Gujarat textile exporter seeking to assemble chips is racing against time

“When I saw supply-chain disruption during the pandemic, I realized that there is a clear opportunity to diversify into the semiconductor industry," Mehta told Mint. “I then leveraged my network of vendors in the US and Malaysia, which I’d built through my textile exports over the past three decades—and finally identified Malaysia as the ideal geography with the right talent and team."

Suchi Semicon will set up an outsourced semiconductor assembly and testing (OSAT) factory in Surat, Mehta said. He plans to start rolling out chips by the end of this year, and targets to assemble 3 million units a day once the full facility is up and running. Other similar projects approved by the central government aim to make 2 to 10 times more.

Mint’s emailed queries to the Gujarat Semiconductor Mission and Department of Information Technology, seeking details on how companies, including Suchi Semicon, are selected for subsidies remained unanswered. 

“I have currently financed ₹200 crore through personal assets, and bank guarantees and financing. This is the amount required for the first year, without taking into account the cost of land and building of the factory—which I have invested over the past three years," Mehta said. “I have already been approved for state subsidies, and have submitted my OSAT application to ISM (central government's India Semiconductor Mission)—through which the rest of the project is expected to be funded."

Also read | We must focus on semiconductor chip manufacturing to get ahead in the GenAI race

Mehta said he has identified a partner in Japan but didn’t disclose the name or how much it will bring in, citing non-disclosure agreements. He said a technical partner will help “to build client trust" and while “financing from a partner is on the table, but it is not my priority."

Mehta's original venture, Suchi Industries Ltd, reported annual revenue of ₹29.5 crore in FY23, while FY24 financials are yet to be filed. The company posted net profit of ₹1.03 crore in FY23.

To be sure, an OSAT, different from a fab that Tata Electronics Ltd. is setting up in Dholera, Gujarat, does not require special equipment to design or manufacture chips. It’s a facility that tests semiconductors for performance and connectivity with circuits. Simply put, these factories prepare silicon chips for installation in a device. The opportunity in the sector is still huge. According to data Gartner shared exclusively with Mint, while chip fabs posted $123 billion in direct revenue last year, OSATs generated about a third, or $40 billion.

Such testing facilities are easier to set up than fabs, require lesser capital, and if a project receives approval from both the state and the centre, 70% of the project's capital expenditure is borne via incentives. For Suchi Semicon, if it gets the central approval, about ₹600 crore of around ₹840 crore worth of investments could be contributed by the production-linked incentive (PLI) scheme. 

The Centre is considering reducing incentives offered to OSATs since they add lower value than pure-play fabs, Mint earlier reported. It isn’t immediately clear if already filed OSAT applications will be eligible for incentives of up to 50% of the cost. If not, Suchi Semicon would only receive 20-30%, if its application is approved by the ISM. The difference could be to the tune of ₹260 crore. Mehta declined to state the quantum of incentives expected by his company.

The state government contributes 40% of the central capex assistance. Separately, the state-level fiscal incentives, according to the Gujarat government's website, include reimbursement of stamp duty and registration fee, access to water at a cheaper rate, 50% subsidy for the desalination plant, power subsidy and exemption from electricity duty.

‘Natural Process’

Ashok Chandak, president of industry body India Electronics and Semiconductor Association (IESA) said the entry of companies like Suchi Semicon is a “natural process" when there is strong backing and growth of a particular industry, in which plenty of subsidies and overall investments are coming in. “For many, OSATs are the most convenient way to enter the semiconductor industry."

Larger companies with technology expertise are also setting up OSATs. Tata Electronics is investing $3.2 billion in a mass-scale OSAT factory in Assam. Other partnerships approved by the ISM include a joint venture between Japan’s Renesas Electronics and Tamil Nadu-headquartered CG Power and Industrial Solutions Ltd. for a $222 million OSAT in Sanand, Gujarat; and Kaynes Technology's plan to invest $478 million for a testing facility in Sanand, Gujarat.

Suchi Semicon, by these standards, will be smallest OSAT facility in India—and by someone with the least domain expertise. CG Power's joint venture and Kaynes Semicon also have no related experience or expertise in the electronics business. 

“But this isn’t necessarily bad. We’ve seen Kaynes rise to the forefront due to the advent of mass-scale electronics manufacturing services (EMS) in India—and it then leveraged its EMS expertise to set-up the OSAT," said Chandak. “Similar journeys will be seen more often, for sure."

Also read: Mint Quick Edit | India’s fab dream: There’s hard work to do

More companies are lining up. On 9 September, Akash Tripathi, chief executive of the Centre's nodal semiconductor assessment unit India Semiconductor Mission, said around 20 chip project proposals are currently under review, with a number of them being for pure-play fabs.

According to Chandak, the key for a venture like Suchi Semicon will be to rely on its joint venture partner for global clients. “There may not be core clients that will come based on a textile exporter’s domain expertise in semiconductors, but that is where the technical partner comes into play."

Kanishka Chauhan, senior principal analyst for semiconductors and electronics at consultancy firm Gartner, said OSATs should not necessarily be looked upon as low value-addition offerings. “As chip fabs start ramping up, OSATs will naturally come to the geography of expansion to set up shop since chip fabs will always need chip testers and packagers," he said. “This is an industry that will naturally grow, and India has a strong prospect in it by the end of this decade."

Aggressive targets

Mehta said every industrial corporation will want to get into the semiconductor industry in the next decade. “I am also not saying that I will be making the chips myself—I have already hired 50 employees that are highly skilled in the semiconductor industry, and possess domain knowledge." He plans to expand the workforce to 200 by the end of this year and 1,200 by 2026.

Suchi Semicon has even set revenue targets for its first year of full-capacity commercial operations by FY28. “We’ve already signed three customers, and we’re in talks with 10 clients," Mehta said. “A first-stage trial production of chips with our first customer has been done, too. Once we are fully operational, I expect to generate ₹2,000 crore in annual revenue."

Also read: The semiconductor choke-point

Mehta targets to start initial operations in the next couple of months, saying that construction is almost over and equipment deliveries will begin from next month. “I will be delivering the first chips to a US-based client in end-November or early-December this year. I am also in talks with clients in Japan and about seven clients in India, with final details expected to be chalked out soon."

Yet, he still doesn't have an approval from the central government for the incentives. “I am confident that we will win ISM’s subsidies," Mehta said, “and we have some of the best minds working for us."