Should India gamble on
microchips? By Indrajit Basu
KOLKATA - Even as the wait ended last week
with India announcing its semiconductor policy,
global information-technology (IT) analysts have
already started wondering whether India should
just stick to designing chips rather than devote
resources to an industry where the money flow is
drying up.
After succumbing to year-long
lobbying from the semiconductor industry, India
announced the broad contours of the package of
incentives that the country is planning for
semiconductor fabrication and other micro- and
nano-technology manufacturing
industries, which it hopes
will put the country on the global
chip-manufacturing map.
"India lacks a
full-fledged 'fab' [silicon-chip fabrication
plant]. Since we did not have a clear-cut policy
so far, we lost several companies to Vietnam and
Israel," said the country's IT and
telecommunications minister, Dayanidhi Maran.
"This could draw foreign direct investment of
[US]$10 billion coming into the country for
semiconductor and allied manufacturing."
But it's not yet clear whether this policy
could actually spur global semiconductor giants to
set up fab units in India. Some global IT analysts
say India has already missed the fab bus and it's
too late to bother.
"India is considering
new chip-making facilities just as the fund flow
to foundries is dying down in Asia," said Bhavin
Shah, a Hong Kong-based analyst for
investment-banking firm JPMorgan. "We think it is
too late for India to devote resources to chip
manufacturing. India should not repeat the mistake
of some countries that have tried to build a
home-grown foundry/back-end industry. We expect no
real returns from any government financial support
for Indian semiconductor manufacturing."
Indeed, going by the successes achieved by
some countries that have set up fabrication
facilities for semiconductor devices and the
"prestige" such countries command, India's
temptation to support this industry is
understandable. But as they say, all mountains
look beautiful from a distance.
"The big
question is," said Ganesh Ramamurthy, analyst at
the global technology research firm Gartner,
"should India be in the semiconductor fab space at
all? As per our [Gartner] study, there will be an
overcapacity situation in fab by 2009.
"Assuming that India starts building fab
construction this year, India would start
production at a time when the world would face
overcapacity. It is not going to be easy for
Indian producers to attract customers in that
situation where cost would be a very critical
factor."
Admittedly, fab is an expensive
proposition by any standard. A full-fledged fab
requires an investment of $3 billion or $4 billion
or more. But cost is not the only barrier.
According to a JPMorgan study, there are other
even bigger barriers, such as access to
technology, finding workers who are familiar with
the foundry process, and persuading customers to
devote a large amount of resources to an unknown
player.
While capital has been easily
attainable from governments, the barriers to
achieving profitability are enormous. "A
full-blown semiconductor logic foundry is one of
the most complex job shops on this planet," said
the report. "Producing a wide range of chip wafers
in different quantities and technologies is a very
difficult undertaking. and research and
development costs are becoming the biggest
challenge for industry laggards."
Then
there is the issue of competitiveness. "In a world
of free trade and WTO [World Trade Organization],
we see no need for any country, let alone India,
to fund new initiatives in this space," said Shah.
Taiwan dominates the foundry industry and
has already captured 65% of worldwide foundry
revenues, which makes it very difficult for
countries such as China and India to compete with
the scale, ecosystem and customer relationships
that Taiwan has built up over the past two
decades. Moreover, India needs to compete with
Ireland, Israel and Malaysia for tax breaks to
semiconductor makers.
For that matter,
even China, which has provided huge support to
kick off semiconductor manufacturing, has seen no
real success story so far, said Shah, at least not
from a return on investment standpoint. He said
Chinese foundries have been unprofitable "despite
a bucketful of incentives" and tax breaks.
Still, why then are India and a few
entrants gung-ho about setting up fab facilities
in the country? For instance, last year, SemIndia,
a consortium of overseas Indians, announced plans
for a $3 billion chip-making facility in Hyderabad
in partnership with Advanced Micro Devices Inc and
Flextronics Software Systems Ltd and financed by a
host of private-equity funds. Recently two more
companies, Nano-Tech Silicon India and NeST, said
they too want to set up a fab.
The
arguments in favor of fabs in India are many. For
one, says the Indian Semiconductor Association
(ISA), semiconductor-manufacturing facilities will
create a semiconductor "ecosystem", which in turn
will help Indian companies move up the global
value chain.
According to the global
consultancy firm ISA/Frost & Sullivan, India
is the fastest-growing market for electronic
products in the world, with electronic-goods
consumption (from mobile telephones, flat-screen
televisions and set-top boxes to smart washing
machines) expected to grow from $28 billion in
2005 to $363 billion by 2015, representing a
compound annual growth rate of 30%. Of this, the
market for the semiconductor industry is expected
to be about $36.3 billion.
More important,
even if fab is not the need of the moment for
India, it is certainly "an issue of pride", said
Bryan Lewis, chief analyst at Gartner. After all,
semiconductors are among the ultimate in high-tech
pursuits and give a country considerable bragging
rights. Some also argue that a semiconductor
industry is strategically important for any
country that hopes to be a true global power.
Many experts feel that even if India is
determined to set up its own fab industry, no
plant should be established for at least five
years.
"India should not think of setting
up a fab in the next five years, after which the
global overcapacity situation is expected to ease
off quite bit," said Ganesh Ramamurthy of Gartner,
and "instead the country should concentrate purely
on chip design and intellectual-property
development", such as developing the software or
instructions that go in an integrated chip.
The broad opinion is that in chip design
India has certain advantages over many countries,
including Taiwan and mainland China, which include
superior technical education, a high number of
English speakers, copyright laws and, most
important, a sense of self-belief boosted by the
successful Indian software sector.
"The
fact that India has no chip foundries should not
matter, because India is already one of the most
preferred destinations for chip design," said Shah
of JPMorgan, "and revenues of this segment of the
semiconductor industry have been growing much
faster than the total semiconductor industry over
the last 10 years."
Moreover, according to
iSuppli - a tech research firm - India already has
a mature design-services sector, which has seen
its revenues grow from $511 million in 2004 to
$623 million in 2005.
"India has about 125
companies doing design, including multinationals,
domestic companies such as Wipro and Sasken, and a
handful of Silicon Valley startups with Indian
research and development centers," iSuppli says.
"In 2005, giant multinationals like Texas
Instruments, Intel, Cypress, Infineon, and ST
Microelectronics comprised about 70% of the total
semiconductor-design industry in India and about
30% was produced by home-grown companies."
What the policy offers
A subsidy of 20% of capital expenditure during
the first 10 years if the unit is inside a special
economic zone (SEZ).
A subsidy of 25% of capital expenditure during
the first 10 years if the unit is outside an SEZ.
Minimum investment in fab plants is $555
million.
Minimum investment in ancillary plants is $220
million.
Government participation is limited to 26% of
the project's equity.
Incentives are not extended to older plants
with second-hand equipment.
Indrajit
Basu is a Kolkata-based journalist.
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