Indian Chip Startups Have Finally Made Their Chips, Now They’re Paying 50 Percent More to Get Them Built

India has spent the last few years getting its own chip design startups off the ground. Many of them now have working chips, but the last step, turning a design into a product that sells at a competitive price, is proving the hardest. According to a Nikkei Asia report, high manufacturing costs and a tangle of rules are slowing them down just as they near the market.

Indian chip startups don't make their own chips. They design them and send the designs to a fab, a chip factory, usually abroad, which prints them onto silicon wafers. Each wafer holds a few thousand chips.

The problem is scale. A startup starting production might order around 100 wafers, while big chipmakers order tens of thousands of wafers a month. Fabs prefer the big customers, and they charge small ones more for the trouble.

"They charge us 50% more than what they give to other companies," said Rakesh Malik, founder of Vervesemi, which has finished designing chips for sectors from power to telecom. When the raw material itself costs more, he explained, it becomes very hard to price the final product competitively.

There are some bright spots. Bengaluru-based Fermionic Design partnered with US chipmaker GlobalFoundries in June to manufacture radio frequency chips, the first Indian company to do so. Founder Gautam Singh said the company is shipping "medium" volumes and plans to scale slowly. Vervesemi also raised $10 million from investors this year.

Packaging, customs and a three-year rule

The cost problem doesn't end at the fab. After the wafer is made, it goes to a packaging plant that cuts it into individual chips and seals them. India now has five such plants running, but Malik says most quoted him two to three times what factories abroad charge.

Going abroad brings its own headaches. A startup sends out one wafer and gets back around 5,000 packaged chips, and that mismatch has confused customs officials. Vervesemi took three months to sort it out.

Then there is the photomask, a precise stencil used to print the chip's circuits, which Indian firms pay for upfront. RBI rules say any physical asset paid for in advance must be brought into India within three years. But the mask is meant to stay at the foreign fab. "We are fighting this also right now," Malik said.

A government official told Nikkei that these issues come from a still-limited understanding of the chip industry among ministries, states and customs, and that officials step in quickly when shipments get stuck.

Is 24 startups enough

India has around 20 percent of the world's chip design engineers, but most work for companies like Qualcomm and Intel. Under the first phase of the India Semiconductor Mission, 24 chip design projects got government funding covering half their design costs, capped at Rs 15 crore, plus sales incentives of up to 6 percent of turnover. Over 100 companies also got free access to expensive chip design software at a centre in Bengaluru.

The second phase, launched this year, will reimburse 9 percent of net chip sales for startups, and the focus is on helping companies that have already made a chip rather than funding many new ones. Even Tata's upcoming fab, the official admitted, may not suit the kinds of chips these startups are designing.

Not everyone agrees with the narrow focus. "I think 24 is too small a number," said Mukul Sarkar, founder of Orvis Semi. He argues that with only two or three startups likely to survive the next decade, India needs to back many more of them.