Electronic System Design and Manufacturing Sector – M-SIPS, National Policy on Electronics, etc.

Electronic System Design and Manufacturing Sector – M-SIPS, National Policy on Electronics, etc.

Semiconductor Shortage and the tech industry

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Semiconductor, Rare earth elements

Mains level : Semiconductor industry

Chips or processors power every possible product on the market from high-end cars to washing machines. There is a worldwide shortage of semiconductor chips.

What are Semiconductors?

  • A semiconductor sits between a conductor and an insulator and is commonly used in the development of electronic chips, computing components, and devices.
  • It’s generally created using silicon, germanium, or other pure elements.
  • Semiconductors are created by adding impurities to the element.

Giants of global chip industry

  • Semiconductor manufacturing is now dominated by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Samsung Electronics in South Korea.
  • American chipmaker Intel now plans to spend $20 billion to build two new chip factories in Chandler, Arizona.
  • These new fabs will also manufacture chips designed by Amazon, Qualcomm, and other customers.

Why is there a semiconductor shortage?

  • During the pandemic, manufacturing came to a standstill impacting the supply chains of products that need one or more of these.
  • As the automotive sector almost shut down last year, chip makers shifted capacity to cater to increased demand for electronics items such as cell phones and laptops.
  • Since orders for advanced chips are placed well in advance, manufacturers have not yet been able to come back to pre-pandemic production schedules to cater to all sectors.
  • The automotive chips are of medium-level complexity, compared to the really small and extremely complicated ones on smartphones and personal computers.
  • Building something this small, featuring billions of transistors is an expensive process.

Has India missed the bus in setting up chip factories?

  • There is a lot of risks involved in setting up a chip plant.
  • Past initiatives to set up chip manufacturing units in the country never took off due to lack of long-term vision, lack of government incentives, and poor planning.
  • Now the government is keen to promote manufacturing and has even proposed tax incentives under Production Linked Incentive Scheme.
  • Things are progressing slowly, but the recent announcement of Tata Group entering semiconductor manufacturing is being seen positively.

How is the chip crisis playing out in geopolitics?

  • The global chip crisis and geopolitical tensions with China have shifted focus back on semiconductors.
  • The US, which was once a leader in chip manufacturing, wants the crown back.
  • The protectionist US is looking to bring manufacturing back to America and reduce its dependency on a handful of chipmakers mostly concentrated in Taiwan and South Korea.
  • China’s renewed aggression on Taiwan is also being seen in light of the chip crisis.

Impact

  • The crisis is expected to cost the global automotive industry $210 billion in revenue in 2021.
  • The global semiconductor shortage has affected many industries for more than a year and because of that, they are either forced to pay more for products or being asked to wait a little more.
  • The consumption of integrated circuits in products is ever increasing and a large manufacturing sector for these kinds of integrated circuits are a part of the supply chain.
  • The shortage has affected smartphones, personal computers, game consoles, automobiles, and medical devices.

 

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Electronic System Design and Manufacturing Sector – M-SIPS, National Policy on Electronics, etc.

Semiconductor chips shortage, and how carmakers are coping

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Chip famine

Mains level : Not Much

A shortage of inputs, especially semiconductor chips, has made India-based car manufactures and premium bike makers curtail production across categories.

Do you know?

Electronic parts and components today account for 40% of the cost of a new internal combustion engine car, up from less than 20% two decades ago.

Chip famine

  • The trigger point was the beginning of the Covid-19 pandemic and the subsequent lockdowns across the world that forced shut crucial chip-making facilities in countries including Japan, South Korea, China and the US.
  • A key feature in a chip shortage is that it almost always causes cascading effects, given that the first one creates pent-up demand that becomes the cause for the follow-up famine.

Why such famine?

  • The COVID-19 pandemic caused disruptions in supply chains and logistics.
  • This is coupled with a 13% increase in global demand for PCs owing to some countries’ shift to a stay-at-home economy.
  • This has impacted the availability of key chips necessary for the manufacturing of a broad range of electronics being a necessary component of every industry.

What is the impact of the chip famine?

  • Consumers of semiconductor chips, which are mainly car manufacturers and consumer electronics manufactures, have not been receiving enough of this crucial input to continue production.
  • There were two reasons for this: a steady decline in input prices and improvements in the processing power of chips.
  • The number of transistors mounted in IC circuit chips has doubled every two years.
  • Notably, the increase in chip consumption over the last decade is also partly attributable to the rising contribution of electronic components in a car’s bill of materials.

How have vehicle makers responded?

  • Supply constraints are learned to have caused some output issues at notable Indian auto firms.
  • In addition to delaying vehicle deliveries, some companies have reportedly started discarding features and high-end electronic capabilities on a temporary basis.

Electronic System Design and Manufacturing Sector – M-SIPS, National Policy on Electronics, etc.

Issues in the Phased Manufacturing Policy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : PMP and PLI Scheme

Mains level : Paper 3- Issues with Phased Manufacturing Policy

The Production Linked Incentive Scheme, though ambitious in its goal suffers from several fundamental issues. The article discuses such issues.

