Semiconductors lie at the core of modern life. Factories to make them can be extremely expensive—to the order of $20 billion or so for a single factory. The ultimate prize can be significant—building a scientific and technical eco-system like Silicon Valley. “The success of Silicon Valley is one that many other countries would like to replicate,” Chad Bown and Dan Wang point out in a 2024 article about the semiconductor industry in the Journal of Economic Perspectives. “They too want a self-sustaining ecosystem for generating, producing, and then regenerating cutting-edge technologies.”
Governments have a critical role to play in this construct, and the Indian government has been trying to progressively position itself for that.
As a recent paper by Pinelopi K. Goldberg and others, about industrial policy in the semiconductor industry, points out: “…government support has been critical for the semiconductor industry’s growth, particularly during its initial development phase. This support is evident across all major segments of the value chain, benefiting established leaders at the technology frontier, such as Korea and Taiwan, countries seeking to advance their industry, such as China and the US, and countries attempting to enter the market, such as India.”
They add: “Since 2020, there has been a significant increase in government intervention, with China, the US, Japan, Korea, and India notably ramping up financial support for the industry.”
Will those efforts bear fruit and see India rise up the semiconductor value chain?
Government support
As Chart 1 shows, the Indian government has its work cut out, in terms of encouraging a domestic semiconductor industry. Countries such as the US, South Korea and China, all countries with large existing semiconductor manufacturing facilities, have committed multiples of what the Indian government has committed to the sector. Even beyond this, governments such as the US have non-fiscal measures in place, such as specific targeted tariffs, often to ensure that specific chip technologies are not transferred to China.
The Indian government has three specific schemes targeted at the semiconductor industry. In addition, there are PLI schemes for electronics and information technology hardware. As originally envisaged in 2020-21, these schemes together commit around $17.5 billion, of which around $10 billion is specifically for semiconductor manufacturing.
Actual payouts under the various programmes have been lesser. Over 2023-24 and 2024-25, the total amount actually handed out by the government is to the order of about ₹16,000 crore—or a little less than $2 billion (Chart 2).
Apart from the central government incentives, which subsidize costs of setting up a unit up to 50% of the project cost, states individually offer schemes of their own, with varying degrees of additional subsidies beyond what the centre provides. For instance, Tamil Nadu commits to offer 50% of the capex assistance provided by the centre, as does Uttar Pradesh. Karnataka and Gujarat offer 20% and 40%, respectively. In addition, states offer additional benefits such as waivers on stamp duty on land acquisition, electricity subsidies etc.
Stage managed
The semiconductor industry, globally, has three stages: design, fabrication, and ‘assembly, test, and package’. The first two stages are the holy grail, so to speak, for the complexity and specialization they involve. For decades, all three stages were done by vertically integrated firms. But the industry eventually fragmented, with the so-called ‘fabless’ model gaining currency—here, companies focus on design, leaving the huge capital investments needed to firms focused on manufacturing. The assembly stage is outsourced as well.
A BCG report from 2021, authored by Antonio Varas, and others points out: “The dramatic increase in technology complexity and need for scale to afford massive investments to keep the pace of innovation in both design (in the form of R&D) and manufacturing (in the form of capital expenditure) favoured the emergence of specialized players.”
Thus, different stages in the process have fragmented across geographies. The US leads the world in chip design and research and development, given its huge pool of scientific and technical manpower. East Asia is where the bulk of manufacturing is concentrated. And it is in China, and East Asia, that the assembly, test and package stage is largely done.
It is this last stage, where among other processes, wafers are cut into individual chips, that India has started with. The bulk of the payouts under the various semiconductor-oriented schemes have been toward such units.
Innovation meets cost
Semiconductor imports into India have steadily risen (Chart 3). This is something to be expected, given the increased domestic manufacturing under various PLI schemes such as those for displays or mobile phones.
However, the source of such imports has shifted away from China and Hong Kong. In 2018-19, these two countries accounted for about 80% of semiconductor imports into India. In 2024-25, this was down to about 52%. And while together, China and Hong Kong are still the biggest source of chips being sent to India, Taiwan and South Korea now account for close to a third of chip imports, compared with around 3.5% in 2018-19 (Chart 4).
Notwithstanding attempts by the US to ‘re-shore’, much of the global semiconductor manufacturing industry is concentrated in Asia. This is partly due to the fact that end-users of these chips—manufacturing units that assemble them into computers, phones, television sets—are also located in Asia, especially China. But as Bown and Wang point out: “The increasing concentration of manufacturing in Asia was not due to only market forces: foreign industrial policy continued to play a role.” They quote the Semiconductor Industry Association as estimating that it was 30% more expensive to set up a fab in the US as compared with Taiwan or South Korea, with the differential rising to 50% in the case of China. Further, around 40-70% of that cost differential was due to subsidies.
But while states, especially in East Asia and China, have aggressively subsidized and promoted chip manufacturing, international technology transfer is critical. As the Goldberg paper points out: “Crucially, beyond making the industry more attractive to entrepreneurs by changing relative prices (through tariffs, subsidized loans, tax breaks etc.), each state was directly involved in the process of international technology acquisition, absorption, and diffusion. Put differently, developing a domestic industry seems to have required some infant industry promotion and, critically, also extensive international technology transfer facilitated by public agencies.”
Given the massive R&D requirements, none of the governments in East Asia that are technological leaders today succeeded entirely on their own. South Korea, Japan and Taiwan all relied on technology collaborations with American firms.
The China factor
It is in this context that today’s semiconductor geopolitics become significant. With the US attempting to prevent, through various measures, technology transfer to China, it becomes an open question as to the extent to which China can move up the value chain, beyond the assembly stage to fabrication and design—though this has already happened to some extent, despite US restrictions.
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But whether China can eventually come to dominate semiconductor manufacturing, like it has so many other industries, even cutting-edge ones such as electric vehicle manufacture, is a different matter entirely.
As the Goldberg paper argues, China has had decidedly mixed results in moving up the semiconductor value chain. Estimates are that it accounts for 1-5% of the global market share in chip design and R&D, and 7% of the market share in chip manufacturing, despite decades of state support to industry. The BCG report, using data as of 2019, puts China’s market share in fabrication at 13-16%, not much higher than that of the US itself (11-12%). In contrast, China’s share of the outsourced assembly, packaging and testing market is around 38%.
Why has China been relatively less successful in the global race to dominate chip manufacturing? The Goldberg paper, quoting research done by JD Minnich, points to the fact that much of China’s production, till recently, has been for international markets rather than its own domestic market. Because of this, it lacked the bargaining power to entice foreign firms, as it couldn’t trade domestic market access for technology transfer.
China accounts for 1-5% of the global market share in chip design and R&D, and 7% of the market share in chip manufacturing, some estimates state.
In recent years, though, it has met with much greater success. This also coincides with shifts within China, towards its domestic market becoming more lucrative than earlier. The authors conclude: “Lessons from China’s efforts are also consistent with lessons from earlier East Asian experiences. In particular, China’s efforts only highlight the importance of technology transfer for successful industrial policy; outside of the US, our historical analysis has not uncovered a single instance where a domestic semiconductor industry developed without substantial foreign technology. This highlights that developing the industry, even with generous support, is difficult without foreign partners willing to share technology.”
In this respect, India’s current position in global geopolitics becomes important. Firms such as Apple are looking aggressively at shifting at least a part of their production outside China. So, technology transfer becomes part of the package, at least at the assembly stage. However, the real challenge will come when India tries to move up the value chain toward manufacturing.
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