The Hindu Business Line : The die is cast

India's decision to locate its maiden semiconductor fabrication plant in Hyderabad signals its entry into the manufacturing league. Is this the right moment to go for the `Made in India' tag? Team eWorld gets cracking on the questions and answ ers thrown up by the move.

TO manufacture or not to manufacture semiconductors in India...

That has, for long, been the quandary facing the domestic semiconductor sector. India has slowly but surely established its prowess in select rungs of the semiconductor value chain. The design and development services have been our crown jewel... innate strengths in fabless semiconductor are slowly turning out to be our pride and silicon intellectual property is emerging as the next frontier to conquer. But when it trickles down to manufacturing, the `red herring' of `economies of scale or critical mass', `viable returns on investment' and `domestic demand for consumer electronics' has hamstrung progress on this front so far.

All this is poised to undergo a dramatic change, with Hyderabad being chosen as the location for India's maiden semiconductor fabrication plant in the private sector (better known as `fab') to be set up by SemIndia at a cost of $3 billion (Rs 13,500 crore). At the recently concluded two-day `Vision Summit' by the India Semiconductor Association (ISA), this decision was announced by the IT minister, Dayanidhi Maran at Bangalore and confirmed the same day by the Andhra Pradesh Chief Minister in a joint presentation with SemIndia at Hyderabad.

SemIndia has been floated by a consortium of non-resident Indians led by Dr Vinod K. Agarwal. The chipmaker Advanced Micronic Devices will be providing technical support for SemIndia's proposed fab project. In the run-up to this announcement, the three States of Andhra Pradesh, Tamil Nadu and Karnataka vied to be the first State to host the concept of a Fab city.

The ball that has been set rolling towards the establishment of the first fab signals the entry of India into the manufacturing league, which has so far been the stronghold of a few countries such as China, Taiwan, Korea, and Singapore. And it also heralds manufacturing as the final and interdependent leg of the semiconductor ecosystem, titled the `Triple Play of Design, Software and Manufacturing: a New Paradigm for Semiconductors' at Vision Summit.

Manufacturing: Why now?

Semiconductors have been widely hailed as the oil of the information age. So far, manufacturers of electronics devices in India have depended on countries such as China, Taiwan, Korea or Singapore to source their semiconductor product requirements. What is changing, however, is that India is emerging as a significant consumer of the exploding electronics market. Powered by the growing affordability of the burgeoning middle class, consumer electronics products such as set-top boxes, DVDs, hand-held devices, energy meters and electronic appliances are driving the growing domestic demand. Obviously, without manufacturing that caters to the domestic demand, the semiconductor ecosystem is said to be incomplete. Semiconductor consumption is directly dependent on the electronics manufacturing that happens in a country, says S.R. Dinesh, Program Manager, Electronics and Semiconductors Asia, Frost & Sullivan.

The common perception till recent times was that India lagged the US or Europe in technology adoption, say by five years. However, that gap is narrowing as device manufacturers have started customising their products for the Indian market, says Dinesh. As and when the consumption of product categories increases, one finds manufacturing taking off, he says.A recent market study commissioned by the ISA and conducted by Frost & Sullivan has projected that India's electronic equipment consumption is expected to reach $126.7 billion by 2010 and $363 billion by 2015, from $28.2 billion in 2005. It is estimated to grow at a compounded annual rate of 30 per cent.

Making a presentation at the Vision Summit, Aditya Sapru, Partner, Frost & Sullivan, estimated that the semiconductor content in the electronic equipment consumption in 2015 is expected to be $36.3 billion. Out of this, semiconductor and other electronic manufacturing companies will be able to tap opportunity worth $15.5 billion. Industry players contend that the strong demand for domestic digital electronic products is likely to fuel and justify the need for a manufacturing facility in India. The chips currently designed in India are being manufactured in overseas foundries. This, says ISA, cannot continue for long mainly due to cost as well as other strategic considerations.

Economics of fabs

According to Dr Vinod Agarwal, President and CEO of SemIndia, there are significant cost advantages in manufacturing the wafers in the country. The cost savings could be as high as 50-60 per cent for end users of devices that use these chips, he says.With a teeming population of over a billion, the domestic market is ready to lap up the benefit of such latest chips that are not only designed but also `Made in India'. However, chip manufacturing is capital-intensive and requires billions on investment. It is estimated that based on current cost structures, a fab would require investments to the tune of $3-3.5 billion, while it used to cost $100 million about a decade-and-a-half earlier.

Moreover, semiconductor manufacturing has taken off in Asian countries with the government's `active support' through fiscal incentives. India is unlikely to be an exception to this trend. "Fabs all over the world have been backed by government assistance and India is no exception. In a few years, China and Taiwan will corner 80 per cent of the global chip market. India will be nowhere in the scene if we don't act now," says Poornima Shenoy, president of ISA.

The ISA is said to have sought a separate corpus of Rs 10,000 crore from the Government for supporting semiconductor manufacturing in the country. This corpus is to be used for picking up a financial stake in different semiconductor projects, including SemIndia. Apart from the Government's equity participation in the fab, the industry is looking forward to interest subsidy to reduce the cost of funds for the fabs. And in a bid to create indigenous demand, the ISA has advocated that direct and indirect tax incentives/rebates need to be considered for electronic goods manufacturers purchasing the semiconductor chips manufactured in India.

