The Hindu Business Line : The road ahead

INDIA is increasingly being seen as the next powerhouse in semiconductor manufacturing. This is evident from the fact that a $3-billion semiconductor manufacturing facility is coming up in the country.

SPEL Semiconductor, a part of the Chennai-based SPIC Group, one of the players in this space, was the first and only integrated circuit (IC) assembly and test sub-contractor in the country. Established in 1988, SPEL served the local market from 1988 to 1994.

It then turned its attention to the more demanding global market in 1995. It has since been exclusively serving Silicon Valley and other parts of the world for over nine years now.

The bursting of the dotcom bubble and the global economic meltdown in early 2000 took its toll on the global IT industry, and SPEL too.

However, SPEL has bounced back in the last couple of years. It is now a one-stop turnkey wafer sort, integrated circuit (a small electronic device made out of semiconductor material) assembly, and test sub-contractor facility in India.

It offers onsite and offshore test engineering support to customers. And, its ICs are used in global products such as Hitachi laptops and Samsung PDAs (personal digital assistants). Some of the palmtops also use ICs manufactured at SPEL's Maraimalainagar plant located about 30 km south of Chennai.

eWorld tracks SPEL's turnaround and the roadmap ahead.

The global view

The $226-billion global semiconductor industry comprises four constituents — design, fabrication, assembly and testing. India has no presence in the fabrication field. It is estimated that a wafer fabrication plant would require an investment of $3-4 billion.

In design, companies such as Texas Instruments, Intel, IBM, Cypress and Alliance are major players. SPEL is the only company in India in the $32-billion global assembly and testing area and does jobs for 15 clients across the world.

Sam Varghese, Chief Executive Officer, says the global semiconductor industry has transited from a vertical to a horizontal model. In the vertical model, companies such as Texas Instruments and Fairchild had their own design, fabrication, assembly and testing facilities.

In a horizontal model, companies specialise only in design. This has seen outsourcing of wafer fabrication and assembly and testing. Much of the work in the assembly and test sphere was outsourced to Taiwan and Malaysia initially, he says.Subsequently, the jobs moved to Thailand and Singapore.

However, today, China and India have a competitive edge. Manpower cost in India is slightly lower than China, but high power costs more in India. "We spend 10 cents a unit for power. China, however, spends five cents a unit," he says.

The turnaround

SPEL went through a tough phase for long due to a combination of factors. The magnetic media project remained a non-starter for various reasons.

The IC journey, in tandem with the public sector Semi-conductor Complex Ltd, suffered a blow with a fire accident at the latter's factory. The worst appears to be behind SPEL now, says Varghese.

SPEL turned around to post a profit after tax of Rs 1.40 crore during 2004-05, up from Rs 40 lakh in the preceding year. Sales and income improved to Rs 32.48 crore (Rs 21.76 crore).

Varghese attributes the turnaround to cleaning up of the balance sheet, settling a substantial portion of term loans and spreading the client base. The company had a term loan exposure of around Rs 15 crore. Now it has no institutional exposure, he says.

Ar. Rm. Arun, Vice-Chairman, SPEL, says the new management team, which took over SPEL in 2000, decided to focus on assembling and testing ICs.

Consequently, the magnetic media project was shelved. The company hopes to reach sales of Rs 55-60 crore and end the current financial year with a net profit of Rs 6.50-7 crore. There is also a proposal to increase the plant capacity to 330 million units from 180 million units. SPEL is pursuing a $10-million fund-raising exercise to finance the expansion, he says.

To enter design arena

SPEL has drawn up a three-year road map to enter the design arena. It plans to enter this area in the next couple of years, according to Arun. "We had to wait for sometime to decide, and feel it is time to look into this sector seriously," he says. The company will create a library of design models for companies to choose from. SPEL will license the IP (intellectual property) right to them. SPEL has so far focussed only on assembly testing of IC. The architecture of the required circuit is designed using advanced software tools. The main features include circuit/layout design, verification and logic design, says Varghese.

The promoters of SPEL Semiconductor, holding 58.98 per cent in the company, are open to selling their stake `to any extent' to a partner, according to Arun. "However, we will not give up the company fully," he says.

Why Sienna sees synergy

THE US-based Sienna Corporation is one of the top 10 customers of SPEL and has been associated with the Chennai-based company for over 10 years.

Its president, Bhaskar Srinivasan, says synergy with SPEL has not only been in assembling ICs but also having good testing facility. Both services require big investment and quality engineering talent - both available here, he says.

The American firm, which supports larger OEMs (original equipment manufacturers) for components assembly and testing of ICs, needs highly skilled manpower.

Earlier, such work used to be outsourced to Taiwan, Malaysia and Korea. However, due to high labour cost in these countries, work is moving to low-cost countries such as India, he says.

During the dotcom boom, SPEL used to supply about five million pieces a month, but this got reduced drastically following the dotcom bust.

Srinivasan hopes the supply will go back to five million pieces in the next couple of years.

raja@thehindu.co.in