Why AI Is Driving A Semiconductor Supercycle

Source: Indian Express
GS III: Developments in Science and Technology and their applications and effects in everyday life; indigenization of technology and developing new technology.

Why in the News?

The Semiconductor industry is witnessing exceptionally high demand due to the rapid expansion of Artificial Intelligence (AI), data centres and AI computing infrastrucutre.

News in Brief

• The trend was highlighted at SEMICON India, organised under the India Semiconductor Mission (ISM) and the Ministry of Electronics and Information Technology (MeitY).
• The semiconductor industry is witnessing what analysts describe as a “supercycle”—a prolonged phase of investment and demand driven by structural changes in technology.
• Similar semiconductor-led demand shifts were witnessed during the rise of personal computers in the 1990s and smartphones in the 2010s.

Key Highlights

• The AI boom is creating strong demand for AI chips, high-bandwidth memory (HBM), advances packaging and data-centre infrastructure.
• Major technology companies are committing large amounts of capital to AI infrastructure, while chipmakers are increasingly entering long-term supply agreements.
• India is building semiconductor manufacturing and packaging capacity, but it remains dependent on imports for advanced chips and several critical components.
• India is also developing capabilities in chip design, chiplets and AI processors, creating opportunities to participate in higher-value segments of the semiconductor ecosystem.

What is driving the Chip Boom?

Expansion of AI Data Centres

• AI data centres require specialised infrastructure to store, process and transmit enormous volumes of digital data.
• Unlike conventional data centres, AI facilities require high-performance computing systems capable of running complex AI models.
• A key component is the AI accelerator, which performs the large-scale calculations required for AI workloads.

High-Bandwidth Memory (HBM)

• AI processors need data to reach them extremely quickly.
• Conventional memory architectures can create bottlenecks because of the distance between the processor and memory.
• HBM addresses this challenge by stacking multiple layers of memory close to the processor.
• This enables large volumes of data to move rapidly between memory and processors.
• Advanced semiconductor packaging technologies are increasingly being used to integrate processors and memory stacks.
• The HBM market currently has major players such as SK Hynix and Samsung of South Korea and Micron of the US.

How is Demand Being Secured?

• The AI boom is changing the traditional semiconductor business model.
• Model manufacturers historically depended heavily on consumer electronics markets.
• AI infrastructures is increasingly shifting demand towards business-to-business customers, particularly large technology companies and data-centre operators.
• Microsoft, Amazon , Google and Meta together planned to spend nearly $635 billion on AI infrastructure in 2026, including data centres.
• Chipmakers are also entering long-term “take-or-pay” agreements.
• Under such contracts, customers commit to purchasing an agreed quantity of chips irrespective of whether their actual demand changes, or compensate suppliers through penalties.

Significance

• Such contracts can make semiconductor demand more predictable and support large investments in manufacturing capacity.
• However, AI infrastructure spending remains concentrated among a relatively small number of companies.
• Therefore, the long-term sustainability of the semiconductor boom will also depend on whether AI services generate sufficient revenues to justify these investments.

Where does India fit in the Semiconductor value chain?

• India has been expanding its semiconductor ecosystem under the India Semiconductor Mission (ISM).
• Under ISM 1.0, the government approved 12 semiconductor projects, and some semiconductor and packaging facilities have started production.
• India’s present focus is particularly on:
  • Assembly, Testing, Marking and Packaging (ATMP)
  • Outsourced Semiconductor Assembly and Test (OSAT)
  • Semiconductor packaging
  • Chip design
  • Research and development
  • Development of specialised processors
• India does not yet manufacture advanced chips at scale.
• Instead, it is building capabilities in assembly, testing and packaging.
• For example, Micron’s Sanand facility in Gujarat is expected to process imported wafers for chip packaging.

Challenges for India

• India continues to depend on global semiconductor supply chains for advance chips and other critical unputs.
• Growing demand for AI servers and data centres has also placed pressure on memory supplies and prices.
• Some foreign portfolio investment withdrawals from Indian markets in 2026 have been associated with investor interest in semiconductor-heavy markets such as Taiwan and South Korea.

ISM 2.0 and Semiconductor Ecosystem

• Launched in February, ISM 2.0 seeks to strengthen the semiconductor ecosystem built under the first phase.
• Its focus includes:
  • Supporting semiconductor manufacturing.
  • Promoting advanced packaging.
  • Providing financial support for chip-related projects.
  • Supporting R&D in chiplet technologies.

What are Chiplets?

• Traditionally, chips are manufactured as relatively large integrated pieces of silicon.
• Chiplets divide a larger chip into smaller, specialised components that can be integrated together.
• This approach can potentially help reduce costs, manufacturing waste and design complexity, while allowing specialised functions to be combined.

India’s Opportunity in chip design

• Chip design represents another potential entry point for India.
• Nearly one-fifth of the global chip workforce is based in India, giving the country an important human-resource base in semiconductor design.
• Under the Design Linked Incentive (DLI) Scheme, Indian startups are being supported in developing semiconductor designs and processors.
• One example is Netrasemi, which is developing edge-AI processors for applications such as cameras and drones.
• These processors can perform AI computations directly on the device rather than continuously sending data to cloud servers.
• This can:
  • Reduce response time or latency.
  • Reduce dependence on cloud computing.
  • Lower data transmission requirements.
  • Support applications requiring faster local processing.
• The acquisition of Bengaluru-based fabless chip company C2i by Germany’s Infineon also illustrates India’s emerging role in the global semiconductor design and value chain.

India and the Global Semiconductor value chain

• India’s semiconductor strategy covers the entire value chain, from chip design and wafer fabrication to assembly, testing, packaging and end-use applications.
• India has comparatively strong capabilities in chip design and semiconductor talent, while efforts are underway to expand manufacturing, assembly, testing and packaging.
• This is important because semiconductor security depends not merely on producing chips domestically but on developing a resilient and diversified value chain.

Conclusion

AI-driven semiconductor demand offers India an opportunity to strengthen domestic manufacturing, chip design and advanced packaging, while reducing import dependence and building a resilient technology ecosystem.

UPSC Prelims and Mains Practice Question

With reference to the semiconductor industry and the growing demand for AI chips, consider the following statements:

1. High-Bandwidth Memory (HBM) enables faster data transfer between memory and processors and is particularly useful for AI and high-performance computing applications.
2. Chiplets involve integrating smaller specialised semiconductor components within a single package.
3. Fabless semiconductor companies necessarily own and operate their own semiconductor fabrication plants.
4. India’s semiconductor strategy includes promoting chip design, assembly, testing and advanced packaging capabilities.

Which of the statements given above are correct?

A. 1, 2 and 4 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2, 3 and 4

Answer: A. 1, 2 and 4 only

Mains Practice Question

Q) The AI revolution is transforming the global semiconductor industry and creating new opportunities as well as vulnerabilities for India. Discuss the opportunities and challenges for India in building a resilient semiconductor ecosystem. (250 words)

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