india semiconductor-fab industry

India may be getting excited about domestic semiconductor manufacturing, but there are two analyst reports—from J P Morgan and Gartner—in the last one week which state that the country should not go ahead with chip manufacturing since it’s not economically feasible without a large subsidy from the government. The subsidy that is actually on offer (expected to be 22-25 per cent of project cost) falls short of industry expectations. China, for instance, gave newly-built semiconductor players a 100 per cent tax break for the first five years, and then a 50 per cent discount for the next five years. To get into the business of making chips, India needs to compete with China, Ireland, Israel and Malaysia in this regard.

Why, then, is SemIndia gung-ho about the $3 billion (Rs 13,200 crore) Fab City project? The answer, as has long been argued, is that setting up a semiconductor plant will create a semiconductor “eco-system”, which in turn will help Indian companies move up the global value chain. India’s consumption of electronic equipment is expected to touch $363 billion by 2015, up from $28.2 billion in 2005, at a compound annual growth rate (CAGR) of 30 per cent. Of this, the market for the semiconductor industry is expected to be around $36.3 billion.

But why should any company come to India for manufacturing chips when Taiwan can execute the same work at a fraction of the price? Besides, foundry revenue has slowed the world over due to price competition from new entrants like China. The growth of the “fab-less” industry (comprising companies that do not manufacture silicon wafers, and concentrate instead on the design and development of semiconductor chips) too has slowed. Taiwan captures 65 per cent of worldwide foundry revenue. One daunting point is that the gestation period for a chip-manufacturing plant is around one and a half years, by which time the technology involved could change, something that could leave a new entrant stranded.

Rather, India’s current play with integrated chip (IC) assembly (labelled AMTP to denote assembly, mark, test and package) makes more sense. This requires much lower investment—in the range of $250-400 million. India can also become a powerhouse in chip design. It already has a large and growing pool of experienced IC design engineers, and hundreds of expat engineers are returning to India every year (as happened with Taiwan in the 1980s). India also scores over China in this regard with more engineers, a greater English-speaking workforce and better protection laws for intellectual property. It already has around 125 companies doing design. In 2005, J P Morgan reveals, multinationals like Texas Instrument, Intel, Cypress, Infineon and STMicroelectronics comprised around 70 per cent of the semiconductor design industry in India. The industry’s turnover was $3.2 billion in 2005, with an engineering workforce of around 75,000. Those numbers are expected to reach $43 billion and 780,000 engineers by 2015. This would therefore seem to be the bigger apple to shoot for.

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2 Responses to “india semiconductor-fab industry”

  1. Raja Manickam Says:

    right on the money … we have to take baby steps in bringing in high end ATMP to India thru our engineering advantage. This would create an eco-system to justify the wafer fabs that would follow. Fabs with high investments must make financial sense. There is no doubt fabs will come to India … but let us make the path smoother by taking baby steps

  2. Raseel Says:

    It is not necessarily true that the technology of chips will change every one and a half year. For example, if the foundry is for manufacturing DSP ICs, I think we can manage for another 5-6 years (for the Indian domestic market at the very least).
    Besides, as rightly observed, we need to create an eco-system. Even if we make certain mistakes, the other players ready to enter this industry will do their “homework” before building a foundry and not necessarily get discouraged.

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