Through favourable policy measures and its domestic handset assembling wherewithal, the country intends to establish itself as a global manufacturing hub for telecom gear.
The coronavirus pandemic crushed demand for almost all industries. Yet, some sectors remained exceptions, witnessing soaring demand. In turn, the latter led to massive global supply shortfalls. The semiconductor sector – characterised by various chips such as memory chips, integrated chips and microprocessors, among others – was one of these fortunate exceptions.
The sudden surge in semiconductor demand was driven by two seminal events – the US-China trade war and the COVID-19 pandemic. Both disrupted global supply chains, causing an unprecedented shortage of semiconductors. The trade war also led to many companies stockpiling semiconductor chips, considered essential for 5G smartphones.
Tailwinds from shortages
Today, chips are critical in a wide array of industries, including cars, computers and smartphones, to name a few. The shortage saw lead times – the period between order placement and delivery of chips – reach an average of 15 weeks, even stretching up to 22 weeks. Earlier, chip supplies had a lead time of 10 weeks. In the past year, approximately 75 per cent of semiconductor parts suppliers have suffered an overall escalation in lead times.
Thanks to the shortage, the two largest chipmakers in Asia, Taiwan Semiconductor Manufacturing and Samsung Electronics, emerged as the centre of attention in meeting the global demand. Due to varied constraints, though, both companies lack the capacity to meet such soaring demand.
Even before the twin events driving the current spike, the overall demand for semiconductors has been rising steadily over the past decade. Be it basic memory chips and microcontrollers or the most sophisticated high-performance processors, booming smartphone usage and higher computing power have been pushing greater demand.
No doubt, the pandemic has taught the world that dependence on one or two companies/countries for supplies of critical components is not the best way to manage the requirements of a nation or business. In capitalising on the universal demand for semiconductors, many countries are keen on establishing semiconductor manufacturing facilities within their borders.
The Government of India too was quick to announce plans to encourage indigenous manufacturing of critical chips. At this time, though the country barely has any chip manufacturing facilities, it holds the wherewithal to attract global chip firms as a design centre and via a new subsidy programme. Through its smartphone manufacturing and assembling segment, India can leverage this advantage in the bid to become a semiconductor fabrication hub.
Indeed, during the India Mobile Congress 2020 in December, Prime Minister Narendra Modi gave a clarion call asking the telecom industry to work in unison for making India a global hub in designing, developing and manufacturing telecom equipment. The PM noted that there is a culture of replacing handsets and other gadgets frequently because of periodic technological upgradation. He also urged industry players to collaborate in ensuring a timely 5G roll out, which can help India leapfrog into the future, empowering millions nationwide.
Incentives and allied drivers
In this context, the Centre’s programme to promote local manufacturing is pertinent. In February, the Central Government approved a PLI (Production-Linked Incentive) Scheme backed by a budgetary allocation of Rs12,195 crore(US$167.19) for telecom and networking products. Staggered over five years, the outlay can ensure enhanced production of more than Rs200,000 crore. Expected to attract Rs3,000-plus crore in investments while creating huge direct and indirect employment opportunities, the scheme will also promote exports of telecom and networking gear under ‘Make in India’.
The Centre believes India could exploit the global US$100 billion market opportunity in telecom and networking products. Part of the umbrella PLI programme announced in November 2020, this scheme seeks to attract both domestic and foreign firms with select eligibility criteria. MSMEs and non-MSME manufacturers are both eligible to participate as per their minimum investment threshold levels. The PLI policy’s overall objective – promoting the shift towards an Atmanirbhar Bharat or self-reliant India.
Meanwhile, the ongoing pandemic and its periodic lockdowns in different cities and countries in 2021 will foster sustained requirement for chips in PCs, laptops, tablets, speakers and headsets as well as scores of digital products, including connected kitchen and workout equipment. Also, the impending 5G roll out in India will push greater demand for semiconductor chips.
Additionally, given social distancing and allied restrictions, people are wary of commuting by public transport. As a result, passenger vehicle numbers are growing. But even as the automotive industry records rising orders for four- and two-wheelers, the segment is hit by a shortage of chips.
Although semiconductor manufacturers are aware of the severe demand-and-supply imbalance, the fabrication of chips cannot be increased overnight due to raw material constraints. Despite planned new capacities in many geographies, it may take as long as two years for them to enter production.
Nevertheless, this augurs well for aspiring chipmakers in India to tap greater growth opportunities. As a domestic mobile phone manufacturer emphasised, though their phones are made in India, the chips were being manufactured overseas. To establish a robust domestic ecosystem for mobile handset manufacturing, chipsets must be made in India. Buoyed by support from the Centre, this is all set to become a reality in the near future. Therefore, sooner or later, India will emerge as a global hub for telecom equipment manufacturing.
