Semiconductor: Bullish Optimism

FY13 was the year of identifying new opportunities for the design captives in India. While slowdown is now an accepted fact but since semiconductors are a part and parcel of electronics industry, it will always be on a growth trajectory-at least for coming few years. But companies in the fray need to indulge in range of innovations as market saturation happens and hence they need to foray into new verticals that secures them a good growth. As a matter of fact, the economic slowdown over the few years acted as catalyst for the companies to set up more design captives wherein they can source high quality work to offshore locations like India. And high-end work shifted from the developed economies to emerging markets like India.

However, companies in the fray over the years have become leaner in an effort to save costs; they focused on their core strengths, consolidating and realigning resources to complement the existing product lines. Time-to-market pressures and design complexities are critical challenges that design teams face even today.

Market Dynamics

The India Electronics and Semiconductor Association (IESA), the premier trade body representing the Indian Electronic System Design and Manufacturing (ESDM) and Semiconductors, released the 6th ISA-F&S Report on the India ESDM Market (2011-2015) earlier this year. The report indicates that the Indian ESDM industry is on a growth trajectory of 9.9% CAGR-from $64.6 bn in 2011 to a forecasted $94.2 bn in 2015. This clearly drives home the current opportunities and gives a sense of bullishness of the market.

Growth rate of 9.9% for the Indian ESDM industry is fantastic considering a tough global economic environment. With a growing market demand, worldclass talent and favorable government policies, it is the time for India to seize the opportunity of $94.2 bn market through innovative domestic product development and value added manufacturing-rather than relying on imports and low value add screw driver assembly.

Information available from IESA suggests that the ESDM ecosystem would also bring to the fore the talent and know-how of small and medium enterprises in India, who could play a crucial supporting role to global companies, Indian PSUs, and Indian multinationals engaged in the design and manufacture of electronics. Bodies like IESA are also working actively to encourage entrepreneurship and innovation in the ESDM sector in India and believes that these will be crucial to achieve the vision of building the $400 bn ESDM industry in India.

Quips PVG Menon, President, IESA, "The next few years will be crucial for the growth and development of the Indian ESDM industry. The ESDM industry must now focus on the number of areas where India can increase self-reliance and both create and leverage intellectual property assets and the high-design capability found in India to develop unique global products for and from India. Examples are areas like computing devices and smart electronics, aerospace and defence, and medical electronics."

If one looks at the taxonomy of the EDSM market, as per IESA, the market in India is composed of:

• Electronic Products
• Electronic Components
• Semiconductor Design Services
• Electronics Manufacturing Services (EMS)
• Let's look at each of these sections individually.

The electronics products have both domestic and exports and IESA says this market was estimated at $52.4 bn in 2011 and is expected to reach about $74.6 bn in 2015. The domestic demand is said to be driven by growing affordability that will power up domestic consumption.

Meanwhile the electronic components industry has two constituents-semiconductors and passive components. Industry sources say that most of the electronic products are enabled by semiconductor components, so it is important to analyze the overall consumption of semiconductors which is expected to grow 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. Since currently there is no semiconductor manufacturing in country (might change soon with approval of fabs), the entire consumption is met through imports.

Let's look at semiconductor design, which is one of the important areas for India given its skills in this area. Here IESA report says that semiconductor design has traditionally been the strength for Indian ESDM industry generating revenues of $8.8 bn in 2011. There are more than 120 companies in India focused on semiconductor design for global products. This industry has witnessed a robust growth of 17.3% since 2009 and today boasts of a 5.1% share of the global pie.

Compared to other areas of EDSM, semiconductor design has an early mover advantage since over the years, India has proved its capabilities in this area. IESA says that over the years, Indian semiconductor design industry has developed significant capabilities and currently is working on state-of-art products. Growing technical competence combined with stringent IP protection environment and a trend towards localization of contents will help this segment continue to grow.

If we look at the EMS industry services contribution as per IESA, it is expected to grow at a CAGR of 27.8% from $0.4 bn to $1 bn in 2015. Both the conventional and emerging industry segments are anticipated to maximize the benefits from this industry.

Outlook

With a bullish growth potential, it is clear that India will emerge both as a consumer of semiconductors and a design captive. As a big fillip, recently the government has approved the setting up of two semiconductor fabs in the country some months ago. It may be recalled that the government has shortlisted two consortium to set up chip fabrication units in the country. The first consortium is led by the Jaypee Group that has drafted IBM as its technology partner, while the other is led by chip-maker Hindustan Semiconductor Manufacturing (HSMC) which has partnered with Geneva-based STMicroelectronics NV. The government had received close to 13 proposals, out of which only two have qualified.

It was well received by the industry as well. IESA said that the fab will be a highly strategic game changer for India, welcoming the fructification of the proposal. Some of the world's leading economies including the USA, France, Germany, Ireland, Japan, Singapore, Taiwan, and China besides a number of developing economies like Malaysia and Israel have their own fabs. These fabs continue to contribute significantly to the growth and development of the economy of their respective countries and we hope that this would be the case in India as well.

Clearly, India is making all the right moves and the companies in the fray are also leveraging the ecosystem well and contributing to the growth.