India Semiconductor Mission (ISM) will reduce financial support for capital expenditure for setting up OSAT (outsourced semiconductor assembly and testing) plants to 20% from 50% earlier for the duration of construction of the projects, according to four people with direct knowledge of the matter.
ISM is the nodal agency within the Indian government that implements the financial incentive scheme for setting up semiconductor manufacturing and packaging units.
“The Centre’s intention is to now look for higher value-added bids in the semiconductor industry, for which the upcoming semiconductor incentives will prioritise display fabs, chip fabs and semiconductor component supply chain,” said the first person cited above, who requested anonymity as the new semiconductor stimulus proposal is currently with the Union Cabinet.
Chip fabs take semiconductor wafers and build chips from them using specialized equipment. OSAT tests these chips and wires 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 follow a natural evolutionary course, with lower levels of central support,” the person quoted above added.
Data from Coin An exclusive from market researcher and consultant Gartner estimated the value of OSATs, the primary facilities for any country to build a semiconductor ecosystem, at about a third of that of pure-play semiconductor fabs globally. The share is in line with what is also expected from India's semiconductor market.
The second person, a senior industry executive who spoke on condition of anonymity because he is part of a government advisory committee, said the government's current stimulus measures are being given on a pari-passu basis, meaning they will continue until units are ready and production begins.
“The idea is that by the time these units come up, there will be a certain level of ecosystem development in and around the areas where the fabs and test units will come up,” this person said. “So investments of new projects in the future would be made after evaluating the then prevailing chip ecosystem in India.”
The executive added that the actual incentive needed would not be as high as the first. That is why lower incentives are being advocated for packaging and testing units, while maintaining the same levels for factories, “as a disproportionately higher number of packaging units are created than production units”.
The third person cited above said that ISM is trying to attract a broader base of suppliers in the supply chain to support key areas of the semiconductor ecosystem. “This would be a critical step to enhance the value addition of the semiconductor industry in India, and hence it would be important for the Centre to focus its resources on developing this component,” this person said, adding that OSATs have already begun and the reading is that they will grow organically.
The fourth person mentioned above added that OSAT incentives of around 30% are also being considered, but the exact magnitude has yet to be determined.
The semiconductor economy
The semiconductor components ecosystem encompasses a wide range of companies including critical minerals and metals suppliers, specialized machinery suppliers, integrated circuit manufacturers and more. Experienced industry professionals believe that boosting this segment will help in a more holistic development of the entire ecosystem.
Kanishka Chauhan, senior principal analyst for semiconductors and electronics at Gartner, said the ISM's move could be a logical development for the sector in India and does not mean that OSATs will be a lesser priority.
“Normally, when foundries enter a geography, OSATs follow — not the other way around,” he said. “For India, the initial push was to attract certain types of semiconductor manufacturing and demonstrate proofs of concept, as well as the availability of talent and stable policies to support the industry. Now, with a change in incentives, the intent could be to incentivize foundry suppliers, with the fundamental idea that once foundries come, OSATs will automatically enter the market — and thus not need fiscal support.”
Chauhan added that OSATs are making a significant contribution to the semiconductor economy. Last year, chip fabs generated $123 billion in revenue, according to Gartner, while the revenue of all OSAT companies worldwide was “around $40-50 billion.”
Therefore, even with a third of the value of chip fabs, OSATs would remain vital, even with fewer incentives. This is what is driving several domestic companies to seize the opportunity.
In an interview with Coin Earlier this month, Raghu Panicker, CEO of Kaynes Semicon, a beneficiary of the Centre's OSAT incentives, said the company's OSAT facility in Sanand, Gujarat is being built at a cost of $480 million and will take 24 months to reach full capacity.
“We are already attracting commercial interest, nearly 70 percent of which is from global customers, and we have hired specialists to focus on this space,” Panicker said. “We are looking to leverage our expertise in electronic manufacturing services (EMS) to grow our presence in the semiconductor ecosystem, but we do not have plans for a pure-play chip fab yet.”
Ashok Mehta, managing director of textile exporter and chip tester Suchi Semicon, also received grants from the Gujarat state government last month to set up an OSAT facility.
“We are 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 company will try to get into this business. We are taking an early leap with an investment of $100 million and we will try to produce 3 million chips per day from our facility once it is at full capacity within the next 24 months.”
Mehta and Panicker reflect the kind of optimism that industry stakeholders are showing in the OSAT space. However, the incentive for OSATs from the centre, going by the current industry trajectory, appears to be on a downward curve as veterans now expect to develop themselves as both competition and business opportunities grow in India.
Criticism of over-stimulation of low-value semiconductor projects has been mounting since the 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 about 30 percent. The rest is being fueled by government and central incentives.
Industry stakeholders criticized the move at the time, questioning whether such a move would really make a difference. ISM, the officials cited above said, wants to avoid a similar situation in the future.