Background of the Phased Manufacturing Policy

  • The Phased Manufacturing Programme (PMP) incentivised the manufacture of low value accessories initially, and then moved on to the manufacture of higher value components.
  • This was done by increasing the basic customs duty on the imports of these accessories or components.
  • The PMP was implemented with an aim to improve value addition in the country.
  • Recently, 16 firms in the mobile manufacturing sector were approved for the Production Linked Incentive (PLI) scheme to transform India into a major mobile manufacturing hub.
  • The PLI comes on the back of a phased manufacturing programme (PMP) that began in 2016-17.

Issues to consider

1) More imports and less value addition in India

  • Firms such as Apple, Xiaomi, Oppo, and OnePlus have invested in India, but mostly through their contract manufacturers.
  • As a result, production increased from $13.4 billion in 2016-17 to $31.7 billion in 2019-20.
  • But factory-level production data from the Annual Survey of Industries (ASI) shows that more than 85% of the inputs were imported.
  • UN data for India, China, Vietnam, Korea and Singapore (2017-2019), show that except for India, all countries exported more mobile phone parts than imports.
  • More export than import by these countries indicate the presence of facilities that add value to these parts before exporting them.
  • India, on the other hand, imported more than it exported.
  • Therefore, while the PMP policy increased the value of domestic production, improvement in local value addition remains low.
  • The new PLI policy offers an incentive subject to thresholds of incremental investment and sales of manufactured goods.
  • Thus, focus remains on increasing value of domestic production, and not local value addition.

2) Shift from China unlikely

  • India produced around 29 crore units of mobile phones for the year 2018-19; 94% of these were sold in the domestic market.
  • This implies that much of the incremental production and sales under the PLI policy will have to be for the export market.
  • Recently, a study by Ernst & Young showed that if the cost of production of a mobile phone is say 100 (without subsidies), then the effective cost (with subsidies and other benefits) of manufacturing mobile phone in China is 79.55, Vietnam, 89.05, and India (including PLI), 92.51.
  • So, it may be premature to expect a major chunk of mobile manufacturing to shift from China to India.

3) PLI doesn’t strengthen the current export competitiveness

  • India’s mobile phone exports grew from $1.6 billion in 2018-19 to $3.8 billion in 2019-20, but per unit value declined from $91.1 to $87, respectively.
  • This shows that our export competitiveness seems to be in mobiles with lower selling price.
  • However, for foreign firms chosen under the PLI policy, the incentive will be at and above ₹15,000 ($204.65).
  • So, it is clear that the PLI policy does not strengthen our current export competitiveness in mobile phones.

4) Absence of domestic firms

  • Domestic firms have been nearly wiped out from the Indian market.
  • So, their ability to take advantage of the PLI policy and grab a sizeable domestic market share seems difficult.
  • Domestic firms may have the route of exporting cheaper mobile phones to other low-income countries.
  • However, their performance in the last couple of years has not been promising.

5) Importance of supply chain colocation

  • The six component firms that have been given approval under the ‘specified electronic components segment’do not complete the mobile manufacturing ecosystem.
  • For example, when Samsung set up shop in Vietnam, it relied heavily on its Korean suppliers which co-located with it to produce intermediate inputs, so much so that 63 among Samsung’s 67 suppliers then were foreign.
  •  Though Samsung is invested hugely in India, it has not colocated its supply chain in the country.
  • So, the foreign firms chosen under the PLI policy should be encouraged to colocate their supply ecosystems in the country.

6) Complaint at WTO against PMP

  • In September 2019, Chinese Taipei contested the raise in tariffs under the PMP.
  • If the PMP is found to be World Trade Organization (WTO) non-compliant, then we may be flooded with imports of mobile phones.
  • This might make the local assembly of mobile phones unattractive.
  • This will affect the operations of the mobile investments done under the PMP.

Conclusion

The PMP policy, since 2016-17 has barely been helpful in raising domestic value addition in the industry even though value of production expanded considerably.

B2BASICS

Electronic System Design and Manufacturing Sector – M-SIPS, National Policy on Electronics, etc.

Production Linked Incentive (PLI) Scheme for electronics manufacturers

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Production Linked Incentive Scheme (PLI)

Mains level : Electronic manufacturing promotion under Make in India

Global electronics giants are set to expand their presence in India under the Production Linked Incentive (PLI) Scheme for making mobile phones and certain other specified electronic components.

Try this question for mains:

Q. What is the Production Linked Incentive (PLI) Scheme? Describe its various features and benefits.

What is the PLI scheme?

  • As a part of the National Policy on Electronics, the IT ministry had notified the PLI scheme on April 1 this year.
  • The scheme will, on one hand, attract big foreign investment in the sector, while also encouraging domestic mobile phone makers to expand their units and presence in India.
  • It would give incentives of 4-6 per cent to electronics companies which manufacture mobile phones and other electronic components.
  • A/c to the scheme, companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 per cent on incremental sales of all such mobile phones made in India.
  • In the same category, companies which are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.

