The Rise of the Semiconductor Industry

The industry has already become a $3-billion business in India. And the story is just about begining

Inside the office of Ittiam Systems in Bangalore, on either side of a television set, are placed two videophones connected to the Internet. Their proximity to each other is purely incidental; one of these phones could even be in San Francisco. It also does not matter much whether you have a good broadband connection. If your connection speed drops, the picture on the phone display becomes smaller and smaller. It will disappear completely if the connection speed becomes too low, but you can still continue your conversation uninterrupted.

The videophone market is still in its infancy, but this gadget could one day replace the audio handsets we use these days. Most major telecom companies are developing them. So are start-up companies. Indian companies work on several aspects of the videophone, both of the wired and wireless varieties. However, not many Indian companies have the knowledge and experience to design and develop a full product. Yet, Ittiam had worked very fast, developing the product within two months of getting the new DaVinci chip from semiconductor manufacturer Texas Instruments (TI).

Ittiam is thoroughly familiar with TI technology; the two companies have been working together for a few years now. Ittiam had earlier developed products using two other TI chips — designed mostly in Bangalore — that were predecessors of the DaVinci. It is now looking for a manufacturer for the phones; among the prospective candidates is one from India itself. If this company gets the manufacturing rights, Ittiam’s videophone will become almost entirely an India story: part of the chip, the product design, the software and, finally, the manufacturing also done here.

In most other industries, this wouldn’t have mattered much. But the semiconductor and electronics industries are so closely wedded to each other that all the components need to feed off each other to grow. So, examples like that of Ittiam are the first signs of a big change: the coming together of the Indian semiconductor and electronics industries, which could push both into the global league.

In the last four years, the Indian fabless semiconductor industry has grown from around $1 billion to over $3 billion. A recent study by Frost & Sullivan predicts that domestic electronic production will be around $155 billion by the year 2015, which will give an opportunity worth $16 billion in domestic manufacturing of semiconductors. The study also says that by 2015, India’s semiconductor industry would have impacted 12 per cent of India’s GDP directly and 15 per cent indirectly (compared to less than 2 per cent now).

Ten years ago, there was not the slightest sign of a semiconductor industry forming in India. By 2000, a few multinationals started operations in the country, but several key components of the ecosystem were missing. Some were missing even three years ago. Yet, it all seems to have fallen into place in the last three years. India now has a semiconductor ecosystem and the electronic ecosystem is beginning to form. The implications of interplay between the two are obvious. Says Bobby Mitra, managing director, TI India: “Semiconductor solutions are at the heart of electronic systems. They are the fundamental engines that help electronic companies drive innovation.”

India is now home to around 120 chip design companies. In the last two or three years, every sort of semiconductor company has set up office or expanded its presence in India. This list includes chip vendors, design services companies, design tool companies, verification companies, intellectual property (IP) companies, testing companies, and so on.

Within the next two months, SemIndia, a company promoted by Vinod Aggarwal, an Indian-American professor, will start work on building a fab city in Hyderabad, a conglomerate of fabs and other companies, investing $3 billion in the next few years. In 1,200 acres, the fab city will have about five fabs, 200 suppliers, a research institute and some training centres. It will complete the missing link of manufacturing while also bringing a greater variety of companies within a cluster.

Meanwhile, India is becoming a large market for electronic goods. The market for semiconductor products is now at $2.82 billion and is likely to grow at 29 per cent a year over the next 10 years, according to Frost & Sullivan. Consequently, a few companies have started electronic design, and a large number of vendors are planning to manufacture products in India. We have already seen Alcatel, Nokia and Flextronics, but more companies will establish manufacturing facilities in India soon. The combined growth of the Indian semiconductor and electronics industries will become one of the most significant events in Indian corporate history.

As with all other industries, the growth of the Indian semiconductor industry was partly a result of changes in the structure of the global industry. The latter started disaggregating towards the end of the 1980s when chip vendors such as Intel and TI gradually stopped doing everything on their own. Tool-making, silicon design, verification, software development, IP development, manufacturing and packaging all became activities of specialist companies.

