Over the last decades, India has made a strong splash in the software, programming, and IT consulting markets. Now, with demand for electronics surging in the country amid rising security concerns, the government is directing its attention to the semiconductor sector with plans to spark the local production of chips for the domestic market.
The government is particularly concerned that critical information technology infrastructure in the country could be vulnerable to attack from foreign sources, including hackers and hostile governments. Recent reports that Chinese hackers have infiltrated some government Websites in the West have raised worries in India, especially because the two countries still have a troubled border region and are suspicious of each other's intentions.
India believes the development of a robust domestic semiconductor fabrication sector would help in reducing its vulnerability while also helping to boost the local high-tech industry. "India badly needs a semiconductor fab, and we have not invested in this area, and we should seriously think about it," said Madhavan Nair, former chairman of the Indian Space Research Organization during a keynote speech at the annual Indian Semiconductor Association conference held in Bangalore last month.
Observers point to surging increase in demand for electronics as another reason India should step up boldly into the production of chips for the industry. Demand for electronic goods in India is expected to reach $11 billion by 2014, up 83 percent from nearly $6 billion in 2010. Even more explosive growth is seen over the next decade as more of the country's 1.21 billion people get access to the Internet thanks to smartphones, laptops, and tablet computers becoming more affordable.
Some Indian companies are already actively seeking opportunities to set up fabs in the country with the support of foreign chip vendors. Hindustan Semiconductor Manufacturing Co., for instance, has reportedly explored opportunities to secure expertise for domestic chip production with such companies as Infineon Technologies. Router and set-top box vendor SemIndia is said to be seeking to partner with Advanced Micro Devices to set up manufacturing operations in India.
While Indian companies are exploring options for increasing domestic production of semiconductors and other electronics components, the government has stepped in as well, but so far with mixed results. Its plan for a government-backed "fab city" in Hyderabad seems to have lost momentum, and the focus has since shifted away from general semiconductor production towards silicon for solar power.
Industry observers have criticized the Indian government for falling so far behind China and Taiwan in encouraging the development of a vibrant electronics sector. They point to limited government incentives and have urged the government to set up funds dedicated to investing in local semiconductor production. Some local observers have also stepped up criticism of foreign companies operating in India, including many that have long had sales, marketing, and research units there but which have not established fabs in the country.
India is itself not an easy location to set up such facilities. Even though government is providing a single-window system for clearing the documentation related to setting up new businesses, it is still far from perfect. The country is noted for the sore absence of angel fund investors, efficient power supply, clean water for fab units, and poor waste management, warehousing, and road network infrastructures. On the other hand, India has some key advantages, including the availability of experts in VLSI design and semiconductor manufacturing, a vast internal market, low-cost engineering resources, and a stable economic environment.
Semiconductor manufacturing is a very risky business, but it’s essential for a region of India's size and capacity. For global companies, the Indian market is still too small to warrant setting up a fab. As a result, both investors and semiconductor vendors have refrained from getting into direct investment or even partnerships with Indian companies.
Local Indian companies simply do not have the technology or the money to get into a huge project like this. This means that they need the backing of a global institutional investor or a semiconductor vendor. Will they get involved?