‘Wearables And Accessories Could Be Next': Tech Analyst Neil Shah On India's Electronics Manufacturing Growth

The semiconductor and electronic manufacturing space in the country saw a few significant announcements earlier this month. The first was US-based Micron Technology Inc signing a Memorandum of Understanding (MoU) with the Gujarat government to set up a Rs 22,500-crore semiconductor unit at Sanand near Ahmedabad, Gujarat.

Secondly, Google is exploring the possibility of shifting a portion of its Pixel smartphone production to India. Taiwanese electronics contract manufacturer Foxconn, which pulled out of its joint venture with Vedanta to set up semiconductor and display plants in India, is also exploring investing in India and most recently proposed setting up a Rs 8,800 crore plant in Karnataka for assembling iPhones.

Investments in the semiconductor and electronic manufacturing space are often geo-strategic apart from being business critical. In general, action in this space is hotting up with major investments on the anvil and some ready to go. To get insights on what Micron's investment could translate into and a technical breakdown of its project as well as others lined up, Govindraj Ethiraj, Founder, The Core, spoke to Neil Shah, Vice President at Counterpoint Research.

Here are edited excerpts from the interview:

Could you tell us about Micron and the present status of all the investments that were supposed to happen in this space?

The government has started a semiconductor Production Linked Scheme (PLI), and then they also have a design link incentive. Both of these are important for semiconductor manufacturing as well as building intellectual property, especially for designing the software for the chips. As you may be aware, 70% of any chip is software and India is doing a large amount of software development for global chip manufacturers - AMD, NVIDIA, Qualcomm, Mediatech, etc. Many of them have their R&D - either the largest or the second largest in India. So, India is quite ahead in that area.

Now, when we talk about chips, manufacturing, assembling or packaging, it could either be a processor or some peripheral IC like a Wifi IC or a display driver IC. As we all know, the most important component of any electronics product is the memory, DRAM and NAND. Micron is a leading manufacturer of both of these important semiconductor components and it is planning to set up an ATMP (assembly, testing, marking and packaging) facility in India.

Here is the typical front-end process - the wafer is produced and then it is converted to small bits and those bits are packaged together into different layers to form a memory. This front-end processing is not happening in India. However, the back-end process, getting the wafer etched and packaging it into a small black chip, is coming to India. This is a great first step and it is easier for India to attract back-end processes for manufacturing chips or memory semiconductors. The front-end process, which is the actual fab for either the memory or the chips can be looked at later.

What was the Vedanta-Foxconn venture? Was it not going to manufacture chips front-end?

Yes, that was pure front-end manufacturing and maybe would have some back-end packaging as well with some partners around it as the ecosystem developed around their facility. At a conference in Bengaluru three weeks ago, David Reed, CEO, Vedanta laid out their plans. They are looking at front-end processes, manufacturing of very matured nodes of 28 nanometer and above-more of 40 or 90 nanometers. It may not be the very advanced or leading nodes where you manufacture a Snapdragon or NVIDIA AI processor but those are also important. Why? During the pandemic, there was a shortage of matured nodes as none of the founders invested in mature nodes as they never estimated a demand for them. So it's good to have a mature node facility in India, a fab that can serve a lot of different applications from industrial IoT to defense, space and automotive.

That would be the 40 nanometer mostly and 28 is what goes into iPhones and so on…

Yes, some part of 28 nanometers now goes into TVs or smartphones. But in smartphones, most of the big processors are very advanced nodes-five nanometers or Apple's new processor could be three nanometers this year.

We also heard about a Google Pixel announcement about their plans to manufacture in India. With respect to the smartphone manufacturing ecosystem, can you tell us where we are in that space or that world right now?

We are quite ahead in smartphone manufacturing since the new government started the Make in India initiative in 2015–16. And then, fast forward to more PLI schemes. Earlier, as I mentioned in my last conversation with you, we moved from a semi-knockdown unit to a completely knocked down unit (CKD), where we actually take the bare PCBs and, using robotic machines, we mount the chip. This is very high-level manufacturing. So, 90% of the phones are CKD. Bigger players like Apple, who have sophisticated manufacturing, are also moving most of their CKD-level manufacturing to India now.

Google is not a new kid on the block, and yet it is a new kid on the block since it has ambitions to have more vertical play like Apple. But Google's strategy is more about showcasing the best possible Android device in the market–their flagship– because most of its partners like Samsung, Xiaomi or Vivo use Android. However, most of their phones are one generation older in terms of Android or at least six or seven months behind the Vanilla Android 14 and they are on Android 13. What Google is trying to do with Pixel is expand to more strategic countries: the US, Japan, parts of Western Europe, a bit in Asia, and now moving to India-which is the biggest Android market. They want to get into the game early, like what Apple is trying to do now, as a premiumisation of the smartphone.

Now, they cannot fully import the complete unit because there will be a duty. So, they have to find partners, once they scale up to manufacture their phones here. And that is where Google is also getting onto the bandwagon of getting domestic manufacturing, waiting for help from EMS partners, potentially US partners.

We get it manufactured, and alleviate the cost of devices, so its market share can increase. Right now, its market share is close to 0.6%, less than 1%. However, it anyways targets the $300-plus segment, which is just 30% of the market.

Chips can power many things – WiFi, phones, and TVs. What else are you seeing in the broader ecosystem applications, in terms of electronic manufacturing?

Smartphones were the first, and then there were TVs, followed by wearables. Players like Boat, and Noise are assembling here. They're not manufacturing, but it's more of assembly. So, with more PLI schemes for the wearables ecosystem, the wearables would be the next- smartwatches, and earbuds.

Additionally, you have the other accessories-the power banks are already assembled here. We have other accessories like smart speakers, which could be manufactured and assembled here. Right now, they are not. The government is doing this in phases, depending on the value addition it can do to the economy and applying different duties and policy structure for different categories. PCs is another market, and servers is another big market which is booming in India. Data centres are booming, as you know like many of the real estate players have got into building data centres right here. Building our own server in India or assembly, to start with, would be a good step, because it's a high-value product.

So in the hierarchy of value addition in terms of what is the value that's being added here in India at this point, where do we stand in electronics?

If you look at it from hardware manufacturing point of view, I would say anywhere between 13% to 17% for smartphones, which is a benchmark for the industry. However, the indirect contribution-manufacturing, designing and developing software for different chipsets, which are also a good percentage of the bill of materials cost, it could be close to 20% in terms of value addition. If you compare with China, China is close to 35% to 40%. Vietnam is also in between China and India with respect to value addition. But China is the highest. And obviously, if you manufacture in Taiwan, then it would be even higher. But we don't manufacture in Taiwan because it doesn't have that space. Only chips are manufactured.