player in Samsung.
The reason the semiconductor industry “is dominated by global giants" is due in part “to the enormous scale of the market and the costs of manufacturing integrated circuits and researching new technology", adds IEEE.
MeitY told Parliament in December this year that “semiconductor FABs are highly capital intensive and resource intensive, and are at the cutting edge of manufacturing with rapidly changing technology cycles". It acknowledged further that the semiconductor fabrication capability for leading/cutting edge technology nodes is available with only few companies
How Is India Seeking To Boost Its Semiconductor Capabilities?
On December 15, the government came up with a Rs 76,000-crore package “for development of semiconductors and display manufacturing ecosystem in India", announcing incentives of Rs 2.3 lakh crore “to position India as global hub for electronics manufacturing with semiconductors as the foundational building block".
Stating that the establishing domestic capabilities in semiconductor production “will have a multiplier effect across different sectors of the economy [and] promote higher domestic value addition in electronics manufacturing", it said that the success in this area “will contribute significantly to achieving a USD 1 trillion digital economy and a USD 5 trillion GDP by 2025".
The scheme is aimed at providing a push to semiconductor and display manufacturing by enabling access to capital support and technological collaborations for companies engaged in production of everything from silicon semiconductor fabs, display fabs, validation, assembly and testing and design.