Semiconductor Design: A Realizable Dream

In 2005, when the Indian Semiconductor Association (ISA) and
Frost & Sullivan came up with the industrys first report card expounding
on its potential, it sounded like a big dream. Now with almost all major
semiconductor companiesIntel, AMD, Texas Instrument, Freescalealready in
India, it is no more a dream unrealizable. But it needs some serious government
support in terms of policy initiatives.

The global opportunity for manufacturing semiconductors is a
$200 bn. Unlike product manufacturing, in other areas semiconductor
manufacturing is more tightly integrated with the design work, less
logistics-intensive and more technology-dependent. This means with some serious
attempt, India can actually make it big in manufacturing. Which would in turn
pull up design services.

That the government was not going to let loose the opportunity
was evident when finance minister P Chidambaram, in his 2007 budget speech, made
it amply clear that it was a priority area for his government. "With the
spread of IT and ITeS, the time is ripe to make India a preferred destination
for the manufacture of semiconductors and other high technology IT
products," said Chidambaram in his Budget speech on February 28, 2007. He
did not stop there, and declared that the government would announce a
semiconductor policy soon.

And it did. In February 2007, the government announced a
semiconductor policy that contained a host of incentives for the industry if the
manufacturing was done in India (see box). The projects already announced since
then include a $3 bn project from SemIndia; two $250 mn projects each from Moser
Baer and Videocon; and two $50 mn projects from Freescale Semiconductor and
Cypress Semiconductors.

The Present

Approximately 200 semiconductor companies, which include all the global top
10 fabless companies and 19 out of the top 25 semiconductor companies, are
operating their facilities out of India. Also, the action has moved out of
Bangalore to almost all major cities, including Delhi (NCR), Hyderabad, Chennai,
Pune, Ahemedabad, and Goa.

The total semiconductor design services industry in India stands
at Rs 8,527 crore. However, this figure represents only a part of the total
industry, as it does not include the embedded software (or VLSI design) revenues
of most multi-services IT firms, which now contributes significant revenue.
Forecasts say that the total semiconductor industry size in India will be around
$12 bn by 2010 (ISA-F&S). According to Nasscom-McKinsey study, embedded
system design is expected to generate exports of Rs 41,000 crore by 2008.

Segmenting the Market

The semiconductor industry consists of three types of players:

Integrated device manufacturers (IDMs): who manufacture chips as
well as sell them; fabless companies: who design and sell their chips but
manufacturing is outsourced to foundry companies; and foundry companies: who
manufacture chips designed and sold by others.

IDMs now have started outsourcing their requirements to foundry
companies rather than making heavy investments in upgrading their existing fabs.
Many of the semiconductor companies are expected to go fabless in the coming
days, thus providing more work and revenue to independent foundries.

Semiconductor Services Industry (FY 06-07)
Segment Revenue (in Rs crore)* VLSI 3,411 Hardware/Board design 819 Embedded Software 4,297 Total 8,527
*Does not include non-captive embedded software revenue
Source: DQ estimates CyberMedia Research
VLSI remains by and large the domain of captives and pure play semiconductor design services firms

Services-wise, the semiconductor design work can be categorized
into three major types:

Embedded software development: The increase in demand for
software content in electronic devices has resulted in greater volumes of
embedded software activity globally. The already acquired software supremacy is
helping India maintain a constant lead by revenue. This sector accounts for 50%
of the total semiconductor services industry in India by contributing Rs 4,297
crore (we have excluded the revenues from non-captive players like Wipro and TCS)
in the year FY 07.

VLSI design: This is the second rapidly growing segment after
embedded software in the Indian semiconductor industry. Apart from indigenous
non-captive players, all the major global players have their centers in India.
The Rs 3,411 crore VLSI design area, unlike embedded software, has remained by
and large with captives and pure play services firms, the captives accounting
for as much as 62%. This can show a huge jump, once manufacturing activities
start.

Hardware and board design: Design services involve activities
such as analog/digital circuit design, board layout and routing, design for
testing, manufacturing and reliability, and system/board testing. In most cases,
the VLSI design service companies, typically, carry out hardware and board
design. Though the contribution from this segment has increased due to the
industry focus on chip designing, the growth has been more or less the same over
the years. It accounted for revenues of Rs 818 crore.

