India offers $1 billion to woo chip makers after previous attempts failed

01, Apr. 2021

A file photo of a shopkeeper seilling electronics products in Chennai in the southern state of Tamil Nadu, India. The country is poised to increase its share in global manufacturing of electronics such as mobile phones, IT hardware and automotive electronics over the next few years as it aspires to achieve $400 billion of electronics production by 2025.  (Photo courtesy of Unsplash)
A file photo of a shopkeeper seilling electronics products in Chennai in the southern state of Tamil Nadu, India. The country is poised to increase its share in global manufacturing of electronics such as mobile phones, IT hardware and automotive electronics over the next few years as it aspires to achieve $400 billion of electronics production by 2025. (Photo courtesy of Unsplash)

By Atul Ranjan and Celine Chen

NEW DELHI, NNA - India is dangling a big carrot in a grand gesture to entice semiconductor companies to set up plants in the country after failed attempts to woo them previously.

On Wednesday, Reuters reported that the Indian government will give cash incentives of more than $1 billion to each company establishing chip fabrication units. It has reportedly sought feedback from the industry on how the incentives should be paid out.

A senior government official told the news agency, “We’re assuring them that the government will be a buyer and there will also be mandates in the private market (for companies to buy locally made chips).”

India's ‘Make in India’ drive has helped the country to succeed as the world’s second-biggest mobile manufacturer after China, and it believes it was high time chip companies set up in the country.

Having the ready availability of chips would build on its smartphone assembly industry and strengthen its electronics supply chain, two officials told the news agency.

News of the eye-watering inducement has come at a time when the current global chip crunch has crippled or delayed the production of vehicles and electronics at many companies since the third quarter of last year.

Governments across the world are subsidizing the building of semiconductor plants while desperately shopping for chips to restart stalled productions at auto and electronics factories as major chip producer Taiwan could not cope much with the surge in demand.

Following U.S. sanctions on China, countries had to turn to Taiwan and other makers but they have been unable to keep up despite raising production to capacity.

Recently, the India Cellular and Electronics Association (ICEA) and the Society of Indian Automobile Manufacturers (SIAM) voiced concerns about shortage impacting their production.

SIAM has sought government support for the local production of electronic components, especially semiconductors, emphasizing that the industry would need big investments for such ventures.

In February, SIAM president Kenichi Ayukawa said his association and the Automotive Components Manufacturers Association of India (ACMA) would be jointly studying ways to boost localization of components.

"For electronics areas, especially for semiconductor parts, government support is required for localization as it needs huge investments,” Ayukawa said.

Last month, the Federation of Automobile Dealers Associations (FADA) raised concerns that the paucity of chips has delayed the production of passenger vehicles for as long as eight months.

The association urged the government to help solve the problem which not only hampered manufacturing but also their sales.

On March 24, Vikram S. Kirloskar, vice chairman of Toyota Kirloskar Motor, a joint venture between the Kirloskar Group and Japan’s Toyota Motor Corp., proposed to Japanese firms to explore the possibility of investing in chip production in India.

“This year, we have landed up in a situation where there’s a chip shortage of electronics parts, and car companies all over the world are struggling to produce,” lamented Kirloskar, while urging Japanese companies to look beyond China and help create a second source for chips in India.

In line with the 'self reliant India' policy of Prime Minister Narendra Modi, the government has been insistent on having their own reliable suppliers for its electronics and telecom industries as it cut dependence on China especially after border skirmishes last year.

India has previously made efforts to woo semiconductor investors, but they were apparently deterred by claims of the country's unreliable infrastructure and energy supply. At least two proposals to set up chip plants failed to materialize.

According to a December 2020 report by EY, India imports $7 billion worth of integrated circuits (semiconductor chips) from China, accounting for 70 percent of its total imports yearly.

Done in collaboration with the India Cellular & Electronics Association (ICEA), the EY report said India has the huge potential to become a $100-billion global manufacturing and export hub for printed circuit board assembly (PCBA) alongside mobile phone manufacturing by 2025-26.

This will significantly reduce India’s dependency on China, which is the world’s biggest exporter of PCBAs.

The Economic Survey of India issued in January 2020 advocated the concept of 'Assemble in India for the World' which may enable India to forge an export trajectory similar to China. This major shift will boost job creation and help India realize its aspiration to participate actively in global value chains.

However, India's dream of becoming a global electronics manufacturing hub cannot be realized unless the government provides support to mitigate the disabilities faced by the PCBA industry, said the EY report.

India has witnessed unprecedented growth in electronics manufacturing in the past five years on account of strong policy initiatives. The National Policy on Electronics 2019 has set a target of achieving production of $400 billion by 2025.

This includes the production of 1 billion mobile handsets valued at $190 billion, with an export target of $110 billion.

"To develop India as an electronics manufacturing hub, it may be important to bring in as many manufacturing operations as possible and PCBA is a key manufacturing activity," said the report.

Last December, India’s ministry of electronics and information technology issued an ‘expression of interest (EOI)’ for investors to set up FAB facilities in India or acquire semiconductor FABs outside the country. The Jan. 31 deadline has now been extended to April 30.

“The government of India is keen to incentivize and attract investment in setting up of semiconductor FABs in India,” said the EOI document.

Highlighting its significance, the document said India is poised to increase its share in global manufacturing of mobile phones, IT hardware, automotive electronics, industrial electronics, medical electronics, IoT and other devices in the near future as it aspires to achieve $400 billion of electronics manufacturing by the year 2025.

With the latest talk about the huge $1 billion incentives, investors might just bite the bait now.