‘India has a big role to play’: New Delhi is trying to turn the country into a chip powerhouse

India could have a large role to play in the semiconductor industry, analysts say, as the world’s fifth-largest economy looks to boost its domestic chip sector.

Along with other countries like the U.S., India has been looking to forge strategic alliances around semiconductors, a critical technology that goes into many of the devices we use from smartphones to refrigerators.

But India has also been making moves to bring the manufacturing of chips to the country and has laid out incentives for the industry.

“I think India has a crucial role to play,” Pranay Kotasthane, chairperson of the high tech geopolitics program at the Takshashila Institution, told CNBC’s “Beyond the Valley” podcast, published last week.

The issue for many countries looking to boost their chipmaking prowess is that the companies and countries that dominate the industry are few and far between. For example, Taiwan and South Korea make up about 80% of the global foundry market. Foundries are facilities that manufacture chips that other companies design.

India has typically not been in the mix of the top countries for semiconductors. So there aren’t many giant Indian chip firms and certainly no leading-edge manufacturing companies.

While India might not have native semiconductor firms, it’s plan under the government of Prime Minister Narendra Modi relies on trying to attract foreign giants.

In December, India greenlit a $10 billion incentive plan for the semiconductor industry.

Therefore, New Delhi’s strategy seems to be twofold — lure in foreign companies and build on areas where India has an advantage.

The large amount of capital required, the time it takes to set up factories and uncertainty over the business, tax and trade environment has often put companies off setting up in India.

“Previous attempts in India failed because of apprehensions on these counts,” Kotasthane said.

However, there are signs that things are changing.

“The track record has been not great but the new government has been heading in the right direction … [with] policies to drive impetus and attract leading semi and fab companies,” Neil Shah, partner at tech consultancy Counterpoint Research, told CNBC.

India has a number of strengths which could back up its bid to be a global chipmaking hub.

“India’s strength is the huge domestic consumption market when it comes to semiconductors, being the second-largest populous economy in the world,” Shah said.

The analyst also said incentive plans will help. “Also, India has loads of English speaking engineering talent and [a] cheaper labor force making it cost effective,” Shah added.

That well-educated and cheap labor force could help India in a specific area of the semiconductor supply chain — chip design — an area that requires a large number of skilled workers.

“I have no doubt that India has a big role to play,” Kotasthane said.

“India has semiconductor humanpower. Semiconductor design requires large numbers of skilled engineers and this is where India’s strength lies,” he added.

Kotasthane said that of the largest semiconductor firms in the world, eight have design houses in India. While also in the early stages, India is trying to boost its domestic companies to build technology.

“What we are now seeing from the Indian government side is trying to take the next step. We have design centers of international firms, but India doesn’t have a lot of intellectual property, which can be termed Indian … because these are companies from other countries which are doing this. So now, the next step is the effort to build an ecosystem where there is some Indian IP (intellectual property) by Indian companies,” Kotasthane said.

While design is one area the analysts say that India can find success, manufacturing is a little more difficult.

In terms of the most cutting-edge chips, such as those in the latest flagship smartphones, Taiwan’s TSMC dominates the manufacturing arena.

India doesn’t have any fabs, or semiconductor fabrication plants, which manufacture chips. However, the government has looked to woo foreign chipmakers. ISMC Digital, a consortium of investors, is planning to build a $3 billion manufacturing facility in India. Tower Semiconductor, an Israeli company, would be the technology partner on that project.

Meanwhile, Foxconn, the Taiwanese firm that assembles Apple’s iPhones, and Indian mining company Vedanta have teamed up to build a $19.5 billion chipmaking facility in India.

These factories would be among the first semiconductor manufacturing plants in India. New Delhi is no doubt looking to lure giants like TSMC and Intel to India too.

However, the ISMC Digital plant will be making older generation chips, often called trailing-edge semiconductors, rather than the cutting-edge components made by the likes of TSMC. These trailing-edge chips are still important, but it does constrain India’s potential to become a global hub for the latest chips, especially as competition rises between countries.

“Trailing-edge fabs are equally important. The demand for these will not disappear anytime soon. Future applications such as 5G radios and electric vehicles will continue to require manufacturing at these nodes. Most current defence applications also require trailing-edge chips,” Kotasthane said.

“Many countries are wooing the leading-edge node foundries, with much larger incentive packages. So India might have to temper its expectations,” he added.