The chips are down, but not out

FAB IN INDIA - II

The new semiconductor plants will be up against India's age-old Achilles' heel, inadequate infrastructure. This will slacken the country's drive to carve out a place for itself on the world map of semiconductor, or wafer fab, manufacturing.

Having to make do with captive power plants, far more expensive than power drawn from the grid, the only consolation for the semiconductor plants is the generally uninterrupted supply.

Quality water may have to be generated by waste water management projects, the cost of which can be absorbed as a part of the total investment, according to experts.

The situation could, however, turn favourable for India now that the government has finally worked out tax incentives in its new semiconductor policy which may lure investments worth $6-10 billion into India.

Intel had shied away from India due to lack of a policy direction and moved to Israel and recently to China, where it established its first plant. Union Minister for IT and Communications, Dayanidhi Maran, has stated that he would reopen negotiations with Intel and other companies to explore possibilities of them setting up units in the country.

The total incentives from the new semiconductor policy work out to around 30-35 per cent (if state government incentives are added), which are almost on a par with the tax benefits provided by other countries. State governments, too, could do their bit in furthering the progress of the semiconductor industry. Karnataka plans to form three special economic zones (SEZs) for the semiconductor sector at the proposed 'Knowledge City' on Bangalore's outskirts. The 10,000-acre Knowledge City is coming up near Bidadi, 30 kilometres south-west of Bangalore. Karnataka had earlier lost the $3 billion 'Fab City' project, promoted by SemIndia, to Andhra Pradesh. The state is now keen on retaining prospective investors by developing the 'Knowledge City', which will have several SEZs for high-end engineering and manufacturing. Other states are likely to follow suit.

Not all agree that the $220 billion semiconductor market is slowing down and that oversupply will necessarily lead to an over-glut in 2010. Research firm iSuppli, for instance, predicts that global semiconductor revenues will rise by 10.6 per cent in 2007, compared with 9 per cent in 2006. "It's a cyclical business just like any other one. The peaks and valleys, though, have become more moderate. While earlier, the cycle would last for around 5 years, it now ranges from 2-3 years," says Ashok Chandak, sales and marketing director, NXP Semiconductors India.

India's current play with integrated chip (IC) assembly (labelled AMTP to denote assembly, mark, test and package) would help it gain in strength. India can become a powerhouse in chip design. It already has a large and growing pool of experienced IC design engineers, and hundreds of expat engineers are returning to India every year, as happened with Taiwan in the 1980s.

India scores over China with a large pool of engineers, greater English-speaking workforce and better intellectual property laws. It already has around 125 companies involved in design. In 2005, J P Morgan reveals, multinationals like Texas Instrument, Intel, Cypress, Infineon and STMicroelectronics comprised around 70 per cent of the semiconductor design industry in India.

The industry's turnover was $3.2 billion in 2005, with an engineering workforce of around 75,000. Those numbers are expected to reach $43 billion and 780,000 engineers by 2015.

This, note experts, would work in India's favour.