Bad conductor

Too little, too late: this is the refrain that grounds the Semiconductor Policy notified in March this year. It has been 25 years in the making and has still not broken new ground—or any ground at all.

By Ravi Visvesvaraya Prasad

The Semiconductor Policy notified on March 21, 2007 may be a case of “too little, too late”. It should have come out 25 or 30 years ago, but lethargy, infighting, turf wars and personality clashes among the bureaucracy and technology administrators caused the nation to lose a quarter century of development. Japan, Taiwan, South Korea and China have been riding the semiconductor wave.
Indian civil servants of that time were not unaware of the importance of semiconductors. Ashok Parthasarathi, science advisor to former prime minister Indira Gandhi, recalls that soon after her return to power in 1980, she asked him what the country was doing about silicon. Briefing her about the country’s fledgling initiatives in silicon and semiconductors, he asked her why she suddenly wanted to know about them. She pointed to a story in The Economist that stated that silicon would be the “new steel” of the 1980s.

The Indira Gandhi government entered into negotiations with the Hemlock Semiconductor Corporation (HSC), a subsidiary of Dow Corning, to build a plant to manufacture 220 tonnes of hyper-pure single crystal silicon from trichlorosilane at a cost of US$ 80 million. But a Tamil Nadu company, Mettur Chemicals, countered that it could also produce silicon by a different process—from silicon tetrachloride—using technology developed by the Indian Institute of Science (IIS), Bangalore. HSC was undoubtedly the best and most cost-effective technology in the world.

After intensive scrutiny, the Union government chose HSC over other leading manufacturers like the Mitsubishi Materials Corporation, Komatsu and Shin-Etsu Handotai of Japan, Siltronix of France, Topsil of Denmark, Wacker Siltronic of Germany, as well as other US manufacturers such as MEMC Electronic Materials. Since it was the era of technology sanctions due to the Pokharan-I blasts, it required several rounds of intense and delicate diplomatic negotiations to persuade the US government to permit HSC to enter into negotiations with the Indian government.

Then, there were the IIS and Mettur Chemicals, the proponents of indigenous technology and self-reliance. The indigenous lobby won: in 1987, the Union government cancelled its contract with HSC on the grounds that its 220-tonne capacity was too large for India, whose domestic demand was 26 tonnes per year. Apparently, it had not explored the possibility of exports.

The IIS’ silicon tetrachloride technology could not make the transition from the laboratory to full-scale manufacturing; it was too expensive and energy inefficient. Mettur Chemicals could produce only a few kilograms a year, and the purity was not good enough for strategic applications.

The result is that, till today, India does not have a fully functional silicon wafer manufacturing plant, which is a strategic necessity for the country’s defence, aerospace, space, telecommunications, information technology and nuclear sectors. The Indira Gandhi government also took the initiative to manufacture integrated circuits by establishing the Semiconductor Complex in Chandigarh. But foreign collaborators such as Advanced Micro Devices (AMD) and Gould Electronics Inc were reluctant to transfer their latest technologies, preferring to send only licensed technologies that they were phasing out. The Semiconductor Complex was also underfunded and too small to have world-class economies of scale. The Complex was always two generations behind the West and Japan in Integrated Circuits (IC) technologies.

When it was destroyed in a mysterious fire in 1989, there were allegations of sabotage. There have been some half-hearted attempts since 1989 to revive it. To this day, India does not have a single facility to manufacture Very Large Scale Integrated Circuits, a deficiency that has seriously held back the progress of our defence, aerospace, space, telecommunications, information technology, and nuclear sectors. After several years of lackadaisical analyses, the Indian government finally notified the Semiconductor Policy on 21 March 2007 in the form of its “Special Incentive Package Scheme to encourage Investments for Setting Up Semiconductor Fabrication and other micro and nanotechnology manufacture industries in India”. The government provided very generous incentives: “The Central Government or any of its agencies shall provide incentive of 20 per cent of the capital expenditure during the first ten years for the units in SEZ and 25 per cent of the capital expenditure for non-SEZ units….The incentives, if any, offered by the State Government or any of its agencies or local bodies shall be over and above this amount….The capital expenditure shall be the total of the capital expenditure in land, building, plant and machinery and technology including R&D….Any unit may claim incentives in the form of capital subsidy or equity participation in any combination of the following (i) equity in the project, not exceeding 26% (ii) capital subsidy in the form of investment grant and interest subsidy….

“The investment will be for the manufacture of all semiconductors and eco-system units, namely displays including Liquid Crystal Displays, Organic Light Emitting Diodes, Plasma Display Panels, any other emerging displays; storage devices; solar cells; photovoltaics; other advanced micro- and nanotechnology products; assembly and test of all the above products…”

These incentives will not be applicable to all such units but only to a selected few: “There shall be a ceiling on the number of units—2 to 3 fab units and 10 eco-system units….An Appraisal Committee shall be set up by the Department of Information Technology and headed by the Additional Secretary, Department of Information Technology. The Appraisal Committee will receive expressions of interest from investors and submit its recommendations to the Government. The Government shall consider such recommendations and grant approvals….”

But these incentives came too late for Intel, which announced that it would instead set up plants in China and Israel. Texas Instruments also announced that it would not set up a manufacturing facility in India but would concentrate only on design of ICs. The fact that only two to three fabrication units and 10 ecosystem units would be eligible for the 20-25 per cent subsidies have already led to allegations that there would be favouritism and crony capitalism. Apprehensions have already been expressed that these units would corner prime land and get power and water at subsidised rates.

So far, there have been two serious proposals. SemIndia is headed by a group of non-resident Indians (NRIs), with equity participation from Andhra Pradesh and Flextronics Software Systems, and technical collaboration from AMD. It announced plans to build an assembly and test plant on 25 acres of land at Hyderabad for US$ 100 million. Later, a US$ 3 billion fabrication unit would come up on 75 acres of land in Hyderabad in two phases.

The second serious consortium is the Hindustan Semiconductor Manufacturing Corporation (HSMC), also headed by a group of NRIs, with equity participation and technical collaboration from Infineon of Germany. Nano-Tech Silicon of South Korea, NeST [Network Systems] Technologies and Videocon have not made much headway.

The SemIndia proposal has already run into controversy, with the Telegu Desam Party (TDP) calling its Fab City “Fraud City”, and characterising it as similar to the Volkswagen project, in which the Andhra Pradesh government was defrauded of several crores by the German auto major. The TDP alleged that the allocation to SemIndia of 1,200 acres of prime land near the Hyderabad airport at a throwaway price of Rs 20 lakh per acre amounted to “crony capitalism”. It also questioned the credentials of SemIndia to execute the technologically-complex project, and highlighted the fact that the NRI promoters of SemIndia had refused to disclose their financial assets.

But SemIndia’s chief, Vinod Agarwal, did not clear the air, blandly stating, “No investor declares his net worth.” He added that since his investors were private holding companies, they would not share information about their equity.

The Andhra Pradesh government was forced to issue a clarification that it would allocate only 300 acres to SemIndia in the first phase, and that the rest of the land would be released only after seeing the progress of the project. State Industry Minister Geetha Reddy had to issue a note of caution: “The government cannot remain a spectator if SemIndia misuses the land allotted to it.”

It is hoped that the Semiconductor Policy, instead of becoming another land controversy like the Special Economic Zones, will add a vital infrastructural sector to the Indian economy with numerous multiplier effects in the information technology, telecommunications and space sectors.