Chips are up for India

Is the Indian semiconductor space hotting up? There are a few trends that appear to buttress this thinking - one, that large and medium-sized players are looking at this space. SemIndia has been talking about its $3 billion 'Fab City' in Hyderabad and Intel has said it will enter the arena if the government offers a conducive environment.

The second is the Centre's in-principle nod to the much-awaited semiconductor policy. While the details are awaited, semiconductor fabrication plants will have to invest a minimum of Rs 2,500 crore to avail of government incentives -25 per cent of the capital expenditure incurred during the first 10 years of a project.

Third, India's electronic equipment consumption was estimated at around $28.2 billion in 2005 and expected to reach $126.7 billion by 2010 and $363 billion by 2015, according to Frost and Sullivan.

A recent In-Stat research reveals the market for semiconductors in India was valued at $1.18 billion in 2005 and is forecast to reach $3.09 billion by 2010. TV sets lead semiconductor consumption in the consumer segment. By 2010, communications is anticipated to be the major contributor to semiconductor consumption.

All this, analysts argue, will help India create a semiconductor 'eco-system' which will help Indian companies move up the global value chain.

The semiconductor ecosystem, which is currently dominated by design services and embedded software, will be in place by 2010 with the setting up of planned semiconductor manufacturing facilities, states a recent In-Stat report.

Currently, India excels in chip design with over 100 players including subsidiaries of world-class chip makers. However, countries like China and Taiwan ($35 billion semiconductor industry) score when it comes to Integrated Device Manufacturing (IDMs - they perform every step of the chip-making process including design, manufacture, test and packaging.

Examples include Intel, AMD, Motorola, IBM, TI and Lucent) units which garner a major part of the revenue and command higher margins. India, it appears, is following suit and it's this design prowess that semiconductor players want to capitalise on.

India, however, needs to compete with China, Ireland, Israel and Malaysia for tax breaks to semiconductor makers. Israel, for instance, recently provided a $540 million grant to persuade Intel to build a $3.5 billion fab there.

Besides, Y Shashidhar, Vice President, Industrial Technology Practice, (South Asia & Middle East), cautions it's too early to rejoice. Indian companies are primarily setting up foundries and ATMP (Assembly-Testing-Mark-Pack) facilities as the first step - and not fabrication (fab) plants - since the costs are very high. Companies typically require around $2.5-3 billion to set up a fab plant.

On the other hand, ATMP facilities require only around $250-400 million. For instance, SemIndia is starting with an ATMP facility, Hindustan Semiconductor Manufacturing Co. (HSMC) is planning its own $3.5 billion fab.

Intellect Inc of Korea plans to build initially a logic semiconductor fab with a capacity of 30,000 8-inch wafer starts a month in Hyderabad. Nano-Tech Silicon India announced it was to set up a $600 million 8-inch fab outside. Another 8-inch fab was proposed last year by India's Nest Group in Kerala with backing from Japanese partners. Little has been heard since then.

It takes around 1.5-2 years for a fab plant to come up. In the meantime, technologies can become obsolete, caution analysts. Currently, the PC and cellphone dominate the semiconductor industry. Gartner estimates about 35 per cent of semiconductor revenues every year come from those two technologies.

However, even in the PC sector, processors evolve, memory capacity grows and LCDs replace CRTs. In the cellphone market, 1G gives way to 2G and 2.5G and then to 3G and wireless technologies.