A few years ago, the concept of semiconductors might have seemed complex to the average person. But the COVID-19 pandemic changed all that. When $10,000 cars were stuck in production due to a $2 chip shortage, the vital role of semiconductors—also known as chips—suddenly became clear to governments, industries, and consumers alike. The realisation was stark: chips power everything from automobiles to space missions, and any disruption in their supply chain can have far-reaching consequences.

The Indian government's decision to take the semiconductor industry seriously, after several failed attempts over the past few decades, comes with the launch of the India Semicon Programme. With a financial outlay of ₹76,000 crore, this ambitious initiative aims to establish semiconductor and display fabs within the country.

While Indian conglomerates like the Tata Group and Murugappa Group have sought government subsidies to set up massive semiconductor fabs or testing plants, L&T made a bold decision: it would focus on semiconductor design, building its own intellectual property (IP) and creating a new footprint in the tech ecosystem.

Sandeep Kumar, chief executive, L&T Semiconductor Technologies (LTSCT) told Fortune India: “It is great to have manufacturing, but that still doesn't make India self-reliant. It brings in manufacturing capability, but self-reliance comes from being able to build products. Even with the PLI scheme on EMS, when we bring in (manufacture) Apple iPhone into India, it's still not an Indian phone. It is manufacturing, it creates jobs and starts creating the ecosystem. The real value or breakthrough is when you start building products over here and build a company like Cisco, Texas Instruments, or Microsoft in India, which delivers products. So that's the difference, and that’s why we are setting up L&T Semiconductor.”

Going fabless

Shortly after the pandemic, L&T faced the strategic challenge created by its complete dependence on imported semiconductors for its defence vertical, as all of L&T’s semiconductors were sourced from abroad. “About 80% of the semiconductors we consume in India come from China — though not necessarily Chinese-made, but manufactured there — and if we include Taiwan, nearly all of our semiconductors originate from that region. In defence, there has always been a drive to achieve some level of independence from the global supply chain. That’s how L&T’s journey with semiconductors began,” explains Kumar.

But semiconductors is a business that requires a large investment, and, therefore, it requires big markets to make it financially viable. Defence procurement, although strategic, does not have sufficient volumes to justify a standalone plant. So instead of just getting into semiconductor manufacturing, L&T’s vision evolved to “let’s bring semiconductor capability and capacity into India, and once that is there on a product level, and we have that knowledge to build it here, and the talent, experience and the business wherewithal, then you can also build solutions for defence,” adds Kumar.

Roughly 20% of the world’s integrated circuit (IC) design resources come from India, yet the country lacks semiconductor giants like Intel. However, whether it’s Intel, Micron, or any other major semiconductor player, nearly every global chip company has its second-largest, if not its largest, design team based in India.

Kumar explains, “To set up a fabless chip company, you need the other two parts – the front-end definition and the back-end support or customer service again. And then you need a solid engineering team to implement it.” He adds as the front-end talent and the back-end talent doesn't exist in India, the company has set operations in Munich, Tokyo, Austin and Detroit, mainly in Austin, where a lot of the architecture work is happening. In parallel, he is setting up teams in India to learn from those so that the capacity and capability can also be built in India slowly.

Another challenge faced by fabless companies is the significant investment required, with developing a single product potentially costing anywhere from $10 million to $50 million, in addition to the expenses involved in marketing and selling the chip. In the case of LTSCT, the company is taking a strategic approach by first targeting customers, securing their business, and gaining a deep understanding of their needs before moving forward with product development.

Fabless

L&T’s semiconductor plan: Fabless, fabrication and chiplet packaging