- As part of the second phase of the Design-Linked Incentive (DLI) Scheme for the semiconductor industry, the Indian government is exploring a proposal to select an equity share in domestic chip design firms.
- The scheme’s goal is to create a stable ecosystem and encourage the creation of “fabless companies” in India—those that design chips but outsource production.
- However, due to the capital-intensive nature of the semiconductor industry and the lengthy gestation periods for setting up design and production units, this approach necessitates a long-term strategy.
What is DLI Scheme?
- The DLI scheme is a programme that provides financial and infrastructural assistance to enterprises that want to set up semiconductor manufacturing operations in India.
- Eligible participants who establish fabrication facilities in the country might get up to 50% of the total cost.
- Furthermore, participants constructing compound semiconductor, silicon photonics, and sensor production plants might receive 30% fiscal support under this scheme.
- Companies engaging in semiconductor design for integrated circuits, chipsets, system-on-chips, systems, and IP cores will earn 4% to 6% net sales incentives over a five-year period.
- The initiative is anticipated to help at least 20 such businesses flourish, with a total revenue of more than Rs 1500 crore in the following five years.
Chip Dynamics at the Present
- Long Gestation Period: Establishing design and fabrication units in the semiconductor business necessitates a lengthy gestation period before the first product is released. Returns on investment do not occur immediately.
- Capital-intensive: The semiconductor sector necessitates significant investment in order to set up fabrication units, scale up manufacturing capacities, and conduct research.
- The cyclic nature of the industry, as well as the shifting functional needs of chipsets, make research and development difficult.
- Supply chain interruptions, such as those experienced during COVID-related lockdowns, might erode investor trust in the sector.
Domestic Chip Industry Scenario Talent Pool:
- India has a highly qualified talent pool of semiconductor design engineers, accounting for over 20% of the worldwide workforce and working for multinational corporations such as Intel, Micron, and Qualcomm, among others.
- Despite a thriving talent pool, India holds a smaller percentage of the intellectual property (IP) connected to semiconductor designs, which is largely kept by multinational firms.
- DLI Scheme for Chip Design: The DLI scheme, which was implemented in December 2021, seeks to indigenize ideas and assist the growth of chip design companies through financial incentives.
- Changing Landscape: The plan has resulted in the development of over 30 semiconductor design businesses in India, with some already getting government funding.
India’s market is expanding
- The semiconductor business is rapidly expanding and is expected to reach $1 trillion in the next decade. India can rapidly rise to $64 billion by 2026, up from $27 billion presently.
- Mobiles, wearables, information technology, and industrial components are the key segments in the Indian semiconductor business, accounting for over 80% of revenues in 2021.
- The mobile and wearables market is now $13.8 billion and is predicted to grow to $31.5 billion by 2026.
Considerations and Obstacles
- Efficiency and effectiveness: According to some analysts, the government’s ambition to establish a venture capital business for chip design firms is useless and inefficient. Foreign purchasers may be preferred by companies for greater valuations and global ecosystem linkages.
- Foreign purchasers may be preferred by companies for greater valuations and global ecosystem linkages.
- Support for Venture Capital: A shortage of venture capitalists in the private sector focused on semiconductors is a barrier to the expansion of design firms.
- The Impact of an Equity Stake: Offering an equity stake helps match the interests of design firms with the success of the project, ensuring shared risk and benefit. It may also aid in more effectively selling chip-designing services and attracting a bigger client base in the market.
- Intellectual Property and Value-Added Activities: The government must assess who can keep the IP and how investments can spur additional innovation and job creation. It is critical to move up the value chain and enable the ecosystem.
Source: https://www.thehindu.com/sci-tech/technology/explained-mapping-indias-chip-design-ecosystem/article67136594.ece#:~:text=About%202%2C000%20integrated%20circuits%20and,Micron%20and%20Qualcomm%20among%20others.