Mapping India’s chip design ecosystem (GS Paper 3, Economy)
Why in news?
- As part of the second phase of the design-linked incentive (DLI) scheme for the domestic semiconductor industry, the Indian government, is considering a proposal to pick an equity stake in domestic chip design-making companies.
Details:
- The modalities and the timing of the policy are yet to be worked out, but the idea behind the scheme is to ensure a stable ecosystem alongside building a few “fabless companies”.
- Fabless companies are entities that design chips but outsource the manufacturing.
What are the broader industry dynamics?
- Any policy directed towards the semiconductor industry, be it manufacturing, or design, requires a long-term strategy as the sector is capital-intensive and involves sizeable costs in setting up fabrication units, upscaling manufacturing capabilities and equipment (such as thermal stimulators, sensors), and pushing research.
- Moreover, returns from the investment are not immediate as setting up design and fabrication units involves long gestation periods.
- NASSCOM says it takes up to 2-3 years before the first product is out and chip designing requires higher investment than a traditional aggregator company.
- Further, as chipsets become smaller and functional requirements from them change, research and development become challenging.
- The supply chain disruptions, could dampen potential investor confidence in the sector.
What is the domestic chip industry scenario?
- India is an important destination for global semiconductor companies primarily because of its highly-skilled talent pool of semiconductor design engineers, who make up about 20% of the world’s workforce.
- About 2,000 integrated circuits and chips are designed in India every year. Global players operating R&D in the country include Intel, Micron and Qualcomm.
- Notwithstanding the thriving manpower, India owns a much smaller portion of the intellectual property (IP) relating to the designs. The DLI for chip designing introduced in December 2021 endeavoured to indigenise innovations.
- It aspired to grow at least 20 companies in India scaling a turnover of more than ₹1,500 crore in the next five years. For product design, the scheme will reimburse up to 50% of the eligible expenditure to a ceiling of ₹15 crore per application.
- DLIs form part of the broader catalyst SemiconIndiafutureDESIGN initiative. Over 30 semiconductor design startups have been established in India following the initiative.
Other considerations:
- The realignment towards equity from the government requires consideration of who can keep the intellectual property (IP), the companies would ideally want to keep it with themselves.
- The government must consider how it plans to link its investments to drive more innovation and employment generation in the sector.
- The value-added activities (with respect to chip designing) are not significantly executed in India. Thus, it is essential that the value-added activities are brought into the country. Moving up in the value chain and enabling the ecosystem must be one of the imperatives of the government.
What are some of the challenges?
- The government’s attempt to become a venture capital firm for chip design companies is likely to be “ineffective and inefficient”. Companies are naturally going to pick foreign buyers because it gives them higher valuation and also connects them to a global ecosystem of customers and investors.
- The lack of venture capitalists in the private sector focused on semiconductors in India. Notwithstanding its share of the global workforce, the cumulative annual revenue of domestic semiconductor design companies is meagre at ₹150 crore.
- The higher gestation periods imply design firms are not able to attract potential investors and venture capitalists as software companies have.
Way Forward:
- The government’s participation would help with regulatory support. The government offers an opportunity for design companies to align their interests with the project’s success, ensuring shared risk and reward.
- The equity infusion would be encouraging for local, small and medium-sized firms who face multiple hurdles to be part of the ecosystem.