As the industry became more complex, more layers started forming and then moving out. You could be anywhere in the world, yet specialise in one of these areas if you had the skill. The business of design services grew with the complexity of the chip. Indian companies, never one to miss a services opportunity, began to establish large silicon design teams.

Some of these teams are now among the largest in the world. Wipro, for example, has 1,450 designers, making it the biggest team in the world outside captive design houses of chip companies. Also, Sasken has 350 people and MindTree Consulting, 200. The revenues are reasonably good as well. Wipro gets around $50 million from design services, and Sasken gets approximately $10 million every year. The overall revenues for all such companies put together were at $585 million last year, according to Frost & Sullivan.

Design services became a noticeable business by the turn of the century. By then, the large multinationals had begun to expand. The semiconductor industry was beginning to enter a slowdown in 2001, and India was a good place to design chips and develop embedded software at a low cost. This was why Intel, the world’s largest semiconductor company, started its India Development Centre in Bangalore in 2002.

Still, we could not talk about an Indian semiconductor industry even at that time. Vital skills were missing. There were no start-ups. Domain expertise was minimal. But the landscape has changed completely since. Says G. Venkatesh, chief technology and strategy officer, Sasken: “Three years ago, multinational semiconductor companies were using India for capacity augmentation. Now they are using India strategically.”

Today, the multinational design centres are a major component of the country’s semiconductor industry, both in terms of numbers and overall influence. The Intel India Development Centre now employs 2,300 engineers. ST Microelectronics employs 1,500 people in Noida near Delhi. TI has now stabilised at around 1,000 engineers. Companies like Philips, Cypress Semiconductor, Infineon and design tool vendors like Cadence and Synopsys all employ several hundred engineers.

It is not easy to see in numbers the contribution of these centres because MNCs do not disclose revenues based on work from specific centres. Still, here is one example. Cypress Semiconductor has an engineering team of around 200 people in Bangalore, who have made products that have so far provided the company with revenues of over $250 million. One product, the static RAM, gets the company $30 million every quarter. One could extrapolate on how much a centre of 1,000 engineers could contribute to a company’s revenues.

The growth of these engineering centres would have been a story in itself. They are significant in other ways too, as they are now functioning at the cutting edge of technology and, as we shall soon see, also trying to develop electronic design and manufacturing within the country.

These centres have designed several critical products: Intel’s Centrino Core Duo was mostly developed in Bangalore. Cypress Semiconductor’s engineers have developed several static memory chips. Engineers at ST Microelectronics have developed megapixel camera chips. TI engineers have developed several products like audio and multimedia chips. Broadcom engineers participate in the development of a large number of chips. Says Rajendra Khare, managing director, Broadcom India: “Broadcom is increasingly giving the ownership of products to Bangalore.”

As the multinational centres took off, the start-up activity also picked up, as both Indian and US companies established base in India. Silicon Valley’s venture capital (VC) community was one of the major drivers of this change. They believed that it was no longer feasible to develop complete products out of the US. There was already a precedent like Moschip, a product company based in Hyderabad, which showed that it was possible for a start-up to develop full chips from India. Beginning somewhere around the year 2003, the VCs started insisting that the entire software or part of the chip should be developed in India. This led to a stream of US-India start ups to the country, most of them based in Bangalore. These companies were in niche areas, and they quickly raised the level of domain expertise within the country.

When California-based SiNett started its Bangalore office in the year 2004, it was beginning work on one of the most difficult things to do in networking: build a processor that can handle both wired and wireless networks. SiNett developed the software for its chips from its Bangalore office. This chip, called OneEdge Switch Processor, has now become one of the most keenly-watched products in its domain.

