As India rapidly moves forward to position itself as a global manufacturing hub, the country’s chip industry has emerged as a critical area of focus. Why? Because it is the backbone of modern technology, powering everything from smartphones to electric vehicles, data centres, and AI-driven applications, practically every tech device we use now.

According to a joint report by Counterpoint Research and the India Electronics & Semiconductor Association (IESA), India’s chip consumption is expected to reach $64 billion by 2026, tripling in size from $22 billion in 2019, with a projected 16% compound annual growth rate (CAGR) over that period. That amount is expected to reach $110 billion by 2030, at which point analysts anticipate India will account for approximately 10% of direct global semiconductor consumption.

Furthermore, McKinsey highlighted that with the growing demand, the global semiconductor industry is projected to become a trillion-dollar industry by 2030. Now that we know the growing importance of semiconductors, let’s look at what is powering this boom and why investors may want to watch out for this industry. 

Semiconductor & Its Significance 

With the launch of “India Semiconductor Mission in 2021, it’s evident that the country is just not cheering from the sidelines of global chip demand—it’s getting into the game with several incentives:

• Semicon India Program: Launched with a $10 billion investment, this initiative aims to attract semiconductor fabs, display fabrication units, and ATMP facilities.
• Production Linked Incentive (PLI) Scheme: As part of the 2024-2025 Union Budget, the government has expanded PLI schemes to cover semiconductor fabs, assembly units, and R&D centres, offering subsidies of up to 20% of capital expenditure. 
• Skill Development Initiatives: A fund of ₹4,000 crore has been allocated for training engineers and technicians in semiconductor technologies to address the skills gap. Also, the government’s “Chips to Startup” (C2S) program, in collaboration with companies like Synopsys, aims to create a skilled workforce by partnering with over 400 universities.  

FDI Push

As part of the government’s vision of making India a global manufacturing hub, Foreign Direct Investment (FDI) is playing a pivotal role in accelerating the growth of India’s semiconductor industry. According to a recent study by Economist Intelligence, FDI inflows to India increased 20-fold between 2000 and 2021, with an expectation of rising allocation for manufacturing in the future.

As seen in the chart above, there was a consistent decline from 2005 to around 2015, before a sharp increase in investments, indicating a renewed focus on the sector. According to government data, India jumped 47.8% to $16.17 billion in April-June this fiscal year on healthy inflows in the services, computer, telecom, and pharma sectors.

Semiconductor Surge: Key Players, Sectors 

India’s semiconductor industry is currently focused on specific segments of the semiconductor value chain rather than full-scale chip manufacturing, given the complexities and capital-intensive nature of establishing large-scale fabs. Here’s a quick snapshot of the key components and areas where Indian companies are actively involved:

Source: Company data
Note: The above list is for educational purposes only and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Investors interested in India’s semiconductor sector should focus on well-positioned companies in these core areas, as they will likely benefit from the government’s push for self-reliance and increased domestic demand.

Why Invest in Semiconductor Stocks?

Let’s dive into the reasons why adding semiconductor stocks to your portfolio might be a smart move.

Rising Global Demand: The demand for semiconductors is rising across industries like automotive, consumer electronics, telecommunications, and healthcare. India’s focus on digitisation, smart cities, and EV adoption further drives this demand.

High Growth Potential: Semiconductor stocks in India operate in a rapidly evolving industry. As a result, the industry is on an upward trajectory, driven by demand across various sectors, including AI, 5G, and EVs.

Government Support: India is implementing strong policies and offering substantial incentives to attract semiconductor manufacturing. This support, combined with global shifts in supply chains, makes Indian semiconductor stocks a promising investment.

Resilient Market: Despite global economic uncertainties, semiconductor stocks have shown strong performance due to sustained demand and technological advancements.

The Global Chip Shortage

The COVID-19 pandemic highlighted the issue of having a concentrated supply chain in one region, mainly China. That, coupled with recent geopolitical tensions like US-China trade wars, have underscored the need for diversified and resilient semiconductor supply chains.

Thus, as companies reduce their dependence on China, India stands to benefit from this shift, attracting both investments and collaborations. Moreover, the country has also signed agreements with Taiwan, Japan, and the US to strengthen its semiconductor capabilities. These collaborations will bring technology transfers, skilled talent, and infrastructure investments. 

That said, the semiconductor industry is highly sensitive to geopolitical tensions. India’s success in attracting global players will depend on navigating complex trade relationships with countries like the US, Taiwan, and China.

Other challenges India faces include high capital requirements for Semiconductor fabs that are highly capital-intensive, asking for investments of over $10 billion each, which can pose ti be a hurdle for new entrants. Moreover, the country needs advanced technology and a skilled workforce for high-end chip fabrication. Strategic partnerships and investments in R&D are crucial to bridging this gap.

Key Points for Investors to Watch

For investors looking for a diversified portfolio in the semiconductor industry, here are certain factors to consider before diving into this sector:

Strategic Partnerships: Keep an eye on collaborations between Indian firms and global giants like TSMC and NVIDIA, as these are critical for scaling up India’s semiconductor capabilities.

Supply Chain and Geopolitical Risks: Geopolitical instability can lead to fluctuations in stock prices as global trade dynamics heavily influence semiconductor supply chains. Investors should focus on companies with strong supply chain management and diversification strategies.

Government Policy Changes: Monitor updates on PLI schemes and additional incentives, as they directly impact the growth of the semiconductor sector.

Technological Trends: Companies focusing on AI, 5G, and electric vehicles are likely to benefit the most from increased semiconductor demand.

Long-term vs Short-term Volatility: Investors with a long-term horizon can benefit from compounding growth, especially as India’s semiconductor sector gains momentum and matures. Patience is Key. Building fabs and scaling production takes several years.

To Wrap It Up

In conclusion, India’s journey toward becoming a global semiconductor manufacturing hub is full of potential but not without challenges. With robust government support, strategic investments, and collaborations with global technology leaders, the country is well-positioned to make significant strides.

However, investors need to be patient and consider the long-term prospects. Notably, the semiconductor industry is capital-intensive and requires sustained efforts in technology development, talent acquisition, and infrastructure build-out.

Disclaimer: The information provided in this article is for informational purposes only and is not intended as financial, investment, or professional advice. Readers are encouraged to seek independent advice before acting on any information contained in this article. Smallcase Technologies Private Limited disclaims any responsibility for actions taken based on the content of this publication.