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The past few days have seen a heated war of words between leaders of two Indian states regarding the siting of semiconductor plants in India. Himanta Biswa Sarma, the Chief Minister of Assam – where a greenfield semiconductor plant is being built in Jagiroad of Morigaon district, has locked horns with Priyank Kharge, the IT Minister of Karnataka – which has traditionally been a leader in the Indian electronics manufacturing sector, over the issue of alleged “politically motivated” sitings of the five new semiconductor plants in India.
Illustration by The Geostrata
On the other hand, at the international level, the past few weeks have been momentous in the history of India’s semiconductor ambitions. India and the USA have entered into a historic agreement to set up a semiconductor fabrication unit to manufacture semiconductors with applications in national security, telecommunications, and green energy.
Extending such bilateral partnerships in semiconductor tech transfer, Tata Electronics and Taiwan’s PSMC – one of the world’s leading semiconductor manufacturers, have finalized their agreement to collaboratively build India’s first 12-inch semiconductor fab facility in Gujarat.
Amidst these dichotomous policy discourses on expanding semiconductor infrastructure in India, a pertinent policy question regarding the siting of the semiconductor plants arises, as all the five semiconductor manufacturing and OSAT facilities have been approved to be set up in Gujarat and Assam – two Indian states that have had no significant presence in the Indian electronics sector yet.
So, the questions pertinent to efficient industrial policy design are:
Where should greenfield industrial projects be sited?
What makes economic sense – developing greenfield high-tech clusters to ensure balanced regional development, or developing specialized clusters of inter-related sets of industries to benefit from their synergies and complementarities?
SITING OF SEMICONDUCTOR FABRICATION AND OSAT FACILITIES: WERE COMPARATIVE FEASIBILITY STUDIES CONDUCTED?
The Indian electronics manufacturing ecosystem has historically developed around six key clusters – Tamil Nadu, Andhra Pradesh, Maharashtra, Karnataka, Telangana, and the National Capital Region. Given this, the decision to develop Gujarat and Assam as greenfield semiconductor ecosystems with massive government subsidies prima facie raises doubts on efficient public expenditure management.
Our semiconductor policies have left the following unanswered, fueling the fire of inter-state rivalry in attracting high-tech private investments:
Were there pre-feasibility and feasibility studies and/or cost-benefit analyses conducted by domain experts before the siting of these greenfield projects was finalized?
Were alternative sites compared for their relative market suitability, transport, water, and power availability at the most economical rates?
What were the pre-eminent socio-political-economic factors that led to the decision of developing greenfield semiconductor ecosystems in Gujarat and Assam?
Even as our semiconductor policies have left these loose ends, scholarly evidence suggests that developing manufacturing clusters comprising of inter-related industries boosts economic productivity due to increased ease of access to information, talent, and institutions.
THE CASE FOR CO-LOCATING SEMICONDUCTORS AND ELECTRONICS CLUSTERS TO GAIN COMPETITIVE ADVANTAGE
The semiconductor infrastructure in India is being built to gain a competitive advantage in our domestic semiconductor manufacturing and OSAT capabilities. But the siting decisions have been taken without regard to leveraging the synergistic strengths and opportunities from existing electronics manufacturing clusters in India.
Michael Porter, in his seminal 1998 Harvard Business Review article on the importance of developing synergistic manufacturing clusters to gain competitive advantage, says that developing inter-related industries at the cluster level has three unique business advantages:
Adapted from Michael Porter's HBR Article titled
"Clusters and the New Economics of Competition"
As India is a new entrant in the global semiconductor market and is looking to rapidly expand its R&D and manufacturing capacities in this high-tech space, distributing our electronics and semiconductor value chains across our vast geographic territory may not be a prudent economic move.
Our semiconductor policies need to focus on developing linkages and complementarities between different supply chain components of the semiconductors/electronics manufacturing clusters so that this fledgling domestic market establishes as a niche that can sustain itself in the long run.
In the next section, I suggest a few policy recommendations to aid the siting decisions of the capital-intensive semiconductor plants, informed by the economic logic of production:
HOW TO DEVELOP SEMICONDUCTORS - ELECTRONIC CLUSTERS AS INNOVATION NICHES: THE WAY FORWARD
The evidence from research is clear and intuitively easy to understand – siting the sources of demand and supply in closer geographic proximity – especially when we are trying to save costs and increase our economic productivity – makes better economic sense, than to distribute our supply chains across different geographies.
Keeping this in mind, I suggest the following policy recommendations, especially applicable to facilitating efficient sub-national semiconductor policymaking:
Developing Cross-state semiconductor/electronics manufacturing clusters:
The Indian semiconductor market can develop cross-state semiconductor/electronics manufacturing hubs, especially in regions where the existing clusters span across state borders (eg: NCR electronics/auto cluster, Karnataka-Tamil Nadu electronics/auto cluster).
Such state-state cooperation in building manufacturing hubs with clearly demarcated governance arrangements will help bridge regional development goals and economic efficiency of production.
Building coordination and trust via horizontal integration of electronics/semiconductors manufacturing clusters:
Our semiconductor policies have not focused on taking a whole-systems approach while choosing the sites of the manufacturing and OSAT facilities. Aiming to build horizontal integration of related sub-systems within the electronics sector will fetch us greater economies of scale, and hence, will maximise our economic efficiency.
Co-locating semiconductor incubation centres within these manufacturing clusters:
Whereas the Design-Linked Incentive scheme under the India Semiconductor Mission aims at developing domestic R&D capabilities in semiconductor innovations, setting up public funded incubators for the chip startups receiving funding under this scheme, within the afore-mentioned niche clusters, will help them innovate and design as per latest industry trends, with access to state-of-the-art technology and skilled workforce.
Conducting & Publishing pre-feasibility and feasibility studies of site locations of future semiconductor facilities in regards to their social and economic costs:
What is lacking in our semiconductor policies today is transparency regarding the siting decisions, that has led to political squabbles at the sub-national level. To prevent such unhelpful politicization of technological advancement, the Union government must conduct and transparently publish feasibility studies of siting these capital-intensive industries, to gain investor and citizen trust.
Taking preventive steps to arrest the ill effects of corporate urbanization:
Lastly, there is high probability that creation of such specialized industrial clusters may reproduce already existing social and regional inequities, and may give rise to informal ghettoization of low-skilled workers surrounding the high-tech clusters.
Our policies should ensure that equitable access to employment and alternative sources of income are in place for those stakeholders who may be negatively affected due to the establishment of the high-tech clusters.
BY PRANUSHA KULKARNI
India Technology Policy Fellow, Pacific Forum
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