Similarly, California-based Infinera started around the same time as SiNett to develop a chip to reduce deployment time in optical networks, using Bangalore as the centre to develop software for the chip. Both these companies were started by US-based Indians. Soon, more start-ups came from the US: Open Silicon, Beceem Communications, Verismo Networks, Sling Media… in fact, so many semiconductor companies set up shop in India in the last three years that the number of engineers employed went up from a few thousand in the year 2000 to over 60,000 now.

The last few years saw pure Indian start-ups as well. As experience picked up, and as the number of engineers began to increase, some of them began leaving the multinational or Indian companies and started their own ventures. Unlike in software, these companies were not simple services companies. They were working at the cutting edge, developing products, and also doing some services to get revenues in the beginning. It is still an unusual business model, necessitated by lack of VC trust in pure-play product companies.

Cosmic Circuits, one such company, was started a year ago by Ganapathy Subramaniam, who worked in TI for 15 years. It specialises in the rare and difficult area of analogue design, and is an important addition to the chip ecosystem. In fact, it is the only analogue design IP company in India. Its first chip, a power management solution for portable gadgets (not to be sold under its brand name), is getting ready, but it has a strong revenue stream already, and has invested Rs 3.5 crore so far.

So, in three years, the semiconductor industry has gone from one based on design and software services to one that also develops products for the world market. During this time, the global industry went through many changes. In 2004, it emerged from its slowdown, but a lot of activity had shifted from the developed countries to India and China. Software began to become more and more critical to the chip and the final product, and this helped Indian companies.

The chip, meanwhile, continued to increase in complexity. Designers now work regularly with transistors of 90 nanometres (a nanometre is one billionth of a metre). Chips with transistors of 65 nanometres are already being shipped, and companies like Intel have demonstrated chips at 45 nanometres. At this level of sophistication, no one has a free hand at anything. The tool makers, the VLSI (chip) designers, the software engineers, the product design companies and even the foundries have to work closely with one another. We saw how the industry disaggregated about 10 years ago. Now it is going the opposite way. Says Jaswinder Ahuja, senior vice-president, Cadence: “The industry has come full circle as the complexity of semiconductors is making it re-aggregate.”

Cadence has a design centre in Noida that develops cutting-edge products. Not far away is its customer ST Microelectronics, and away in Bangalore is another large customer, TI. Both work at a level that requires deep understanding of physics as well as handling of complexity at the design level. Cadence has worked with these companies to develop methods that prove a design to be correct, before the product goes to the foundry. Cadence and TI have also worked together to define and develop low-power design methodologies.

This example lies right at the beginning of the semiconductor value chain. A little ahead of the value chain, we find more examples of collaborations within the country. Wipro has been doing designs using processor cores from the British IP firm ARM Semiconductor. This necessitated frequent trips to UK. Two years ago, ARM started its own design centre in Bangalore. Today, Wipro’s engineers travel only a few kilometres. ARM itself has five of its 11 certified partners — companies that are authorised to work with its designs — in India, making the country its most important development base.

Most of the companies mentioned are now forming closer relationships, but they are usually kept under wraps because product development is extremely competitive. Broadcom, for example, uses silicon IP from MindTree Consulting, develops software for multimedia over the Internet with Verismo Networks, has used Stag Software for quality testing, develops ASICs (application specific integrated circuits) with Open Silicon, and so on. TI works with about 40 companies in the country. Even start-ups have found partners. SiNett, the chip company, is working with some potential customers in Bangalore.

This synergy is unusual for India’s IT industry. Its software companies never worked with one another. The semiconductor industry’s components, though, have to interact closely. In fact, despite the fact that geographies matter less these days, the success of the semiconductor industry in a country depends on how many components of the ecosystem it can form and how closely they interact. India still has some way to go, but the missing components are now beginning to form.

With Bangalore in the midst of a construction boom, one seldom notices new buildings in the city these days. Yet, in Electronic City Phase II, already filled with several imposing buildings, one cannot help but notice a small, enclosed complex of four handsome big buildings. Only one is occupied, by California-based chip testing company Tessolve. The rest of the buildings are almost ready. The complex has the interesting name Semicon Park. What’s cooking here?

