India’s manufacturing push takes an audacious gamble on chips

Spanning some 355 square miles, the agglomeration of 22 villages in Dholera in India’s western state of Gujarat is a pet project of PM Modi. When he was chief minister of the state, he envisioned developing the underused land into the country’s answer to Shenzhen, the manufacturing hub of southern China.

The site is now earmarked as the likely home of a roughly $20 billion semiconductor fabrication plant to be built by Taiwan’s Hon Hai Technology Group, also known as Foxconn, which already manufactures Apple iPhones in the country, in a tie-up with India-focused commodities powerhouse Vedanta Group. The Foxconn-Vedanta deal would represent the largest corporate investment in India and its first privately owned fab.

Indian officials are hoping to see construction begin next year, and for operations to begin around 2025.

“It’s an opening of a door to many decades of huge opportunities,” said Rajeev Chandrasekhar, India’s junior technology minister, when the deal was announced in September.

The Modi government’s foray into the global semiconductor race is part of a concerted push to boost high-value manufacturing in India, which has long trailed regional rivals because of concerns over the country’s challenging bureaucracy, protectionist rules and poor infrastructure. Spurred by a desire to expand its economy, create jobs and shore up supply chain security, India has announced tens of billions of dollars worth of production-linked incentives in the last two years to draw investment to critical sectors ranging from large-scale electronics manufacturing, to batteries and automobiles, to solar panels.

Manufacturers can claim the funds based on how much they increase their production compared with the previous year. India has also focused efforts on streamlining the myriad processes to acquire the varied licenses required to operate in India.

The efforts have delivered some encouraging results at a time when geopolitical tensions and pandemic supply chain disruptions have prompted Western companies to look beyond China. Foreign direct investment into India crossed more than $80 billion last year, a record, and Apple, seen by many as a barometer of India’s place in the global tech supply chain, has fast-tracked the production of its new iPhone 14 in India.

India’s exports exceeded $400 billion in its fiscal year ended March 31, 2022, rising 35% from two years earlier, before the first incentives were announced.

Semiconductor production will be the greatest test yet of India’s capabilities. Chip fabs require years to build, years more to break even, and depend upon a highly-trained workforce. So much as a flicker in the electricity supply can create lengthy delays and cost tens of millions of dollars.

That complexity has seen even China struggle to bridge the gap with Taiwan’s TSMC, the world’s largest contract chip maker.

“The geopolitical situation now is that everybody wants to have some ability to manufacture some level of semiconductors domestically,” said Paul Triolo, a senior associate at the Washington-D.C.-based Center for Strategic and International Studies. “And so India is no different in a sense, but they’re even farther behind the curve than China was when they decided to get into this.”

Despite strides in local automobile and smartphone production, India remains largely unproven in high-tech manufacturing and has struggled to shake off its tag as a jurisdiction difficult to do business with. State officials responsible for the Dholera development acknowledge the challenge ahead, but hope this project will change that perception.

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“Frankly, I am not aware in India if you can compare this project to any other project anywhere in the country, by scale, size, execution capabilities, or infrastructure-level connectivity,” said Hareet Shukla, managing director of Dholera Industrial City Development Ltd., the agency overseeing the development. He noted that a dedicated power distribution network was already in place that would have multiple redundancies to ensure constant electricity supply.

India has in the past made several abortive attempts to produce semiconductors locally. Industry experts and government officials, however, say this time is different due to a confluence of global factors that have steeled Indian political resolve.

“Earlier efforts by the government were very piecemeal, they were either targeting just a fab or sometimes just an assembly plant,” said Pranay Kotasthane, the deputy director of Takshashila Institution, a think tank in Bengaluru. “But right now, if you look at the current policy, it’s trying to support the entire ecosystem, whether it’s design, manufacture, assembly. It’s a comprehensive push.”

India’s strained relations with China had already spurred it to look at reducing its reliance on electronics imports from its largest strategic adversary. The coronavirus pandemic wreaked havoc on global supply chains and led to shortages of chips across industries from automobiles to medical devices, prompting global concern. The U.S., a leader in chip design and advanced chip making tools, is now trying to regain manufacturing ground ceded to Asian tech firms, while also circumventing China’s ability to advance as a chip developer.

India’s semiconductor demand is expected to more than double to $64 billion by 2026, according to the India Electronics and Semiconductor Association, with electronics now its second biggest import cost after energy.

“If you don’t do anything, basically there’s a big risk because of the geopolitical situation,” said Vivek Tyagi, chairman of the India Electronics and Semiconductor Association. “Today we’re dependent on one or two countries for a lot of supplies of electronics and semiconductors.”

The $10 billion of incentives on offer for the semiconductor industry are more generous than those for phone makers, with the Modi government offering to defray half the cost of capital investment upfront. There are also incentives across the value chain, including design, assembly, testing and packaging.

India is competing, however, with the deeper pockets of the U.S., European Union and Japan, and has had to temper its expectations. While initially targeting more money for cutting-edge chips projects, in September it adjusted incentives for producers of trailing-edge semiconductors to match.

Industry experts say producing chips from established technology would fit more comfortably within India’s current production capabilities. While the smallest chips are at the forefront of smartphone and laptop computer innovation, there is just as much need for larger chips that go into electronics such as LED lights and home appliances.

“I don’t think India would be successful if they tried to do a very advanced process node,” said Bengaluru-based Sanjay Palsamudram, a venture capitalist with a focus on semiconductor investments. “It may sound sexy but that’s not required.”

One main criticism of India’s manufacturing incentives, however, is that they are often undercut by tariffs to promote local sourcing, potentially at the expense of driving truly globally competitive exports. The typical semiconductor production process involves a hyper-globalized supply chain where components travel thousands of miles, according to the Semiconductor Industry Association, a U.S. lobby group.

Mr. Kotasthane, of Takshashila Institution, said India should focus on becoming exceptionally good at just one or two segments of the semiconductor supply chain. India already designs around 20% of semiconductors, but mostly for foreign companies who own the intellectual property. “For India, the comparative advantage lies in the semiconductor design segment,” he said.

Foxconn said the semiconductor fab was just a starting point in the Indian government’s overall vision to enable customers and supply chain ecosystems to come into India.

“The group sees its development in India as actively heading in a positive direction and that the overall industry environment in India has been improving,” it said in a statement.

Singapore-based IGSS Ventures and Mumbai consortium Indian Semiconductor Manufacturing Corporation have also signed preliminary agreements with Indian states.

Though the concept of Dholera as a futuristic industrial hub was first touted in 2005, ground work began in earnest in 2018, according to Mr. Shukla. Today, the basic infrastructure for the first stage of development covering nearly 9 square miles is complete, with utilities ready for connection and new roads with freshly painted signs and lane markings ready for megafactories to spring up.

The long lead times for setting up semiconductor fabs, however, mean it will be years before India knows whether its push will be a success.

“At some point it all has to make commercial sense,” said Mr. Triolo. “The government’s giving this sort of a jump-start by providing these incentives and helping to build some of the infrastructure. The kicker is that it has to be sustainable.”