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Features

Of Fish n’ Chips

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DQI Bureau
New Update

India has been a very small player in the global semiconductor industry.
Despite being one of the largest countries in the world, India is neither a
major producer nor a consumer of semiconductors. Consequently, the absence of
any large Indian semiconductor company is not surprising. However, the future of
the semiconductor industry in India is very promising.

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Major semiconductor markets like Japan and the US are mature. Large untapped
markets like India and China will be the main drivers of industry growth in the
future. In fact, India is among the fastest growing markets for semiconductors,
according to a recent report prepared by Avendus.

History

The Indian government created Semiconductor Corporation of India as a ‘strategic’
PSU in 1983. Its mission was to develop and produce semiconductors for
electronics equipment for defence and telecommunication applications. In keeping
with the spirit of self-sufficiency, the company was a vertically integrated
entity handling all stages of semiconductor value chain, from design to
packaging and testing.

Issues
of Concern
We have so
far focussed on the positives of the Indian industry. We now look

at some of the issues for concern in this industry. Most Indian companies
are too small to be publicly listed on global exchanges like NASDAQ. This
makes IPOs an unviable exit option for international investors. However,
mergers and acquisitions are common in this industry. Some examples of
recent mergers include Armedia, Switch on Networks, S3 and Vengines.

The rapid growth of the industry may be
constrained by existing training and education infrastructure. Engineering
colleges add only 250-300 trained VLSI engineers every year, while the
requirement will significantly greater if the design industry is to grow
at projected rates. Therefore, unless both engineering colleges as well as
private training institutions takes steps to increase the number of
designers trained every year, growth will hit a bottleneck.

Most Indian design firms have expertise
in the digital domain. The number of firms with experience in analog and
mixed signal domains is very few. Analog design skills are valued higher
by the market. Further, as semiconductor process technology shrinks,
analog effects begin to be seen in digital designs as well. Therefore
analog expertise will be crucial in the next generation designs and Indian
firms lacking in this area will miss out on a significant shunk of the
total opportunity. Spectacular growth in the design industry will only be
possible if most design services firms are able to migrate up the value
chain to the SIP or fabless business model. While most design firms aspire
to do so, only a few have the capability, the will and the resources
necessary to make the transition. Further, experience from the IT services
companies shows that most successful services companies have been unable
to switch successfully to the product model.

Lack of strong linkages between design
houses and foundries in India will put Indian design firms at a
disadvantage to their Taiwanese and Korean counterparts. However, strong
links can be established with non-Indian foundries as the experience of
firms like Wipro (TSMC) and U&I (Hynix) shows.
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A few players in the private sector like Continental devices, SPEL, Crompton
Greaves set up semiconductor manufacturing facilities to cater to the needs of
the market. These facilities were primarily in the lower technology areas of
discrete devices of SSI/MSI ICs. However, semiconductor manufacturing was not
very successful in India. Neither the market conditions nor the economic
policies of the government were conducive to the growth of semiconductor
manufacturing. The economic reforms initiated in 1991, made the economic
policies of the government more industry friendly. However, the changed economic
environment has not had a significant impact on the status of semiconductor
manufacturing in India.

The Indian semiconductor industry has been more successful in the design part
of the value chain. Unlike manufacturing, design does not need sophisticated
technology. It does need highly skilled workforce, which was readily available
in India. India possessed a large pool of skilled design engineers working in
academic institutions, PSUs, and government bodies. Design was also subject to
fewer regulations than manufacturing. In 1985, TI became the first semiconductor
major to establish an R&D centre n India. This allowed TI to design its ICs
at a fraction of the cost in the US. Several other global semiconductor firms
followed TI in setting up design centres in India. The presence of these design
centres coupled with the growing trend towards design outsourcing spurred the
creation of Indian design companies.

Current scenario

Currently, the Indian semiconductor industry has a presence in all parts of
the semiconductor value chain. However, semiconductor manufacturing
(fabrication, packaging and testing) is limited to a handful of players. On the
other hand, the design part of the value chain has several players. One of the
key reasons for the lackluster state of semiconductor manufacturing in India is
the small size of the domestic market. In the year 2000, the total semiconductor
consumption of the Indian economy was between $400 and $500 mn. This is a
minuscule proportion of the global market for semiconductors (which was worth
over $200 bn in 2000). Imports accounted for most of the domestic requirement.

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Future outlook for the Indian chip segment

While we maintain a gloomy outlook for semiconductor manufacturing in India,
we believe the future of Indian design companies is very bright. We first look
at the Indian design industry. We estimate the total size of the Indian design
industry to be $100-125 million. This includes design services, SIP, and EDA
firms. In our estimate, the design services segment, which comprise the bulk of
the Indian design industry, accounts for 75-80% of the industry. SIP in form of
IP components accounts for 10-15% of the total. EDA firms account for the
remaining part of the industry. We have not included fabless firms in our
analysis. The revenues of fabless companies are based on chip sales are not
directly comparable to other segments. Ideally, we should compare the value of
design in fabless revenues but this figure is difficult to estimate. However,
the value of design in fabless revenues is already included in estimates for
design services. Further, many fabless firms in India have yet to launch
commercial products; they would be generating little revenue.

We estimate the total value of design to be 10-15% of semiconductor sales.
Thus, design accounts for $20-30 bn of total value of semiconductor sales. The
total number of IC design engineers in the world is estimated to be between
2,000,000 and 250,000. This implies that an IC designer is worth between
$100,000 and $150,000.

We estimate the total number of IC designers in India to be between 2,500 and
3,000. If we assume that an Indian designer is as good as the average designer
is, then the value of the Indian design sector should be $250-450 mn. This
computation assumes that most Indian designers work with fabless or IDM players
like their global counterparts. However, most Indian designers work with design
services firms and generate only $40,000 annually. Therefore, there is
significant potential for moving up the value chain.

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The only hope for revival of semiconductor manufacturing in India is if a
major foundry or IDM establishes a new fab in India. The setting up of a fab
would have a multiplier effect on the economy as downstream hardware based
industries would also get established. Unlike China, which as a large and fast
growing domestic market for semiconductors, India does not offer the benefit of
an available domestic market. Cumbersome regulations for export and import also
do not help India’s cause. The indifferent attitude of the Indian government
stands out in sharp contrast to the government in these countries. But lets hope
the governemet wakes up and gives the country more reason to cheer.

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