The Grand Folly of India’s Foundry Plans

At the beginning of the year, New Delhi’s outgoing government launched an initiative purported to drive the nation’s technology independence and reduce the current account deficit on electronics imports. The initiative describes a partnership between New Delhi and two industrial consortiums for the building of semiconductor manufacturing plants – one outside of the capital and the other in Western Gujarat.

“Every age has its peculiar folly: Some scheme, project, or fantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the force of imitation.” – Charles Mackay, “Extraordinary Popular Delusions and the Madness of Crowds”

The plan is ambitious. The 28nm fab near New Delhi and the 22nm foundry in Western Gujarat will each support 40,000 wafer starts per month. The plan is also very expensive. Together, the facilities are projected to cost just under $11B USD. The government’s role in these two separate efforts is essentially that of a zero cost banker. Each consortium will receive an interest free loan of approximately $900M USD. Furthermore, the central government is on the hook for 25% of the total capital outlays, and is providing further incentives in the form of a bundle of tax deductions and duty exemptions. Thus, New Delhi’s expenses in this effort, not counting the tax incentive bundle, are just shy of $4B. What did the previous Cabinet expect to receive as a benefit to the nation for such an industrial policy?

Well, India’s electronics imports reached $31B in 2013, and that number is expected to explode to a whopping $400B by 2020. The contention is that laws requiring local content will translate to a drop in the net import value of electronics and help ameliorate the balance of trade. More directly, though, the Cabinet advertised the economic benefits it expected from the project – an estimated 22,000 direct jobs and another 100,000 spawned from enterprises that would sprout up to support foundry operations and employees in their immediate locations. There are other hoped-for benefits of a more strategic nature. The policy echoes sentiments that call for greater Indian participation in the Information and Technology sector of the global economy, along with all the economic clout and revenues which follow. Furthermore, as India grows in its expected role as a world power, efforts need to be made to provide local sources for the components that are used in the increasingly sophisticated navigation and communications suites, avionics and targeting systems used in the aircraft, naval vessels, ground vehicles and missiles of India’s armed forces. But will this really be of benefit to India? A very quick look at basic math provides a distinctly negative answer to this question.

Consider the following: the central government in New Delhi will be responsible for subsidies and credit to the efforts of the two industrial consortia amounting to $4B (and recall that this is not counting an additional un-quantified bundle of tax and customs subsidies.) If the estimates of consequent employment are correct (and that’s a big ‘if’, folks), each direct job will cost the Indian taxpayer over $180,000. In a country where the per capita income is $4300, the cost-benefit ratio is atrocious. Adding the ‘indirect’ job creation estimate for a total of 122,000 expected positions (also a very questionable figure), the cost is still at least $33,000/job. The gross inefficiency of such government ‘investment’ is glaring. The balance of trade benefits are even more dubious.

Let’s assume that both fabs were fully functional today and produced a complete range of semiconductor devices for 3C (communications, computing and consumer) electronics. This would, by necessity, have to include analog, RF, mixed signal, optical and TTL components, microprocessors, DRAM, SRAM, Flash, programmable logic, SoCs, discretes, MCUs and so on. The combined 80,000 wafers/month capacity of the two fabs amounts to roughly 1.5% of worldwide market share in 200mm wafer equivalents. In 2013, the semiconductor market was $315B on a global basis. Thus, one could theoretically produce $4.8B of semiconductor value to offset the 2013 electronics import tab, reducing it to roughly $26B thru regulations requiring 100% local content.

However, in 2020 the effect is more or less inconsequential, as fab capacity limitations would reduce a $400B deficit merely to $395B. India’s fab capacity would have to expand by an order of magnitude to keep pace, with a consequent explosive growth in cost.These considerations just scratch the surface of what is becoming increasingly identified as a historic debacle in India’s central government industrial development planning. There are many other factors involved in assessing the short and long term utility and efficacy of this initiative, including the role of the central government, tax policy, technology considerations, social issues, environmental aspects and broader implications to the national economy.

These issues and more are explored in greater depth at the Vigil Futuri blog and the Pune Chips website.

lang: en_US