Features

Of Fish n’ Chips

DQI Bureau

27 Dec 2002 00:00 IST

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.

Advertisment

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.

Advertisment

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.

Advertisment

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.

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.

TEAM DQ

Advertisment