From Tata Group to HCL: Here's why the decision of some top Indian companies to enter the semiconductor fray is good news

You could call it the Corona effect. Or say it is the right place and time. On January 18 this year, it was not surprising when the HCL Group said it was partnering with Taiwan’s Foxconn to set up a facility to test and package semiconductors designed by third parties. 

HCL Group isn’t the only Indian conglomerate trying to get into OSATs. The salt to software Tata group and CG Power, which is into design and  manufacturing of products related to power generation, received government approval to set up testing and packaging plants in the country on February 29. The Union Cabinet also approved India’s first chip fab proposal, that of the Tata group in collaboration with Powerchip Taiwan, which will come up in Gujarat’s Dholera at an estimated investment of Rs 27,000 crore. Besides, the Hiranandani Group, which made its billions in real estate, is also in the game. All of them spied an opportunity and are trying to make the most of it.
That opportunity has come because the Covid-19 lockdowns in 2020 disrupted supply chains of everything, from the potato chips that fed a locked-in population to the silicon chips or semiconductors that go into smartphones, laptops, game consoles and even cars and buses.

For the Tata group—which already operates in various sectors that heavily rely on semiconductors, such as automobiles and electronics—stepping into the semiconductor ecosystem promises cost benefits and greater control over products. In the case of power electronics player CG Power—which serves end markets like automotive, industrial, and transport and logistics—this will help extend its value chain by vertically integrating the most important and strategic component of power electronics, semiconductor chipsets. And it is timely because all three of its end markets are poised to grow exponentially in India over the next decade.

The HCL Group, too, is heavily invested in semiconductors: HCLTech provides end-to-end engineering services spanning the entire IC manufacturing process. In grabbing Foxconn for an OSAT or outsourced semiconductor assembly and testing plant, HCL is also getting closer to its manufacturing roots in a manner.

Roshni Nadar Malhotra, Chairperson of HCLTech, told Business Today, “The genesis of HCL [in 1976] was in manufacturing and creating India’s first indigenous 8-bit processor-based PC. We shipped the same day as Apple, but India was a closed economy, and no one ever covered us. And so, there’s been a rich legacy that we’ve had in engineering services and creating for engineering.” 

Nadar Malhotra, who runs the business founded by her father Shiv Nadar, says HCL has the manufacturing DNA and understands this ecosystem. HCLTech, the world’s eighth-largest IT services firm, works with all the top semiconductor players and OSATs in equipment automation, data management and process control. 

RIGHT TIME

In December 2021, the Indian government announced a Rs 76,000-crore incentive package for the semiconductor industry. In the February 2024 Interim Budget, the government allocated Rs 6,903 crore for the scheme. Today, with every big economy scrambling to “reshore” the fabs, OSATs are the biggest opportunity unfolding in India’s information technology landscape. 

Indian IT services companies have been working with global chip ecosystem players at the backend and now see this as a great opportunity to scale vertically. While HCL Group declined to share more details on the backend work, Harshul Asnani, President-Technology and Media Business, Americas, Tech Mahindra, explains his company’s role in the ecosystem. “We have been providing design services to several leading semiconductor companies globally for over a decade,” he says. This includes end-to-end design services in pre-silicon and post-silicon validation, embedded software, systems design, automated test engineering, and new-age solutions in IoT for various industry verticals. Tech Mahindra also provides turnkey system-on-chip (SoC) design services for new-generation silicon and derivative products in digital and analog domains.

BUT WHY OSATS?

OSATs are one of the key parts of the semiconductor supply chain. They are just like pure-play foundries but assemble, package, and test the wafers fabricated by any foundry (like TSMC) or integrated device manufacturer (IDM, like Intel). Setting up an OSAT is simpler and cheaper than a fab, and an OSAT can be up and running in a year and a half. 

With chips becoming an integral part of everyday life and even being tested in the human brain, the semiconductor industry is expected to reach $1 trillion by 2030. Given the growing demand for chips, many fabs are coming up worldwide. 

Ajai Chowdhry, a co-founder of HCL, points out that only some of the fabs coming up will have ATMP (assembly, testing, marking and packaging) plants sitting next to them. “So they will ship the wafer out to OSATs, who will do the packaging. Given that most of the packaging market is in Asia, that is where India can benefit,” says Chowdhry, the founder of Electronics Products Innovation Consortium. He is also on the advisory committee of the India Semiconductor Mission. 

Sanjay Gupta, Chairperson of the India Electronics & Semiconductor Association (IESA), says, “Indian IT companies have expertise in software development, system integration, chip design, verification, and validation, which are essential for the semiconductor industry.” 

Indian companies also have established partnerships and collaborations with global semiconductor players, such as Intel, Samsung, IBM, and TSMC, to provide them with various services and solutions, which is why they can leverage their existing capabilities and relationships to enter the OSAT and fab segments, he says.

RIGHT PLACE

Amongst the leading chip players, so far, only Micron Technology, a US-based memory chip maker, has announced plans to set up an ATMP plant in India. Indian companies building OSATs can bring multiple new opportunities against just one ATMP unit by Micron. The planned HCL-Foxconn OSAT facility in India is worth a third of Micron’s planned investment in the ATMP in Gujarat, but the HCL-Foxconn project will have a much bigger market.
Micron ATMP’s output is restricted to Micron products as it is an IDM, not a foundry or OSAT, says Danish Faruqui, CEO of Fab Economics, a US-based boutique advisory for semiconductor fab/ATMP/OSAT greenfield projects. “Micron’s ATMP will add only to supply chain resiliency for Micron and its customers. But the HCL-Foxconn OSAT will provide assembly, packaging, and testing to a whole array of customers like a foundry model, thus enhancing supply chain resiliency for multiple players in India and globally,” says Faruqui.

