Choking the Fab Process

It was in mid-March 2013, when the empowered committee headed by Sam Pitroda for setting up semiconductor fab units in India submitted its recommendations to the government, having shortlisted two consortia.

But even after around three months, the approval is pending with the government and experts fear that such inordinate delay will threaten India's semiconductor fab hopes.

"Fabs are a great step. However, any delay in getting approvals for the fab manufacturing proposals can be a risky move," says MJ Zarabi, co-founder and chairman of Masamb Electronics Systems.

Zarabi, who has been the oldest watchman of India's semiconductor industry, was also part of the empowered committee which invited the proposals.

According to sources, the approval is hanging midway because of the Law Ministry and the Finance Ministry, which are taking more than expected time to decide on terms and conditions and the subsidy load in the fabs.

Experts say that the delay of this nature might cost India heavily as the targets which the Department of Electronics and Information Technology has set to attract FDI into the electronics manufacturing sector will remain unfulfilled.

Electronics Imports to Pip Oil Imports?

Meanwhile, concerns about electronics imports exceeding oil imports by 2020 were raised in the National Policy on Electronics (NPE).
"As stated in the NPE, if the electronics imports exceed oil imports and we refrain from building an in-house infrastructure to supplement the growing demand for electronics, it will be a huge loss," warns Sanjeev Keskar, chairman, IESA (India Electronics and Semiconductor Association).

"India has the opportunity to still catch up. The fab manufacturing is a step to give fillip to the domestic manufacturing," he adds.

The Indian semiconductor industry has its interesting days ahead, only if the government turns out to be a lead investor in the proposed two consortia for setting up semiconductor fabrication units-the Jaypee-IBM and HSMC (Hindustan Semiconductor Manufacturing), STMicroelectronics NV, and if the government manifests willingness to drive things at much faster pace than visible right now.

 

 

Best Time is Now

The best time to set up fabrication units in the country is now. A number of studies and experts favor the presence of fabs in the country despite challenges involved in setting them up.

India's semiconductor consumption reached $8 bn in 2012, a 7.4% increase from 2011, according to a Gartner study. This was in contrast to the global trend as worldwide semiconductor revenue declined 2.6% to reach $299.9 bn in 2012.

These statistics put India at the forefront of making it a destination for electronics manufacturing, if the opportunity is adequately tapped.

The figures are favoring India's steps to invest in two capital intensive fab manufacturing facilities estimated to cost `25,000 crore or more.

"It is the time when we should not squander time by debating fabs. Rather it is time when we should look at the bulk consumption of wafers.

In my opinion, this is the best time to take steps and to attract investors," opines Jaswinder Ahuja, managing director, Cadence Design Systems, India.

According to another study conducted by IESA in association with Frost & Sullivan, the Indian ESDM industry is on a growth trajectory of 9.9% CAGR-from $64.6 bn in 2011 to likely $94.2 bn in 2015. This figure encourages the industry to look at India as a destination to investment, to expand, and to innovate. All of this is sure to happen, when the manufacturing ecosystem gets a boost.

"Consumer electronics need semiconductors. If these are imported, India will not be able to go up the value chain. Once fabs become a reality, the first step will be taken. Critical mass of local demand for chips produced in these fabs will give wings to India's manufacturing story. Not all the chips manufactured in these fabs will be consumed locally. We'll be able to cater to markets like Middle-East and Africa," says Keskar.

The objective is also to compete with China and Asia Pacific counterparts such as Thailand, South Korea, Taiwan, etc, from where a lot of electronics import demand is met.

Opportunity

The electronic components industry comprises of semiconductors and passive components. As most electronic products are enabled by semiconductor components, it is important to analyze the overall consumption of semiconductors, expected to grow, according to IESA, from $6.1 bn in 2011 to $9.66 bn in 2015.

Local demand and sourcing of semiconductors is limited ($2.94 bn in 2011 and increasing to $3.69 bn in 2015) due to import of electronic products and low domestic manufacturing. The IESA reports underlines, "Since currently there is no semiconductor manufacturing in the country, the entire consumption is met through imports. Continued innovation of semiconductors devices coupled with their enhanced processing capability has led to the increased consumption in mobile devices, IT/ OA , telecom, automotive, and industrial sectors."

According to Gartner, of the three key electronic devices-mobile phones, PCs, and LCD TVs, which account for over
70% of India's overall semiconductor consumption, LCD TV saw the biggest growth of nearly 45% in terms of semiconductor consumption during 2012.

Mobile phones' semiconductor consumption grew by 5.7% but PCs declined by 0.3%.