Tenure of the scheme

  • The PLI scheme will be active for five years with financial year (FY) 2019-20 considered as the base year for calculation of incentives.
  • This means that all investments and incremental sales registered after FY20 shall be taken into account while computing the incentive to be given to each company.

Which companies and what kind of investments will be considered?

  • All electronic manufacturing companies which are either Indian or have a registered unit in India will be eligible to apply for the scheme.
  • These companies can either create a new unit or seek incentives for their existing units from one or more locations in India.
  • Any additional expenditure incurred on the plant, machinery, equipment, research and development and transfer of technology for the manufacture of mobile phones and related electronic items will be eligible for the incentive.
  • However, all investment done by companies on land and buildings for the project will not be considered for any incentives or determine the eligibility of the scheme.

Electronic System Design and Manufacturing Sector – M-SIPS, National Policy on Electronics, etc.

[pib] Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : SPECS

Mains level : Not Much

The Union Cabinet has approved Scheme for Promotion of manufacturing of Electronic Components and Semiconductors.

About SPECS

  • The scheme aims to offer the financial incentive of 25% of capital expenditure for the manufacturing of goods that constitute the supply chain of electronic products.
  • The scheme will help offset the disability for domestic manufacturing of electronic components and semiconductors in order to strengthen the electronic manufacturing ecosystem in the country.

Benefits

The proposal, when implemented, will lead to the development of electronic components manufacturing ecosystem in the country. Following are the expected outputs/outcomes in terms of measurable indicators for the scheme:

  • Development of electronic components manufacturing ecosystem in the country and deepening of Electronics value chain
  • New investments in Electronics Sector to the tune of at least Rs. 20,000 crore
  • Total employment potential of the scheme is approximately 6,00,000
  • Reducing dependence on import of components by large scale domestic manufacturing that will also enhance the digital security of the nation

Electronic System Design and Manufacturing Sector – M-SIPS, National Policy on Electronics, etc.

[pib] Production Linked Incentive Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Production Incentive Scheme (PLI)

Mains level : Various schemes for Industrial promotion

The Union Cabinet has approved the Production Incentive Scheme (PLI) for Large Scale Electronics Manufacturing.

Production Incentive Scheme (PLI)

  • The scheme proposes production linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components including Assembly, Testing, Marking and Packaging (ATMP) units.
  • The scheme shall extend an incentive of 4% to 6% on incremental sales (over a base year) of goods manufactured in India and covered under target segments, to eligible companies, for a period of five (5) years subsequent to the base year as defined.
  • The proposed scheme is likely to benefit 5-6 major global players and few domestic champions, in the field of mobile manufacturing and Specified Electronics Components and bring in large scale electronics manufacturing in India.

Benefits

  • The scheme has a direct employment generation potential of over 2,00,000 jobs over 5 years.
  • It would lead to large scale electronics manufacturing in the country and open tremendous employment opportunities.  Indirect employment will be about 3 times of direct employment as per industry estimates.
  • Thus, the total employment potential of the scheme is approximately 8,00,000.

Electronic System Design and Manufacturing Sector – M-SIPS, National Policy on Electronics, etc.

Schemes for Electronic Manufacturing

Note4Students

From UPSC perspective, the following things are important :

Prelims level : EMC 2.0 Scheme

Mains level : Not Much

The Union Cabinet has approved financial assistance to the Modified Electronics Manufacturing Clusters (EMC2.0) Scheme

Background

  • To build and create requisite infrastructure ecosystem for electronics manufacturing; Ministry of Electronics and Information Technology notified Electronics Manufacturing Clusters (EMC) Scheme which was open for receipt of applications upto October, 2017.
  • A period of 5 years is available for disbursement of funds for the approved projects.
  • There was a need for continuation of such scheme in modified form for further strengthening the infrastructure base for electronics industry in the country and deepening the electronics value chain.

EMC 2.0 Scheme

  • The Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme would support setting up of both Electronics Manufacturing Clusters (EMCs) and Common Facility Centers (CFCs).
  • For the purpose of this Scheme an EMC would set up in geographical areas of certain minimum extent, preferably contiguous, where the focus is on development of basic infrastructure, amenities and other common facilities for the ESDM units.
  • For Common Facility Centre (CFC) there should be a significant number of existing ESDM units located in the area and the focus is on upgrading common technical infrastructure and providing common facilities for the ESDM units in such EMCs, Industrial Areas/Parks/industrial corridors.

Aims and objectives

  • The scheme aims for development of world class infrastructure along with common facilities and amenities through Electronics Manufacturing Clusters (EMCs).
  • It is expected that these EMCs would aid the growth of the ESDM sector, help development of entrepreneurial ecosystem, drive innovation and catalyze the economic growth of the region by attracting investments in the sector, increasing employment opportunities and tax revenues.

Benefits

The Scheme will create a robust infrastructure base for electronic industry to attract flow of investment in ESDM sector and lead to greater employment opportunities.  Following are the expected outputs/outcomes for the Scheme:

  • Availability of ready infrastructure and Plug & Play facility for attracting investment in the electronics sector:
  • New investment in electronics sector
  • Jobs created by the manufacturing units;
  • Revenue in the form of taxes paid by the manufacturing units
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