The ISA has also sought support for R&D funding, tax incentives for training programmes and incentives to Ph.D.s to meet the huge investments in research activities and make the industry globally competitive, says Poornima. Besides this, easing administrative bottlenecks will also play a key role in stimulating manufacturing activity within the country. The customs procedure for tape-outs by the design firms located in India is time-consuming, says Dinesh. This delays the time-to-market strategy for design firms. With technology getting obsolete by the day, device manufacturers are under pressure to introduce newer, powerful and more cost-effective products. A delay in design and subsequent tape-out would imply significant losses for the companies involved. Hence, setting up a fab in India would justify the need for such a facility, he says.

Fab debate rages

In a truly globalised world, a section of the industry argues that India has already arrived in the semiconductor space, especially in design and development. The absence of a manufacturing facility all these years has not had any impact on the growth of the semiconductor design sector in India, says Tapan Joshi, vice-president of e-infochips. Drawing a parallel with the US semiconductor industry, which is the largest in the world, Joshi says there are hardly two to three fabs in the US and they still make do without it.

Varun Kapur, Managing Director, Intel Capital Asia-Pacific, who has observed the growth of the Chinese semiconductor closely, says the fabs in China have not delivered a solid financial story and are still not making money. Kapur says government support for the industry is a must and crucial for its sustained growth. Echoing Joshi's views, Ulf Schneider, managing director of Infineon Technologies (India), says there is no necessity for a wafer fab in the country. The design firms and the fabs need not be co-located but need to be aware of each other's domains, he feels.

However, Rajendra Khare, chairman, ISA, begs to differ. In his view, co-location would be a huge advantage. In the absence of friendly policy measures for the design industry, it accentuates the need for a fab in the Indian context. Queried specifically about Taiwan Semiconductor Manufacturing Company (TSMC) or United Microelectronics Corp (UMC), the world's top two contract semiconductor makers setting up a fab in India, during the Vision Summit, Sajiv Dalal, Director, Business Management, TSMC North America, said it all boiled down to RoI (return on investment). At this point, he felt that setting up operations in India might not be cost-effective in the absence of fab clusters from the perspective of efficiency and support infrastructure to scale up quickly.

Testing the waters

Defying the sceptics, the proposed investment by SemIndia is a momentous start to the Indian semiconductor industry's tryst with manufacturing. Since the fortunes of the entire sector ride on this investment, the euphoria will have to be tempered by a watchful eye on the financing of this project, which is to be secured by the promoters through a combination of private equity and debt. If it passes this litmus test and work begins in right earnest, it has the potential to open the floodgates for manufacturing.

Other players such as Nano Tech and Cypress Semiconductor have also evinced interest in locating their manufacturing base in Hyderabad. Since the Government is still actively wooing Intel, it promises to be a crucial year for the future of semiconductor manufacturing in India.

Small is in, thin is wow!

SMALL is in, thin is wow. This demand for lighter and smaller gadgets is driving semiconductor companies to move to complex manufacturing processes to make more powerful chips. From the 10 micron manufacturing process of the 1970s, through 1.5 micron in the1980s and 0.13 microns of the last decade to 90nm, chip makers have followed Moore's law to increase the power of chips while retaining the same chip size (die).

Microns and nanometers refer to the size of logic gates of transistors, which are components of an integrated circuit (IC) or chip. These are used as a standard for manufacturing of chips. As the size of transistors reduces, the power required by the chip also reduces. Hence the battery life of gadgets increases. Also, the complexity of chip design increases, enabling devices to become more complex and offer more functions. This is what allows a mobile to double as an MP3 player and a TV to connect to the Net. Chips currently are made in 90nm and older technologies. They run digital TVs, set-top-boxes, gaming consoles, cars and mobile phones. Advanced Micronic Devices, IBM, TSMC and Intel have 65nm chips in the pipeline and are conducting research on the next method - 45nm.

According to Sanjay Dalal, General Manager, TSMC North America, 65nm chips will be available later this year, while 2007 will see the entry of 45nm chips and production of 35nm and 22nm chips will begin by 2011. 65nm chips increase performance by 20 per cent over 90nm ICs while packing nearly twice as many circuits on the same chip size. With standby power of handsets gaining in importance, the latest mobiles and consumer devices will be able to take advantage of the new semiconductor manufacturing processes. Currently Intel's Yonah chip is made in the 65nm process, and the company is working on bringing out chips made with the 45nm process. At 45nm, power consumption will drop by a factor of four (square of the difference of feature size) compared to the 90nm process. This would mean even longer battery life for portable media players, mobile handsets and laptops. Increased clock speeds would also result, ensuring higher processing power.

However, the industry is concerned about the issues that arise as geometries get smaller. Interconnect delay, signal integrity, leakage of current and yield losses will cause a problem, said Ulf Schneider, Managing Director, Infineon Technologies India, at the semiconductor summit. In India, hand-held billing machines, smart card readers, storage devices and handsets will drive the domestic semiconductor industry, says Francois Guibert, Corporate Vice-President, Emerging Markets Region, STMicroelectronics. Other possible drivers would be digital set top boxes, HDTV (high definition televisions), automotive, electric meters and white goods (appliances). By the end of this decade, the Indian semiconductor industry might also supply to the $81-billion worldwide consumer electronics market, says Aurangzeb Khan, Corporate Vice-President,Cadence Design Systems. "Video processing engines might be produced for the worldwide market, power management chips and amplifiers for Indian customers," says Biswadip Mitra, Managing Director, Texas Instruments. Chips for security products and digital TVs can also be made from right here.

(By Bharat Kumar, Krishnan Thiagarajan, Vishwanath Kulkarni and Preethi J)

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