Also, while Micron ATMP’s output is restricted primarily to memory die type assembly, packaging and testing, HCL-Foxconn’s OSAT will offer fungibility for assembly, packaging and testing of logic, memory, analog sensors, and discreet die types. So India will offer the full portfolio diversity to design, manufacture, package and test products for all end markets. 

OSATs from Indian players will be large assembly, packaging and testing units that could provide service to potential fabs in India needing OSAT services. For the design start-ups sprouting with government support, these OSATs can help complete India’s manufacturing-assembly-packaging-test value chain domestically. In short, India will sit on a trusted value chain.

CHINA’S SUPREMACY

Fab Economics says 98% of the world’s OSAT capacity is physically located in Asia and concentrated in China, whether the companies owning them are headquartered in Taiwan or the US. “It is important to understand the China OSAT play to inform strategy and planning around OSATs,” says Faruqui. He says China understands the strategic importance of OSATs. 

China has three OSAT players in the next-generation advanced packaging, 11 in the commercial or current age advanced packaging and five in the legacy playing architectures—a portfolio unmatched in any geography. Fab Economics says China-based OSAT facilities took in annual revenue of $14.68 billion in 2023, which could grow four times by the decade’s end. 

US-China tensions have been going up in the past few years. The US has imposed targeted sanctions on advanced technology across equipment and fabrication services to be exported to Chinese players, including restricting TSMC wafer supply used for leading-edge products.

However, according to the Global Business Policy Council R&A, advanced packaging is still untouched. Instead, Taiwan-based OSATs with manufacturing sites in China, such as King Yuan Electronics and ASE Group, have aggressively ramped up their capacity support for China-based clients, including HiSilicon, Oppo, and Unisoc.
Faruqui notes that China has been developing OSAT capacity aggressively for the past two years as it knows that the end value chain would not be a permanent free pass. 

“India is a very close alternative to China for an OSAT hub, but an India-based OSAT ecosystem build-up requires strategic planning informed with China OSAT portfolio,” says Faruqui, adding, “Otherwise, OSAT being a cost-sensitive play, the Indian player may face trouble commercially.”

NOT JUST CHINA

Indian firms will again have to get a technology-grade licence. The IESA’s Gupta says the production-grade technology for OSAT can be obtained from various sources and the international players that own the IP and have set up plants in China, Taiwan, Malaysia and Singapore. For instance, CG Power has signed a JV with Renesas Electronics and Stars Microelectronics. “This relationship covers both access to technology through Stars Microelectronics and offtake of output by Renesas Electronics, which are two most important ingredients for commercial success of an OSAT project,” says Satya Gupta, President of VLSI Society.

But semiconductor analyst Arun Mampazhy warns of the danger of expanding in plain-vanilla packaging and too many companies setting up facilities, which could lead to idle capacity. To avoid this pitfall, the newcomers could graduate to advanced packaging.

Advanced packaging architectures lie behind all semiconductor leadership products that are the true moat of competitive advantage of end devices. This kind of packaging architecture is behind Nvidia’s H100 GPUs powering Gen AI/ChatGPT. The same goes for AMD MI 300 AI Accelerators, Apple M series Ultra, A17, Intel’s Meteor Lake and Amazon’s Inferno. 

Prithvideep Singh, General Manager at CDIL Semiconductors, a Mohali-headquartered firm that began making chips in 1964 but now works on a “fabless” model, says these OSATs can look at developing products five years down the line. “It might take five years, but step one is to learn the product, technology, and process. Then you can always use capacity and build your brand,” says Singh.

INDIA, AN OSAT NATION?

India is by far the best place for subsidising ATMP/OSAT units. If one combines the Indian government’s semiconductor incentive scheme with incentives offered by various states, the subsidy could go up to 70% for the major cost structures involved in OSAT/ATMP site economics.

But incentives and government support alone cannot make India an OSAT nation. Indian players getting into OSATs must ensure successful execution while keeping track of the competition. Over the past decade, there has been growth and acceptance of speciality foundries that have innovated with architecture and materials on the legacy nodes. Still, there has been no radical player in the value chain’s backend or packaging portion—India can leverage this strategic value opportunity. 

THE WAY AHEAD

With the government doing its bit to get the best private names in the business, 2024 could be a breakout year for the sector in India. “The year 2024 will be a breakout year for this sector with large OSAT projects already approved and more under evaluation,” says Gupta of the VLSI Society.  

However, the government has made production-grade technology mandatory for approving any project. According to information in the public domain, many projects are being discussed, including those of Tower Semiconductor (fab), Silicon Power (compound semiconductor fab), and SICSEM (compound semiconductor fab).

“A significant chunk of Rs 4,203 crore has been earmarked for incentives for ATMP, Rs 1,500 crore for fabs, Rs 900 crore support for the Mohali-based semiconductor laboratory, and Rs 200 crore for the design-linked incentive scheme,” says Gupta of IESA.

The players expect the government evaluation of other projects to be completed by the end of this year.  

@nidhisingal