Indian Prime Minister Narendra Modi’s government is looking to boost the country’s chip manufacturing prowess.

Pari Sharma | AFP | Getty Images

India could play a big role in semiconductor manufacturing, analysts say, as the world’s fifth-largest economy looks to boost its domestic chip sector.

Along with other countries like the US, India is looking to build strategic alliances around semiconductors, a critical technology that goes into many of the devices we use from smartphones to refrigerators.

But India is also taking steps to bring chip manufacturing domestically and has laid out incentives for the industry.

“I think India has a critical role to play,” Pranai Kotasthane, chair of the High-Tech Geopolitics Program at the Takshashila Institute, told CNBC’s Beyond the Valley podcast last week.

India is trying to woo giants

The problem for many countries looking to increase their chip-making power is that the companies and countries that dominate the industry are few and far between. For example, Taiwan and South Korea account for about 80% of the global foundry market. Foundries are facilities that produce chips designed by other companies.

India is usually not among the top countries for semiconductors. So there aren’t many giant Indian chip firms and certainly no leading manufacturing companies.

While India may have no homegrown semiconductor firms, its plan under Prime Minister Narendra Modi’s government relies on trying to attract foreign giants.

In December, India greenlit a $10 billion stimulus plan for the semiconductor industry.

New Delhi’s strategy therefore appears to be two-fold – attracting foreign companies and building up areas where India has an advantage.

Indian strengths

The large amount of capital required, the time it takes to set up factories, and uncertainty about the business, tax and trade environment often deters companies from setting up in India.

“Previous attempts in India have failed due to concerns over these charges,” Kotastan said.

However, there are signs that things are changing.

“The track record is not good, but the new government is going in the right direction… [with] policies to incentivize and attract leading semi-manufactured and factory companies,” Neil Shah, partner at technology consultancy Counterpoint Research, told CNBC.

India’s strength is its huge domestic consumption market when it comes to semiconductors as it is the second largest economy in the world.

Neil Shah

Partner, Counterpoint Research

India has a number of strengths that could support its bid to be a global chip manufacturing hub.

“India’s strength is its huge domestic consumption market when it comes to semiconductors as it is the second largest economy in the world,” Shah said.

The analyst also said the stimulus plans will help. “Also, India has a lot of English-speaking engineering talent and [a] cheaper labour, making it cost-effective,” Shah added.

This well-educated and cheap labor can help India in a specific area of ​​the semiconductor supply chain – chip design – an area that requires large numbers of skilled workers.

Read more about tech and crypto from CNBC Pro

“I have no doubt that India has a big role to play,” Kotasthane said.

“India has manpower in the field of semiconductors. Semiconductor design requires a large number of skilled engineers and that is where India’s strength lies,” he added.

Kotasthane said that of the world’s largest semiconductor firms, eight have design houses in India. Although also at an early stage, India is trying to encourage its domestic companies to build technology.

“What we are seeing now from the Indian government is trying to take the next step. We have design centers of international firms, but India doesn’t have much intellectual property that can be called Indian… because it’s companies from other countries that do that. So now the next step is the effort to build an ecosystem where there is some Indian intellectual property (IP) from Indian companies,” Kotasthane said.

Focus production

While design is one area where analysts say India can succeed, manufacturing is a bit more difficult.

When it comes to the most cutting-edge chips, such as those in the latest flagship smartphones, Taiwan’s TSMC dominates the manufacturing arena.

India has no semiconductor factories or plants to manufacture chips. However, the government has tried to attract foreign chip makers. ISMC Digital, a consortium of investors, plans to build a $3 billion manufacturing facility in India. Tower Semiconductor, an Israeli company, will be the technology partner for this project.

SMIC has a long way to go to catch up with TSMC, the analyst says

Meanwhile, Foxconn, the Taiwanese firm that assembles Apple’s iPhones, and Indian mining company Vedanta have teamed up to build a $19.5 billion chip manufacturing facility in India.

These factories will be among the first semiconductor manufacturing plants in India. New Delhi is no doubt keen to attract giants like TSMC and Intel to India as well.

However, ISMC Digital’s plant will produce older-generation chips, often called trailing-edge semiconductors, instead of cutting-edge components made by the likes of TSMC. These newer chips are still important, but they limit India’s potential to become a global hub for the latest chips, especially as competition between countries increases.

“Their factories are equally important. Their demand isn’t going away anytime soon. Future applications such as 5G radios and electric vehicles will continue to require manufacturing at these nodes. Most current defense applications also require trailing edge chips,” Kotasthane said.

“Many countries are wooing the leading nodule foundries with much larger incentive packages. So India may have to temper its expectations,” he added.