The India Semiconductor Mission (ISM) will reduce fiscal support for capital expenditure on setting up OSAT (outsourced semiconductor assembly and testing) factories from 50% earlier to 20% for the duration of construction of the projects, according to four people with direct knowledge of the matter.
ISM is the nodal body within the Indian government implementing the financial incentives scheme for setting up semiconductor fabrication and packaging units.
“The intention of the Centre is to now look for greater value-added offerings in the semiconductor industry, for which the upcoming semiconductor incentives will look to prioritize display fabs, chip fabs, and the semiconductor components supply chain,” the first person cited above said, requesting anonymity since the fresh incentives proposal for the semiconductor industry is currently with the Union cabinet.
Chip fabs take semiconductor wafers and build chips out of them with specialized equipment. OSAT then test these chips and wire them up so they can be installed in products.
“We already have three such facilities approved by the ISM, and two more with state-level approvals. The rest of the OSAT industry can go through a natural course of evolution, with lower levels of central support,” the person cited above added.
Data sourced by Mint exclusively from market researcher and consultant Gartner pegged the value of OSATs, which are the primary facilities for any country to build a semiconductor ecosystem, at approximately one-third that of pure-play semiconductor fabs globally. The share is in line with what is expected of India’s semiconductor market as well.
The second person, a senior industry executive who spoke anonymously since he’s part of an advisory committee to the government, said the current incentives of the government are given on a pari-passu basis, meaning that they will continue till the units come up and start production.
“The idea is that by the time these units come up, there will be some level of ecosystem development in and around the areas where the fabs and testing units will come up,” this person said. “So, investments from new projects going forward would be made after evaluating the then-prevalent chip ecosystem in India.”
The executive added that the actual incentive needed would not be as high as the first one, which is why a case is being made to lower incentives for packaging and testing units, while retaining the same levels for fabs, “since a disproportionately higher number of packaging units are coming up versus fabrication units”.
The third person cited above said that ISM is attempting to attract a wider base of supply chain vendors to support key areas of the semiconductor ecosystem. “This would be a crucial step towards improving the value addition of India’s semiconductor industry, which is why it would be important for the Centre to focus its resources on developing this bit,” this person said, adding that OSATs have already started coming up, and the reading is that they will grow autonomously.
The fourth person cited above further added that OSAT incentives of around 30% are also being considered, with the exact quantum yet to be finalized.
The semiconductor economy
The semiconductor components ecosystem includes a wide variety of businesses, including critical minerals and metals suppliers, specialized machinery suppliers, integrated circuit makers, and more. Industry veterans believe that incentivizing this segment will help in a more holistic development of the entire ecosystem.
Kanishka Chauhan, senior principal analyst for semiconductor and electronics at Gartner, said the ISM’s move could be a natural evolution of the industry in India, and is not a sign of OSATs being deprioritized.
“Typically, when foundries enter a geography, OSATs tag along—not vice versa,” he said. “For India, the initial push served to attract some forms of semiconductor manufacturing, and showcase proofs of concept as well as showcase availability of talent and stable policies to support the industry. Now, with a change in incentives, the intention could be to incentivize foundry providers, with the fundamental idea that once foundries come, OSATs will automatically enter the market—and thus do not need fiscal support.”
Chauhan added that OSATs are a significant contributor to the semiconductor economy. Last year, while chip fabs generated $123 billion in revenue as per Gartner, the revenue from all OSAT firms worldwide was “around $40-50 billion”.
Therefore, even at one-third the value of chip fabs, OSATs would remain vital even with lesser incentives. It is this that is pushing multiple homegrown firms to grab the opportunity.
In an interview with Mint earlier this month, Raghu Panicker, chief executive of Kaynes Semicon—a benefactor of the Centre’s OSAT incentives—said the company’s OSAT facility at Sanand, Gujarat is being built at a cost of $480 million, and will take up to 24 months to reach full capacity.
“We’re already fielding commercial interest; nearly 70% of them are from global clients, and we’ve hired specialists to focus on this domain,” Panicker said. “We’ll look to cash in on our electronics manufacturing services (EMS) expertise to ramp-up our presence in the semiconductor ecosystem, but we don’t have plans for a pure-play chip fab as yet.”
Ashok Mehta, managing director of textile exporter-turned-chip tester Suchi Semicon also received the Gujarat state government’s subsidies last month to set up an OSAT facility.
“We’re currently evaluating a technology partner from Malaysia to help us develop the OSAT project,” Mehta said. “The semiconductor industry is the next big business domain, and every corporation will look to get into this business. We’re making an early foray with an investment of $100 million, and we’ll look to produce 3 million chips per day from our facility, once it is running at full capacity within the next 24 months.”
Mehta and Panicker reflect the kind of optimism that industry stakeholders show in the OSAT domain. However, incentivization of OSATs from the Centre, going by the current industry trajectory, looks set to be on a downward curve—since veterans now expect them to develop on their own as both competition and business avenues grow in India.
Criticism of over-incentivizing low-value addition semiconductor projects rose from the start, when US memory maker Micron announced its advanced testing, marking and packaging (ATMP) facility in Sanand, Gujarat in June last year.
The project is being built at a total cost of $2.7 billion—of which Micron’s investment is only $875 million, or around 30%. The rest is fuelled by state and Centre incentives.
Industry stakeholders had criticized the move then, questioning if such a move would truly make a difference or not. ISM, the officials cited above said, is keen on avoiding a similar situation going forward.
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