While the semiconductor industry has already experienced shortages, the one that began due to the March 2020 pandemic is far deeper. With the pandemic, demand has declined and orders have been cancelled. The Asian plants have slowed down, and many have closed while companies have been trying to find ways to operate safely and with considerably lower demand. At the same time, the automobile companies, a significant part of the customers of the semiconductor industry decided to use semi finished inventory to build what they could. Low demand and COVID-19 safety concerns have forced the semiconductor industry to operate at significantly lower capacity, reducing utilization rates to record low levels.
During lockdowns and the massive transition to working from home, many businesses and consumers flocked to purchase personal computers and tablets in unprecedented numbers over many years. Even the closed schools impacted in sudden growth to already booming gaming platforms. In September 2020, the auto market began to rebound and orders began to accumulate, but OEMs and Tier 1 suppliers were running out of stock. As all the supply chains were working in a lower capacity, and sudden orders came in but scarcity of parts caused market to panic with over booking making the situation worse.
The positive side to industries was that there was minimum bargaining and advertising, sales people were to relax as people knew what they want.
What India can will benefit from the current situation?
In QUAD summit held in 24th September, 2021 came up with a solution. To understand the outcome of the summit, we should know that chip manufacturing is a complex process with different steps. If each country works on all the steps may lead to increase in cost and time, instead each country to work on the process that goes with the skills and requirement will effectively reduce cost and time of processing. Like, U.S. is leading in semi-conductor design, Electronic Design Automation, and licensed intellectual property; Japanese companies dominate in Semiconductor materials and chemicals that are required for chip manufacturing, Silicon wafers and substrates used for IC manufacturing are also available here; Australia excels in supply chain as it has critical materials and advanced mining capabilities; and lastly India comes in as we have large numbers of skilled engineers and skilled labours. Here, India plans to have 20 semiconductor units in the next 2 years. The youth of India will be provided with employment options and also boost economy of India significantly.
Indian government will be coming up with incentive support to those companies who are dealing with silicon semiconductor fabs, display fabs, compound semiconductors, silicon photonics, sensors fabs, semiconductor packaging and semiconductor design.
How Share holders can benefit from this incentive programs?
For Investors to understand the semiconductor industry, need to have an keen eye on this government driven production-linked incentive program and finding out the list of public companies benefitting from this program. But, Investors should also need some understanding of the previous failures of government for chip incentive schemes and the reason behind it.
In 2007, Intel expressed interest, but moved to China and Vietnam because the policies and incentives of the Indian government have not been well thought out. In 2013, the government approved two proposals by Jaypee Group and HSMC with the promise of subsidizing the cost of the project but the projects were abandoned because they were unable to attract investment. As an Investor, you need to have in detail research on why these incentives failed and will these reasons have been taken care of for the new policy.
Sources: 1st source, 2nd source, 3rd source