Indian semi-conductor industry

Overview

Indian Semiconductor Association (ISA) estimates the consumption of electronics in India to reach $363 billion by 2015 from $28 billion in 2005. Consequently, the domestic semiconductors market is to touch $36 billion in 2015 from $2.8 billion in 2005.Telecommunication (45.4%), IT Hardware & Office Automation (27.6%) and Consumer Electronics & Durables (10.6%) are major demand drivers, with Industrial Electronics (5.4%), Automotive Electronics (3.5%) and other electronics (7.5%) constituting the balance.  

Government owned Bharat Electronics started semiconductor production in India back in 1962. Since then, 22 out of 25 top global semiconductor companies and all of 10 leading fab-less companies have set up their design and development centers in India. Total market for the design services provided by Indian companies, was estimated to be $6 billion in 2007 with three major subgroups: Embedded software (81%), VLSI design (13%) and hardware/board-level design (6%). The revenue from semiconductor and the embedded design is expected to reach $43 billion by 2015 from $3.25 billion in 2005.

"Fab” or “No-Fab”
India, as a destination for semiconductor foundries (fabs), has both advantages and drawbacks. Fab close to the design location can be useful, however, the $2-$3 billion price tag is prohibitively high, not to mention periodic up-gradation costs.  Moreover, worldwide overcapacity is already squeezing the bottom lines of the foundries. Even if the huge domestic market can outweigh the capacity concerns, poor infrastructure and lack of experience makes it an uphill battle for Indian fabs. 

In 2007 Indian government took policy measures to subsidize 20-25 percent of first ten years’ capital expenditure for fab projects. Also in 2007, Hindustan Semiconductor Manufacturing Corporation (HSMC) (with technology license from Infineon Technologies, Germany) and SemIndia (with technology licenses from AMD, USA) announced plans to set up foundries in India, proposing to invest $4 and $3 billion respectively.  Quite a few other companies, including Moser Baer India, Signet Solar Inc, Reliance Industries, Videocon Industries, KSK Energy Ventures, Titan Energy Systems, Chandradeep Solar, Neotech Solutions, Photon Energy Systems, Surana Ventures and RamTerra Solar Pvt. Ltd, have also proposed to invest a total of over  $20 billion  over next ten years. Although, most of the investment proposals lack concrete plans.

Future
Commoditization of semiconductor design is a practical challenge in India. Low entry barrier may push the number of start-up design companies from 710 in 2006 to 3,248 by 2015. With so many companies, excessive competition and design copying are distinct possibilities. Consequently, the design process can be commoditized, pushing the price down.  However, the higher end analog and microprocessor design work in India are less likely to be commoditized compared to discrete and memory components design. Additionally, industry consolidation also decreases commoditization risk. Talent crunch will be the next major challenge. In 2006, around 0.22 million students graduated with engineering degrees in India, while in 2015 the semiconductor and allied industries may need 3.5 million new people. The workforce situation may improve, if companies outsource some of their R&D work from universities and collaborate with them to create industry specific training programs to improve the supply of talent.

In India, semiconductor design and fabrication should be viewed as two separate industries. India is a mature player in the first, with proven track record of delivering high end design services to world market. Hence, the design industry should continue to work with the established ecosystem distributed across countries and concentrate on high end. Fabrication however, is a novel venture in India, fraught with dangers of poor infrastructure, global overcapacity, currency appreciation etc. Therefore, there should be just 1-2 large fabs in India, concentrating only on low end ICs for domestic electronics’ market. Thus, Indian market will not be held hostage by foreign supply, while Indian fabs can decouple from competitive world market. Local fabs will also need initial handholding from union government, in the form of quick policy implementation and strict import duty environment for electronic components. Furthermore, India needs more electronic manufacturing services (EMS) and Assembly, Test, Mark and Pack (ATMP) companies, to support the foundries. With sensible business strategy and proper policy implementation, both design and fabrication industry can achieve robust growths over next ten years. 

The article has been written by Hemendra Aran. Hemendra Aran is the CEO of Aranca, an end-to-end provider of custom investment, business and economic research. With offices in San Francisco, New York, London, Mumbai, Aranca serves global clients, comprising hedge funds, investment banks, independent research providers, PE/VCs, consulting firms and corporations among others. He can be contacted at hemendra.aran@aranca.com