Indian semiconductor industry is still immature to stand up to the global semiconductor markets despite the semiconductor policy of 2007. Karnataka has finally got its own semiconductor policy, which should serve as a model for other states, and provide a fillip towards the growth of the $120 billion electronic system design and manufacturing industry in the state.
By Srabani Sen
Sunday, April 18, 2010: India is rich in talented software engineers and has good R&D facilities but it still has a long way to go before it becomes a semiconductor manufacturing hub. The first setback came in this direction when Texas Instruments (TI) ruled out to set up a chip plant in India at a time when the country was gearing up to be a microchip industry hub. Intel also decided to open its plant in China instead of India. This was despite the fact that Prime Minister Manmohan Singh had announced various benefits for chip makers who set up base in India like incentives, tax breaks, subsidies and interest free loans for first 10 years of operations.
On the other hand, India’s neighbouring countries—Taiwan, China, Korea, Singapore and Japan—have already taken the leap, whereas India imports almost all semiconductor components despite a good domestic demand for electronic and hardware components.
Meeting certain key requirements for promoting semiconductor manufacturing is a pre-condition for realising the potential of India as a manufacturing destination. India needs world class infrastructure and huge capital flow to compete with the global hubs for semiconductor manufacturing.
Given the current growth rates and as per Indian Semiconductor Association (ISA), $400 billion worth of opportunity will evolve by 2020 with respect to the electronic system, design and manufacturing industry in the country. The Karnataka semiconductor policy is a positive step in that direction.
All this said, can India be a viable place for manufacturing semiconductors in near future? We took up this debate and sort opinions from some of the experts in the semiconductor space and tried to find an answer. What came out was a consensus that India has great potential to grow its semiconductor manufacturing capabilities. But the country needs to make necessary investments in infrastructure and education. It is, therefore, advisable to boost the electronic design and manufacturing climate in India vis a vis fabs, promote product development, nurture startups and introduce a level playing field at different points in the entire electronic ecosystem. However, this would need concerted efforts from various stakeholders involved in the entire ecosystem. In particular, strong encouragement from the government is required to draw the first set of investors to commit to large investments.
Semiconductor fabs will only come up when market forces justify
Cutting edge semiconductor fabrication units (fabs) require investments in excess of $ 3-5 billion and a well developed ecosystem. In addition, India needs world class infrastructure to compete with the likes of USA, Taiwan, China and Singapore, which are some of the global hubs for semiconductor manufacturing. Access to ports, uninterrupted electricity, abundant supply of clean water, waste management capability, warehousing, good road network and global air connectivity are critical for success.
In addition, fabs require co-location of the ecosystem to be efficient. This means that all the players in the manufacturing ecosystem—all raw materials suppliers and support infrastructure—should be located in the same area near the manufacturing base for easy access.
Finally, there are significant technology challenges to be considered when setting up a fab. For a fab to manufacture at the latest process nodes (where the biggest business opportunity lies), there is a tremendous amount of high tech knowledge collaboration that needs to take place with industry partners.
Due to these challenges, chances of semiconductor fabs coming up in India is possible only when the market forces justify. Most importantly, since fabs are capital intensive, they need to be fully loaded (utilised) most or all the time, to be profitable. According to iSuppli, fab utilisation worldwide in the first quarter of 2009 was just 48 per cent. At the end of 2009, the utilisation rate for fabs was about 80 per cent but that is an average and the actual utilisation will vary between different fabs.
After the semiconductor policy announcement by the government in 2007, several companies have shown interest in setting up solar and LCD fabs in India. We have seen an uptick of solar and photovoltaic (PV) fab activity, and if it continues to gain momentum then it could help build up the ecosystem, infrastructure and talent base that is required for the resource intensive semiconductor fab plants.
Manufacturing in immediate future
Over the past 20 years, India has built up its design expertise and experience engaging with global ecosystem partners. Now Indian companies are capable and confident of building products locally. In addition, India is one of the fastest growing semiconductor markets in the world in terms of domestic consumption. A growing consumer base with increasing disposable income presents the opportunity for semiconductor companies to develop products in energy, telecom, wireless and medical applications, for the domestic market and potentially other emerging markets.
