Are fabs the right fad for India?

We’re at the crossroads of an intricate circuitry. At a time when India is ready to jump on to the semiconductor manufacturing bandwagon, global experts feel that the country would perhaps be better placed if it focused on leveraging its strength on design and development.

There are about 200 semiconductor companies operating in India, of which 120 are into chip design. For India, this is a huge leap from the first semiconductor-related operations that started at Bharat Electronics over 30 years ago.

According to Fabless Semiconductor Association (FSA) executive director Jodi Shelton, “VCs are shying away from funding semiconductor companies in the US due to rising cost of chip development, which has gone up by 30%, during the last few years. India can utilise this to its advantage. A combination of design expertise and platform expertise will help companies add value to their products and if needed they can go for manufacturing tie-ups.”

Despite the lack of a well-defined semiconductor policy, two companies, Nano-Tech Silicon India and SemIndia, have announced their plans to set up fabs – both in Andhra Pradesh - while NeST wants to set up a foundry in Kerala. According to Bryan Lewis, research vice-president and chief analyst (semiconductor) at research firm Gartner: “Unless the government is ready to support a fab with a huge subsidy, it will not be profitable. Semiconductor consumption in India is very small and a fab focusing on local industry will not be able to make any profit.”

According to him, in order to make profits, a fab has to utilise 85% of its capacity. “It should have a minimum of 20 customers. Besides, a global slowdown in semiconductor industry is expected in 2009 and prices will drop. It will again be difficult for a state-of-the-art fab to compete globally,” he adds.

India has established itself in the design space with giants like Texas Instruments, Intel, Cypress, Infineon and STMicroelectronics setting up their R&D bases here and accounting for 70% of the total semiconductor design industry in India. A study by the India Semiconductor Association, along with Frost & Sullivan, pegs the total design market in India at $3.25 billion. It predicts that Indian chip-related design services industry will grow to $43 billion by 2015.

“India has been playing a pivotal role in the progress of the global semiconductor technology-driven industry. All the global top 10 fabless design companies have operations in India and 17 of the top 25 semiconductor companies have a strong presence here,” says Poornima Shenoy, president of ISA.

FAB INCENTIVES: WHAT THE POLICY OFFERS

20% of capex during first 10 years if unit inside an SEZ 25% of capex during first 10 years if unit outside an SEZ Minimum investment in fab plants is Rs 2,500 cr Minimum investment in ancillary plants is Rs 1,000 cr Govt. participation limited to 26% of the project's equity Seen as partial victory for players who asked for 25% of capex Incentives not extended to older plants with second-hand equipment

She further points out that “the growth of the semiconductor design industry and the emergence of a surging market in India for consumer electronics, wireless communications and automotive products provide attractive opportunities to the global semiconductor industry.” The key factors driving this growth include rapidly-growing local markets, strong education infrastructure, low-cost design talent, short product lead-times, reduced barriers to entry, rising government support and improved infrastructure.

The counter argument for presence of a fab facility is that with the domestic market growing from $3.2 billion to $43 billion in 2015, India’s reliance on imports will rise without a manufacturing facility. Besides, even fab companies are churning out new strategies to achieve much-needed economic viability. “Global market may slow down but Indian market will still be vibrant in 2009,” says Ajay Marathe, chief operating officer of SemIndia.

The news of fab projects in India has already started attracting interest of leading fabs across the world. Thailand-based TSMC, for example, has set up an office in India. “We are here to acquire new clients and to study the market,” says Ashwin Ramachandran, head of TSMC’s India operations. According to him, the company, which commands about 50% of the manufacturing market globally, will be able to offer the best prices and technology advantages to its customers despite threat from new entrants.

The Indian semiconductor industry is also attracting interest from the VC community with nearly 40 funds making their presence in 2006 against a modest 10 in 2001. “Asia-Pacific, especially India and China, are becoming attractive destinations for VC and PE funds.

Studies show that VCs have invested $515 million in India in 2006, logging a near 74% year-on-year growth. Of this, 70% goes to the IT sector, which includes semiconductor sector as well. Private equity investment in India stands at $7.5 billion of which $1.5 billion is again in the IT and semiconductor segment,” Michael J Scown, managing director, treasury (Asia Pacific), Intel Capital says.

Bob Kondamoori, managing partner of Sandalwood Partners, which has picked up 5% stake in the proposed $3-billion SemIndia fab project in Andhra Pradesh, says that one can start a fabless company (chip designing and development) in India at an investment of $15 million while it will cost $30 million in the US.

“Last year, we launched a $100-million fund, of which 30% will be for the technology sector. Recently, we picked up stake in a chip-designing venture besides investing $10 million in the fab project. We are in talks with some companies and expect to close a few deals in one year,” he said.