Soaring demand for AI chips: What ‘supercycle’ means

Why in the News

Semicon India, the flagship conference of the India Semiconductor Mission (ISM) under the Union IT Ministry, has been held in New Delhi. It met amid exceptional global demand for semiconductors, driven by artificial intelligence (AI) and the infrastructure AI requires. That demand is being described as a semiconductor supercycle. The contested point is where India sits in a surge concentrated in memory chips and advanced packaging, since India does not yet produce chips and is not capturing profits from advanced ones.

What is a semiconductor ‘supercycle’?

1. Definition: A supercycle is a multi-year period of investment and growth produced by a fundamental technology shift that alters the underlying structure of demand, rather than by an ordinary upswing in orders.
2. Earlier instances: The same pattern was seen with computers in the 1990s and with smartphones in the 2010s.

What is driving the current chip boom?

1. Data centres: These are physical facilities housing equipment that stores and processes digital data, such as servers and computers, and they generate a large share of present demand. An AI data centre carries the specialised infrastructure needed to support AI technology.
2. AI accelerators: The AI chip, or accelerator, undertakes the massive calculations needed to run AI models.
3. The memory bottleneck: These processors must also receive data rapidly, and traditional memory hardware struggles to supply it because of its physical distance from the processor.
4. High-bandwidth memory: High-bandwidth memory (HBM) chips stack layers of a computer’s working memory close to the processor, which allows large volumes of data to move rapidly between memory and processor.
5. Advanced packaging: Processors and memory stacks are combined using highly advanced packaging techniques, so packaging is part of the performance rather than a finishing step.
6. Market structure: The HBM market has three big players, SK Hynix and Samsung of South Korea, and Micron of the United States.

How is demand being secured?

1. Shift to business buyers: Memory manufacturers traditionally relied on consumer sales, and the AI buildout is moving the market towards business-to-business sales.
2. Scale of committed spending: Microsoft, Amazon, Google and Meta plan to spend nearly $635 billion on AI infrastructure in 2026 alone, including data centres, on S&P Global data.
3. Take-or-pay contracts: Chipmakers are entering long-term take-or-pay agreements, under which a customer must buy the agreed chips regardless of current demand or pay hefty penalties.

Where does India fit in the supercycle?

1. Projects approved: India approved 12 semiconductor projects under ISM 1.0, and some packaging facilities have begun production.
2. Position in the chain: India does not produce chips, and has focused on establishing manufacturing capacity in assembly, testing and packaging.
3. What that looks like in practice: Micron’s Sanand facility in Gujarat will process imported wafers used for chipmaking.
4. Profit position: India is not capturing profits from advanced chips, so the demand surge passes through its facilities rather than accruing to them.

What do ISM 2.0 and the design route offer?

1. ISM 2.0: Launched in February, it aims to build on the existing base, and its packaging scheme offers financial support.
2. Chiplet research: Another scheme will support research and development (R&D) in chiplet technologies. A conventional chip is made from a single piece of silicon, and chiplets combine smaller specialised chips to lower cost and waste.
3. Design workforce: Nearly a fifth of the global chip workforce is based in India, which makes chip design a separate entry point from fabrication.
4. Edge-AI design: Under the design-linked incentive scheme, the startup Netrasemi is developing edge-AI processors for cameras and drones. These perform AI computations on the device instead of sending data to the cloud, which speeds up responses and cuts data transmission over the internet.
5. Value chain signal: Germany’s Infineon has acquired the Bengaluru-based fabless company C2i, a firm that designs and sells chips without manufacturing them.

Challenges to India’s position in the chip supercycle

1. Concentration of the buyer base: Predictable order books rest on a handful of buyers, so a spending pause by one of them resets demand for the whole memory market. Eg. Nearly all of the 2026 AI infrastructure outlay tracked by S&P Global sits with four companies.
   The Fix: Tie capacity commitments to the revenue AI services actually generate rather than to announced infrastructure budgets.
2. Participation limited to the back end: Approved Indian capacity sits in assembly, testing and packaging, so the margin on an advanced chip is earned before the part reaches India. Eg. Wafers processed at the Sanand facility are imported.
   The Fix: Convert the design workforce advantage into Indian ownership of chip designs rather than design services performed for foreign firms.
3. Input costs rising before returns arrive: The AI surge raises prices for every Indian buyer of servers and devices while India earns nothing from the surge itself. Eg. A parliamentary reply in July recorded that demand for AI servers and data centres was tightening memory supplies and raising prices.
   The Fix: Prioritise memory packaging capacity in the ISM 2.0 pipeline, so part of the price increase is captured domestically.
4. Capital drawn to established hubs: Investor interest follows existing semiconductor depth, and India competes for that capital without the same base. Eg. Some foreign investment withdrawals from Indian markets in 2026 have been linked to interest in the semiconductor-heavy markets of Taiwan and South Korea.
   The Fix: Sequence incentives towards capability milestones that shift India up the chain, so the investment case rests on capacity rather than on announcements.

Conclusion

The demand shift the supercycle describes sits in memory and in packaging, which is the part of the chain India has chosen to build. India remains a processor of imported wafers and a supplier of design labour, so the surge raises its input costs before it raises its earnings. The unresolved question is whether the packaging and chiplet schemes move India from assembly towards value it can retain. The markers to watch are whether an Indian facility begins producing rather than processing, and whether the industry’s order books hold once AI service revenue is measured against the infrastructure already contracted.

Matching Previous Year Question

“[2025, GS3, 15 marks] India aims to become a semiconductor manufacturing hub. What are the challenges faced by the semiconductor industry in India? Mention the salient features of the India Semiconductor Mission.”