IndiaA Hot Cake

Highly dynamic markets demanding new product variants/models from companies
have forced original equipment manufacturers (OEMs) and product companies to
reduce the product development cycle time. As a result, they are outsourcing
more and more of their work. Declining revenue margins and increased R&D
budgets have compelled these companies to look for cost-effective centers
without compromising on the quality of work. India has been a natural choice. Of
course, cost effectiveness in research and development to bolster declining
margins has been one of the reasons for companies to set up their offshore
development centers or opt for outsourcing to engineering design companies in
India. In addition, the huge pool of engineering talent and the English language
proficiency are significant factors in the growth of chip design work in India.
There are nearly 4,000 engineering colleges in 28 states admitting nearly
5,00,000 students every year, give India a competitive advantage in human
resources.

Challenges

India started as an activity-based center mainly due to its cost advantage
and skilled workforce. However, as India realized that costs couldnt be a
major competitive advantage in the long run, both captive and third party
companies started developing competencies in IP development and integrationthereby
complete product development.

Providing end-to-end solutions to customers is proving to be a
major challenge before the Indian design market. In India, the indigenous design
industry is scattered at different places catering to various services. Serving
as a one-stop solution for global customers as well as fulfilling the demand of
our own growing semiconductor consumption market, looks like a rocky journey.

Show Stealers

The recent years can easily be marked as the years for chip designing. The
overall outsourcing of chip design work to India increased as companies set up
their captive centers or outsourced projects to Indian firms. AMD, one of the
major chipmakers, acquired ATI, a company having a foothold in graphics,
chipsets and consumer electronics. The acquisition created an opportunity for
AMD to transform from a processor innovation leader into a preferred partner of
choice for solution-level innovation. Another player, NXP Semiconductors, came
with a special Indian market strategy to popularize its key products like chips
in low-cost phones. The company acquired Silicon Labs cellular business
enabling it to design single chip cell phones, reducing the cost of cell phones
to a great extent.

Renesas Technology, Japan set up its offshore development center
at KPIT Cummins to boost its design and development capabilities. Ahmedabad-based
eInfochips entered into a strategic partnership with Cubic Micro, a leading
International Manufacturers Representative and RF Design Services company,
for its Japan operations. The company also established its Chicago operations.
The other was the acquisition of the Indian operations of US-based Applied Micro
Circuits Corporation (AMCC) by Eleven Technologies.

India, till now, was known as the outsourced design hub for the
world market. But, that changed this year, with the industry starting to look at
India as a major consumer market for semiconductors. Electronics consumption and
production is increasing resulting in a large demand for semiconductor products.
Also, fast growing markets like consumer electronics, wireless, and
communications are driving the need for semiconductors as consumers demand
high-performance, and energy-efficient and sleek devices. Most players are
working on new innovations to lure the evolving Indian consumer brigade, and
this has become the prime concern behind every innovation.

In product design, engineering achievements in India include the
development and industrialization of high-value SoCs (System on Chip), embedded
systems, application specific IP (Intellectual Property), and reference designs
in various application segments including telecommunications, imaging, car multi
media, computer peripherals and industry control.

Freescale semiconductors introduced two chips for digital
multimedia applications for home, whose total design cycle was completed in
India. ST Microelectronics in India developed embedded solutions for a wide
variety of applications, including Bluetooth, Wireless LAN, DSL, STB and DVD.
Among them the most hyped launch was the STi5107, the first made-in-India
single-chip solution to make a digital set-top-box.

For the portable device market, Texas Instruments launched the
TPS61200, a very low input voltage DC/DC boost converter, which will enable
portable electronic-end equipment to draw power from alternative new energy
sources like solar and micro-fuel cells. In mobile technology, one chip solution
for cell phones was the new idea of innovation and industry leaders including
Texas and Freescale started working to offer this. However, the solution is yet
to hit the market. It is speculated that the use of this chip in mobile phones
will lower the cost to a great extent. Giving a further push to Indias claim
as a product design center, eInfochips unveiled an advanced intelligent IP
surveillance camera IPNetCam with complex video analysis that will help
companies in building a range of IP surveillance cameras with low development
costs.

Manufacturing: The Road Ends Here

After witnessing remarkable growth in embedded software and semiconductor
design, manufacturing is the buzzword. India is the only country in the world
which has the unique advantage of two key components of semiconductor design:
ecosystem-design and testing, with manufacturing needed to complete the cycle.
The semiconductor policy hopes to close that circuit.

In the wake of the policy, companies like Hindustan
Semiconductor Manufacturing Corp (HSMC), Infineon, and Solar Signet have already
announced big-ticket investments in semiconductor manufacturing in India.
SemIndia is already working on its project Fabcity. However, it remains to
be seen whether the government will increase the incentives for specific
projects, as Israel offered a 60% grant for chip major Intels $1 bn
fabrication unit against its normal incentive package of 32%. Similarly, China,
which offers minimal incentives between 25-30%, sometimes offers more benefits.

Kumar Anshuman

anshumank@cybermedia.co.in