Tessolve opened its office in Bangalore a year ago, despite the fact that the country had no state-of-the-art fab. Inside its office, on the ground floor, are assembled some of the most expensive chip testing machines in the world. Some of these cost more than a crore each and have the ability to test complex chips extremely fast (each chip from a fab has to be tested separately). Why would a chip testing company put up a large facility in a country with no fab and limited electronic design and manufacturing activities?

Actually, Tessolve has come here anticipating chip manufacturing activities soon. And it is not building an isolated entity. It has also taken on the responsibility of developing and maintaining the Silicon Park (started by some private overseas investors), which is supposed to house at least five electronic product design companies in a few months, with an investment of Rs 10 crore. It is one of a kind now, and is already being used by some start-up product companies.

Beceem is one such company. Set up in 2004 by Rajat Gupta, who had earlier managed Cypress Semiconductor’s R&D centre in Bangalore, Beceem is a high-tech company by any yardstick. It has developed two chipsets for WiMAX, a wireless technology that would begin deployment in three or four months. One of the company’s founders is Paul Raj, a distinguished Indian scientist who is now a professor at Stanford University. Raj is one of the pioneers of a technology called OFDM (orthogonal frequency division modulation), and Beceem used his contributions extensively.

When the company developed its chipset, it did not have to go to Taiwan to test it. “Having Tessolve so close is a big advantage,” says Gupta. Tessolve is building its own ecosystem within the Silicon Park, but would benefit immensely from the (SemIndia) fab in Hyderabad when it comes up. So would Applied Materials, the world’s largest manufacturer of fab equipment, which set up a development centre in Bangalore last year anticipating chip manufacturing activities, much like Tessolve. So, almost all the components of the semiconductor ecosystem are now in place.

Meanwhile, electronics manufacturing is also beginning to happen. For example, Alcatel is manufacturing around $1 billion worth telecom equipment every year. Says Ravi Sharma, managing director, Alcatel India: “Alcatel is making India one of the manufacturing hubs for the world.”

One can visualise how things are likely to happen. Alcatel uses chips from Freescale Semiconductor in its switches. Freescale has a development centre in Noida with 400 developers who are working on some of its state-of-the-art chips. This centre is already trying to optimise some of its chips that go into Alcatel products. In the future, it could design the chips here itself. So, the cycle could begin and end in the country.

Domestic manufacturing would help product development immensely, because product development and manufacturing normally go hand in hand. When Tejas Networks developed its optical switches in India, it could use the manufacturing facilities from Flextronics and Solectron in Bangalore. Tejas’s development gives an indication of changing times. Of the 10,000 switches this Rs 150-crore company has sold, two-thirds were sold this year.

Flextronics itself is an example of design, development and manufacturing going hand-in-hand. A year ago, it bought three companies in India: Hughes Software, Deccanet and Emuzed. These companies were already working with one another, and Flextronics brought them together under one management. Emuzed, which has developed all the multimedia technologies in Nokia phones, is now working closely with TI to develop mobile videophones, for which the erstwhile Hughes Software will develop software as well.

We can foresee another situation developing. Many gadget manufacturers are trying to develop low-cost products for the Indian mass market. Bringing down the cost necessitates the use of sophisticated technology, so these companies will have to tap the domestic semiconductor and electronic ecosystems to the hilt. Says Rajat Gupta: “Bringing down the cost of a product involves several engineering challenges.”

Not long ago, nobody expected the development of a domestic semiconductor industry. Says K. Neelakantan, general manager of GDA Technologies: “In the 1990s, I had not imagined that India will have a thriving semiconductor industry.” Ten years ago, as the head of the defence lab Anurag, Neelakantan was responsible for the development of the country’s first chip. So, the last 10 years have surprised even industry insiders. And the next 10 could do so to a greater degree.

Source : Businessworld