India set to challenge China’s dominance in semiconductor packaging

India has had a delayed start in the semiconductor race for supremacy and even a rocky one. However, even though there has been a significant delay in building mega semiconductor factories, the country is simultaneously looking at a different approach to capture a share of the global semiconductor supply chain.

One of the most important aspects of manufacturing advanced semiconductor chips is packaging and testing, also known as Outsourced Semiconductor Assembly and Test — an area currently dominated by China and Taiwan. At least four Indian companies have either begun work or made plans to do so in this sector. Notably, the Tata Group has recently proposed to establish an assembly and packaging unit in the northeastern state of Assam, signaling a significant development.

“ATMP (Assembly, Test, Mark, and Pack) and OSAT are good starting points for India,” said Satya Gupta, president of the VLSI society in India. “This is because they require lower investments, have faster time to production, and the output can go directly to the electronics manufacturer from the packaging and testing factory.”

Taiwan and China dominate the OSAT market with a combined global market share of 75 percent, as per IDC. However, India’s entry into this sector has the potential to significantly reshape the global electronics manufacturing landscape in the longer term.

Acting as an alternative to China

India’s growth in the OSAT industry marks a pivotal moment not just for India’s technology sector but also for the global semiconductor landscape. For the Indian market, the local OSAT businesses — many of which also offer Electronic Manufacturing Services (EMS) for global companies — can offset imports and lower costs overall.

“For example, we are a hardcore EMS player,” said Raghu Panicker, CEO of Kaynes SemiCon, a subsidiary of Kaynes Technology, that has announced plans in OSAT. “We supply modules and PCBs to automotive EV companies. These modules primarily contain microcontroller packages. These packages currently come from international sources, but if we manufacture them in India, it will lower the prices as they would be made domestically.”

This becomes relevant to the global electronics supply chain when you consider that more and more global companies are moving manufacturing to India. A survey from BCG released earlier this year said that more than 90% of the North American manufacturers relocated some production from China in the past five years — and a similar percentage plan to make such moves over the next five years. India has emerged as one of the prime destinations for these companies.

“This shift brings with it the entire supply chain,” said Varun Manwani, CEO of Sahasra Semiconductors, another OSAT entrant. “A prime example is Apple, which initially brought in its EMS. Recent reports suggest TDK plans to do the same for battery packs. This progression indicates a movement towards establishing a comprehensive component-level ecosystem within the country.”

Local OSAT advancements could also disrupt the fabless business sector, leveraging India’s strong engineering and design capabilities that have spawned numerous startups. Manwani pointed out the challenge these companies face without an integrated chip packaging ecosystem.

“Previously, they all had to return to the US, Taiwan, etc., for packaging,” Manwani said. “Now, they’re also exploring opportunities with Indian providers. This shift is not only beneficial for us but also for them, as partnering with companies overseas for packaging incurs significantly higher costs. By collaborating with an Indian company, these costs can be substantially reduced, and timelines can be improved as well. Consequently, this represents a customer base within India that we have access to and are currently engaging in discussions with.”

From India to the global market

While acknowledging India’s market potential, companies such as Sahasra are casting a wider net, tapping into security, surveillance lighting, and IP hardware sectors in markets such as Belgium and the US. Panicker and Gupta also emphasized the importance of a dual-focused strategy, balancing local and international opportunities.

“Targeting solely the Indian market will not likely result in large-scale success,” Gupta said. “Typically, a business in semiconductor manufacturing, be it fabrication or packaging, should aim for a market distribution of about 70 percent global and 30 percent Indian. Relying exclusively on the Indian market might not lead to success, as the requirement for high-end packaging in India may exceed the capabilities of a new entrant.”

For instance, the packaging required for laptop or mobile processors involves complex, advanced technology. Such packaging presents a challenge for a new entrant due to the required technical expertise. Therefore, the potential size of the Indian market might not be as vast as one might estimate, given the advanced nature of many of these chips.

“To begin with, a multinational business strategy is essential because that’s where the volume and, consequently, the revenue come from,” Panicker agreed. “Eventually, our business plan should also cater to the needs of India, as this will be crucial for achieving long-term volume targets. We’re focusing on verticals like home appliances, two-wheelers, EVs, industrial products, and lifestyle products such as headsets and headphones. Specifically, we aim to produce high-volume items like microphone sensors, catering to both the Indian market and global demand.”

Challenges to overcome

While there is notable optimism surrounding India’s entry into the OSAT market, analysts warn of the intense global competition that new entrants face. Additionally, the absence of local foundries in India could lead to higher logistical costs, presenting a significant challenge to the country’s OSAT aspirations.

“OSAT plays an important role in the semiconductor supply chain; it takes around 15 percent share of the manufacturing cost,” said Helen Chiang, who leads Asia semiconductor research at IDC. “Usually, OSAT players go with foundry since the logistic and operation costs will be high if they are in different locations. It’s important for India to build or attract foundries in local India first and then help to raise the environment for OSAT.”

There are other challenges as well. The operating margins in this industry are generally in the single digits. For instance, ASE, the largest OSAT player in the world, reported a consolidated operating margin of 7.4 percent in the third quarter of 2023.

“Consequently, individual investors or businesses entering the market must exercise caution,” Gupta said. “They need to carefully manage margins and profitability, considering that, according to the performance of existing players, this sector does not typically yield high margin returns.”

India’s emerging influence in OSAT

While it may take time for Indian OSAT companies to significantly influence the global semiconductor supply chain, the current trends in global manufacturing and geopolitical shifts suggest that their rise is inevitable.

Significantly, companies such as Kaynes have a roadmap to this. The company aims to reach a milestone of $1 billion in revenue within five years. Panicker believes that achieving this target would elevate them to a prominent position on the global stage.

“Once we reach this target, we will have a significant influence in the market,” Panicker said. “This includes having a say in pricing and the ability to introduce the technology we deem appropriate.”

Gupta expects it to take more than five years, as he cautions against short to medium-term speculation.

“It takes at least a decade to become significant enough to make that kind of impact,” Gupta said. “But I think it’s a good start to begin building those capabilities.”