A road map to propel US-India chips push

Prime Minister (PM) Narendra Modi will travel to Washington DC on June 21 for his first official State visit. A prominent item on the agenda is technology cooperation. In May last year, the two governments elevated their strategic partnership by announcing an initiative on Critical and Emerging Technology (iCET). During this visit, the two sides will aim to announce concrete steps under this initiative. This article proposes a way forward on one of the main pillars of iCET: Resilient semiconductor supply chains. iCET’s readout explicitly mentioned enhanced cooperation in three areas: Supporting the development of a semiconductor design, manufacturing, and fabrication ecosystem in India; promoting the development of a skilled semiconductor workforce; and encouraging the development of fabs for mature technology nodes and packaging in India. Using iCET’s vision, we propose cooperation options in the three archetypal stages of the semiconductor supply chain: Design, manufacturing, and Outsourced Assembly and Test (OSAT).

On the face of it, the India-US connection is already a crucial arm of the global semiconductor design ecosystem. The chip design stage requires large numbers of skilled engineers, which is where India’s strength lies. India’s Silicon Valley in Bengaluru took off with an American semiconductor firm, Texas Instruments, starting its design centre there in 1985. Today, the top 10 American semiconductor firms by revenue have design centres in India. Over time, many Indian chip-design-as-a-service companies have also sprung up, catering to the design centres in India and abroad.

An essential cog of the design integration process is specialised software called Electronic Design Automation (EDA) which is used to model, analyse, simulate and verify circuits. The world’s top three EDA companies, collectively having >97% market share, are American; they, too, have their research and development centres in India. Technology upgradation of these design centres and further investments by more American companies will serve the crucial goal of developing a skilled workforce.

Further, a critical Indian public policy concern today is the indigenisation of intellectual property. Even though India is believed to have 20% of the world’s semiconductor design engineers, the cumulative annual revenue of domestic semiconductor design companies is less than ₹150 crore, as most of the intellectual property (IP) is owned by foreign companies. The key to transitioning from design services to viable chip-as-products design requires a vibrant downstream market. Taiwan and China saw the creation of many fabless chip companies because each economy had significant demand from its domestic market for chips. India stands to benefit from western de-risking by developing extensive electronics assembly as an alternative to Chinese production. Such assembly could eventually provide a sizable domestic market to spur Indian-designed chips.

Another area of collaboration is open-source IP. Open-source alternatives can reduce the costs of chip design substantially. The US and India can jointly encourage commercialising open-source processor alternatives, contributing to supply chain resilience in a market that’s overly dependent on a single company, Arm.

The second stage – chip manufacturing – is India’s weakest link in its semiconductor ambitions. It doesn’t have much to offer, while the US is still home to significant fabrication capacity. The Indian government has announced ambitious plans to kickstart commercial chip manufacturing in India. While investment decisions by US companies will be influenced by several factors beyond government-to-government alignment, the US government reiterating India as a trusted technology partner would help reduce the geopolitical risk for companies. Any investment by an American company in a mature technology node fabrication facility in India will have the effect that the Indo-US civil nuclear deal had in the 2000s.

Chip design start-ups need access to prototyping facilities for testing before committing to high-volume commercial production. This is a costly and time-consuming process. India and the US can jointly sponsor a prototyping foundry that start-ups from these places can easily access.

OSAT, as the third stage, should be a perfect fit for investment in India. OSAT plants test the manufactured chips for defects and ensure protective packaging for all finished chips. This stage requires high capital investment, though not of the same order as fabs. Further, this stage requires large numbers of relatively low-skilled labour, whereas the manufacturing stage requires a sizeable high-skilled workforce.

With low-skilled labour better available in India, American companies can benefit by offshoring these operations to India. The Indian government has announced several attractive financial incentives, such as an upfront subsidy of 50% of the cost of capital for an OSAT facility. Announcements by American OSAT companies to set up Indian operations would be crucial for reducing the overdependence on East Asia for this stage of the supply chain. Another concrete step the two governments can take is to announce joint ventures by a university from each country for doctoral programmes in advanced packaging. Research and development in packaging is a frontier area for semiconductors, and collaboration here will provide India and the US with a strategic advantage.

Collaboration in these three areas of commercial semiconductors will help resolve the more complex issues related to defence cooperation, such as ITAR (International Traffic in Arms Regulations) — a US regulatory regime that restricts and controls the export of defence and space technologies. During the Cold War, India faced stringent technology denial from international regimes in the nuclear and space sectors. This factor casts a long shadow on India’s foreign policy outlook. Given the current focus on semiconductors, a significant announcement during the PM’s visit can potentially push India-US relations into another orbit.

Pranay Kotasthane is chairperson of the high-tech geopolitics programme at Takshashila Institution. Douglas Fuller is associate professor at Copenhagen Business School. The views expressed are personal.