Increased consumption of electronic goods, government's focus on e-governance infrastructure and services, and a huge demand for networking products, especially in the telecom segment have played an important role to boost Indian semiconductor industry.

In addition, growth of smart devices such as smartphones and tablets due to high disposable income, rise in the sale of automotive and consumer goods, growing healthcare network, and emerging trends in personal monitoring are other key factors driving demand.

The focus on broadband penetration, digitization of cable industry, e-governance initiatives, particularly in the area of education and healthcare, and efficient smart grid solutions to address transmission and distribution issues of the power sector are opening up doors for consumption of semiconductor wafers.

"It is critical to look at the upcoming events seriously, especially tremendous growth in smartphone, TV and set-top box segment. India has the capability to reap on the opportunity and go about it pragmatically," regards Somsubhra Pal Choudhary, managing director, Analog Devices India.

Besides, the advent of new technologies such as 3G and 4G is also augmenting this demand. These factors are acting as a force multiplier, contributing towards the semiconductor industry's growth in India.

Creating a Niche

Traditionally, India has lived up with an image of talent pool and labor-cost arbitrage. However, in the last few years the country has moved up the product innovation ladder. In the semiconductor space, India has already created a valuable place on the design side.

"Semiconductor design has traditionally been the strength for the Indian ESDM industry, generating revenues of $8.8 bn in 2011," underlines the IESA report.

There are more than 120 companies in India focused on semiconductor design for global products. "More importantly the semiconductor design has witnessed a robust growth of 17.3% since 2009 and today has a 5.1% share in the global market," adds Keskar.

In addition, the industry is expected to grow at a healthy rate. Indians design products for most of the companies in the world. "We have a talent pool of people who understand and have experience of working on the semiconductor design. We can leverage this strength in manufacturing wafers in India," opines Ahuja of Cadence.

"Why the government is interested in fabs is because of its electronics consumption, which is projected to reach $400 bn by 2020, exceeding oil imports. It's critical to generate opportunities locally if the consumption or demand is in the local market," he adds.

Over the years, the Indian semiconductor design industry has developed significant capabilities and at present works on state-of-the-art products. It ranges from growing technical competence combined with stringent IP protection environment to localization of contents. The design centers in India are involved in end-to-end design and are contributing to the global value chain.

Bleeding Edge or Leading Edge?

While the buzz centered around the two wafer manufacturing consortia, the industry saw an influx of views contrary in nature on the kind of wafers India should focus on. It is yet not clear as to what kind of fabs the consortia are focussing on. However, it is expected that they are going to be in the 65-nanometre (nm) node. Many favor either the use of smaller nodes in the range of 24nm or below. However, majority is in favor of 65 nm because of the bulk consumption being in this space. "For India, the bleeding edge technology is not the focus. It's better to look at the bulk demand and try to create an ecosystem," opines Choudhary of Analog Devices.

While argument around smaller nodes holds strength, India cannot afford to overlook the volume demand which is around 65nm and 180nm. Design innovation can later mitigate the need for a leading-edge fab. According to McKinsey report, the leading-edge nodes comprise merely 14% of total demand. Half of the customers still use chips of a previous generation.

"Stimulating the whole ecosystem requires focus around volume demand. It is better to target 65nm or 40 nm because of the consumption ratio.

India doesn't need hundred of fabs. If India goes for two fabs, I don't think we'll be able to use its whole capacity," says Ahuja of Cadence Design Systems, India.

In an earlier interaction with Dataquest, PVG Menon, president, IESA, had also favored the stress on maximum consumption which is around 180 nm.

"Two fab units in the country are a very good beginning to tread the path of chip manufacturing in India. It will help India to catch up in the lost race for electronics manufacturing," said Menon.

The IESA has already welcomed the 0% customs duty for import of equipment for the fab, which will trigger the industry.

A Thousand Mile Journey

The Chinese proverb ‘a journey of a thousand miles begins with one step' explains India's semiconductor fab move. All said and done, India needs fab to stimulate the manufacturing ecosystem, irrespective of thought-entanglements being woven around the nodes. The move is in the larger interest of the country.

Those who are wary should perhaps try to answer these questions. Will India be able to cut the supply of semiconductor imports through home-grown chips by 2020? Will India be able to compete with Chinese, Thai, and other brands in the domestic and international markets? Will India be able to further strengthen ‘Brand India', moving up the value chain?

A sincere effort to answer these questions will enable India to set out a journey of thousand miles, though with small, little steps. But what remains to be seen is how soon the government takes a decision to allocate subsidy load, decide on terms and conditions, and gives the final approval to these fabs.