The Hindu Business Line : Small guys show the way

Mergers and acquisitions, particularly the purchase of overseas companies by Indian firms, has gotten much ink these last few months. Acquisition of steel companies (Arcelor, Corus), pharmaceutical firms (Taro Pharmaceutical) and infotech (Infocrossing) hog the headlines.

Other stories such as the sale of Biocon’s enzyme business for $115 million to Denmark’s Novozymes and the sheer size of Bharti Airtel’s outsourcing deal with IBM point to the opportunity India offers as a market place and the arrival of Indian big business in technology. The casual reader could not be faulted in wondering what this might mean for the consumer, technologist and the industry in India.

All this misses the real story that Indian technologists should be paying attention to — over the last five years, companies with not-so-creative names such as Aplus, RealTek and Action Semiconductor, out of Taiwan and China, have been steadily building real semiconductor businesses, often taking on well-entrenched incumbents.

Just this last quarter, the Semiconductor Industry Association (SIA) reported that global sales of semiconductors reached a record $247.7 billion in 2006, an increase of 8.9 per cent from 2005. The semiconductor business has historically been dominated by American and Japanese companies, with a handful of European semiconductor majors barely holding their own.

Fabs’ foray

Much like the BPO and IT story of India today, less than 20 years ago, Taiwanese semiconductor manufacturers (‘fabs’) made a foray to be the ‘back-end’ of the semiconductor business and have grown to become the de facto factory for much of the world’s semiconductors.

Despite successfully integrating the manufacturing, assembly and testing of most of the world’s semiconductors, the Taiwanese seemed unlikely to pose a real threat to the US semiconductor giants such as Intel and Texas Instruments — Via Semiconductor was one of a handful of Taiwanese companies that seemed to be the exception to the rule that the Taiwanese were going to be content being the world’s factory, building others’ designs. The rise of Taiwan Semiconductor Manufacturing (TSMC) and UMC only seemed to reinforce the status quo.

In Korea, Samsung alone managed to break into the big league, on the back of its unrelenting focus and investment in the memory business — the very same one that put another Korean company, Hynix, into bankruptcy — yet newer companies such as TeleChips and GCT Semiconductor were sprouting and making their presence felt.

The last few years have seen even the large Japanese semiconductor giants consolidating and cutting back — yet much like in California’s Silicon Valley, where the world seems to expect ever new semiconductor start-ups to spring up, Taiwan and now China are sprouting their share of successful semiconductor firms — yes most of them are small and still at an early stage of growth. However, if we looked closer at one of them as an example, there are some interesting insights.
Not bought but won

Action Semi out of China entered a market providing the main chips for portable music jukeboxes. This market already had two dominant players, Portal Player, which supplied primarily for the Apple iPod, and Sigmatel, which provided chips for nearly the rest of the world’s jukeboxes and several other smaller players.

Yet, in a short span of time, the company has come to own the highest market share in non-Apple music players — even more interestingly, its gross margins are as good or higher than its bigger rivals — demonstrating that its market share had not been bought but won. While most of these start-ups have made having a lower average selling price (ASP) a key component of the value they offer, their gross margins are clearly indicative of their innovation, both in design and manufacturing.

The Taiwanese and Chinese experience is by no means unique — earlier Israeli firms such as DSP Communications (DSPC) and DSP Group and more recently English firms such as Cambridge Silicon Radio (CSR) have shown that new technologies can be leveraged as a successful entry point for new semiconductor firms to beat out much larger and entrenched global rivals.
Scene in India

In India, the fact that semiconductor manufacturing is capital-intensive and marketing costs are manifold compared to design and development costs has held back even the most enterprising semiconductor designer. The paucity of venture funds did not help matters, as a typical fabless semiconductor firm required anywhere from $25 million to $60 million to go from concept to IPO and/or profitability.

While there have been a few trailblazers, such as Arcus and Armedia or Wipro’s spin-out (and subsequent spin-in) of EnThink, the last 15 years have seen few Indian semiconductor firms come up.

The recent purchase of Impulsesoft Private Ltd and TrueSpan Semiconductor by SiRF Technology Inc, the successful IPO of Indian tech companies such as Sasken and MindTree and the increased interest shown by venture capitalists in the India tech sector offer an opportunity once again for Indian entrepreneurs.

The formation of the India Semiconductor Association (ISA) and the impending beginning of operations by SEMIndia also augur well.
‘Pure-play’ product model

The lessons to be learnt from the Chinese and Taiwanese firms is that fabless semiconductor model with its focus on innovation in design, targeting of high-volume markets, perseverance and, as in any good business, adapting in real time to market changes can be highly rewarding.

Even when many of these firms had their roots in other tech companies (either founders originating there or funding coming from these more established players), they have been run as distinct businesses with a very narrow focus and the clarity of a well understood fabless semiconductor model.

In other words a ‘pure-play’ product model rather than a perceived risk-mitigating hybrid model of services and products, which has been a prevalent model in the Indian tech sector.

The other lesson is that emerging technologies can be used as a means to create disruption in the marketplace, but are not mandatory as even in mature markets and technologies, innovation (in size, cost, power or all of the above) can bring market leadership as Action Semiconductor and RealTek have shown. This is the real story that Indian technologists and entrepreneurs need to pay attention to and internalise, if we are to keep up with our technological neighbours.

The author is vice-president at a fabless semiconductor company. He can be reached at srikrishna@yahoo.com.

More Stories on : Hardware | Insight

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Small guys show the way

Brilliance, by any degree…

Network trouble

For Hollywood, from Mysore

Auto sector chips in

R&D is the code

Quiz

Digital forest of mediocrity

Cartoon

Air Mouse

Another notebook