A number of semiconductor companies have already invested in or are considering investment in alternate technologies, such as green technologies like solar panels. More companies will address electronics manufacturing directly for the domestic market with a focus on the automotive segment, energy management and home entertainment. Significantly, we expect that there will be an increase in systems manufacturing.
In addition, India can leverage its strengths in embedded design and software development and large domestic market to attract global companies to shift their development and production base into India. This growth in manufacturing has already attracted global electronics manufacturers and electronic manufacturing services (EMS) companies to setup manufacturing facility in India.
Role of govt & industry
With the semiconductor policy, the government has already provided support to companies wanting to make considerable investment of setting up a fab unit. In addition, government should invest in improving the quality of the country’s infrastructure, ideally by way of public private partnership (PPP) model. This would not only create the physical conditions suitable for semiconductor manufacturing in India but also build the confidence of investors who would want to commit the large capital investments necessary for the fabrication units.
Certain government subsidies can be encouraging to an extent. For instance, the tax exemptions and incentives proposed by the Karnataka government in its recent semiconductor policy announcement for companies that invest in large projects in the state are positive measures. This may not necessarily spur semiconductor fabs but will encourage investments in other types of related manufacturing such as solar fabs, PV units, EMS, etc.
Opportunities for startups
India and emerging regions have unique needs and there are immense opportunities in areas of wireless, consumer, energy, automotive and medical electronics due to large and relatively untapped domestic demand. And since we have well developed semiconductor design ecosystem in India, there are a lot of design engineers who have the experience, skill and market knowhow to turn into entrepreneurs.
Currently, the opportunities for entrepreneurs in the semiconductor industry are two fold. First, capital injection into the local ecosystem has improved and provides business opportunities to IP, design services companies and indigenous products. Second, design services companies in India that continue to provide quality and ROI benefit to the global market.
That said, some of the biggest challenges for startups include market development and attracting and retaining good talent. And while opportunities for funding for Indian startups have opened up, thanks to a more mature VC network, startups still experience difficulty in attracting investors.
Certain government incentives such as the one announced recently by the Karnataka government to provide seed funding to semiconductor, solar and assembly, testing, marking and packing (ATMP) entrepreneurs setting up projects in the state from the Karnataka IT venture capital fund (KITVEN), will give a fillip to startups.
Excellent opportunities in semiconductor space, especially for startups
India has a substantial market in electronics equipment. According to industry estimates, India’s electronic equipment consumption is likely to grow by 5.5 per cent in 2010 and by 11 per cent by 2015. This gives an excellent growth opportunity for semiconductor companies. Original equipment manufacturers (OEMs) are also setting up manufacturing units in the country.
The Karnataka semiconductor policy is slated to provide a fillip towards the growth of the electronic system design and manufacturing industry in Karnataka. Other states in India may also adopt similar policies in the future. However, manufacturing of semiconductor requires huge capital flow and certain level of infrastructure, and this has been the reason that semiconductor companies are skeptical about manufacturing plans. India still have a long way to go for semiconductor manufacturing.
Manufacturing in immediate future
There is certainly opportunities in the semiconductor space, especially for startups. The Karnataka semiconductor policy provides a good opportunity for entrepreneurs entering semiconductor design and embedded software. The Karnataka government will contribute a substantial amount towards the Karnataka IT venture capital fund. These funds are aimed at raising more resources from the industry to aid semiconductor startups with focus on design and embedded software. The policy has also put in place a proposal for setting up labs for testing chips which traditionally is outsourced and can be quite expensive. Setting up a testing usually costs between $10-20 million. The policy is expected to bring down the cost which will be beneficial for smaller companies and startups.
What needs to be done & govt role
West Bengal is already studying the Karnataka semiconductor policy in order to replicate the model in the state. While the country has emerged a viable destination for electronic component manufacturing with a lot of OEMs setting up manufacturing units in the country, India still have a long way to go for semiconductor manufacturing which is quite capital intensive and require huge infrastructural support.
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine