The Hindu Business Line : New chip on the block

The top five end-user products that are expected to drive growth are mobile handsets, desktops and notebooks, GSM base stations, set-top box and energy meters.

Moumita Bakshi Chatterjee

After proving its mettle in IT services and chip designing, India appears set to script its next success story, this time in the semiconductor manufacturing space.

The building blocks — that promise to position India in the global map to join the ranks of Taiwan, China, Korea, Japan, Singapore and the US — are beginning to fall into place.

India’s over $10-billion fabrication dream took shape earlier this year when the Government unveiled a Special Incentive Package Scheme (SIPS) to encourage investments for establishing semi conductor fabs and other micro and nano technology manufacturing industries in the country.

Simply put, fabrication is the process used to create chips — the integrated circuits that are present in electrical and electronic devices. The entire manufacturing process is performed in highly specialised facilities referred to as Fabs.

Policy boost to manufacturing

Under the mega-scheme, the Centre has announced capital subsidy for investors setting up chip manufacturing units. On offer is an incentive of 20 per cent of the capital expenditure during the first 10 years for the units within the special economic zone (SEZ) and 25 per cent of the capital expenditure for non-SEZ units. Non-SEZ units would also be exempt from CVD. The incentives offered by the States or its agencies would be over and above this.

Any unit can claim incentives in the form of capital subsidy or equity participation in any combination, including equity in the project of up to 26 per cent; or capital subsidy in the form of investment grant and interest subsidy. In the case of semiconductor manufacturing (Fab units) products, the threshold Net Present Value (NPV) of investment has been fixed at over Rs 2,500 crore.

“This is India’s opportunity to bridge the gap between the projected electronics consumption and manufacturing. Already the response that we are getting (on the semiconductor policy) from the industry is tremendous,” points out M Madhavan Nambiar, Additional Secretary of the IT Department.

Incentives have also been rolled-out for setting up manufacturing facilities for liquid crystal displays (LCD), organic light emitting diodes (OLED), plasma display panels, photo-voltaic cells, storage devices, solar cells and micro and nano technology products, including assembly and testing of these products.

In this case, companies will have to make a minimum investment of Rs 1,000 crore. Only the fab facilities established in the country before 2010 are eligible to avail of these benefits.

Says the SemIndia CEO, Dr Vinod K Agarwal, “The policy has come at an opportune time when globally semiconductor manufacturing is moving eastwards.

While the traditional manufacturing destinations such as the US and Europe have started to concentrate on IP and design as manufacturing costs escalate, there is a global shift to contract manufacturing to low-cost locations such as China, Taiwan and Singapore.

Scores of global players, including Infineon, are adopting a fab-lite or fabless strategy so as to reduce investment in manufacturing, to reduce costs and focus on technology developments. This transition to outsourcing augurs well for India.”

A compelling market

Backing the ‘investor-friendly policy’ is an equally compelling market proposition. According to a joint study by India Semiconductor Association and Frost and Sullivan, the Total Market (TM) revenue for semiconductors in India during 2006 stood at $2.69 billion. Telecom, IT, Office Automation and Consumer Electronics segments contributed 82.6 per cent to these revenues. The growth of these key user segments is expected to catapult semiconductor revenues to $5.49 billion in 2009, growing at a Compounded Annual Growth Rate (CAGR) of 26.7 per cent.

“The developing domestic market now points to the growing market for semiconductors in India.

This is fuelled by the emerging middle-class and increasing demand in telecommunications, information technology and office automation and consumer electronics. India’s growth has accelerated over the past couple of decades, and with it the spending power of its citizens. In fact, a recent McKinsey report ‘A Bird of Gold: The Rise of India’s Consumer Market’, noted that by 2025 India will become the fifth largest consumer market," says Poornima Shenoy, President, India Semiconductor Association.

Going forward, the top five end-user products that are expected to drive growth are mobile handsets, desktops and notebooks, GSM base stations, set-top box and energy meters.

The top semiconductor products fuelling revenues will be microprocessor, driven by desktops, notebooks and telecom equipment; analogue driven by mobile phone, monitors and UPS; memory driven by desktops, notebooks, servers and telecom infrastructure; and discrete driven by TV and audio systems, energy meters and converters and mobile and telecom infrastructure, according to the semiconductor association.

It is this sheer potential of the Indian market that is attracting companies such as Hindustan Semiconductor Manufacturing Corporation (HSMC) and SemIndia to join India’s semiconductor juggernaut.

Drawn to the action

A Silicon Valley-based semiconductor company, HSMC has already announced plans to invest over $4 billion in chip foundries in India, with Germany-based Infineon as its technology partner. HSMC and Infineon have signed an MoU to license its 130 nm CMOS process technology that would help build the foundation for the production of integrated circuits for mobile phones, ID cards and automotives in India.

“There is a huge domestic demand waiting to be tapped. While we feel that the demand for microprocessors for PCs will be limited to a certain extent as domestic players are buying motherboard from overseas, the market for TVs, cell-phones and smartcards makes a compelling case for volume production,” says Deven Verma, Chairman of board of HSMC, which is evaluating Karnataka, Andhra Pradesh, Maharashtra and Gujarat for finalising the location for its proposed units.

As per the plans, HSMC’s first fab would require an investment of $1 billion and would produce chips on 8-inch wafers.

The second fab would be for more advanced 12-inch wafers, requiring an investment of $3.2- 3.5 billion.

The first products from HSMC fab will roll out in the next two years.

“We will be supplying wafers to Infineon, who will, in turn, sell it to end-users such as telecom handsets firms. We are also in advanced discussion for signing-up customers other than Infineon although we cannot share the details due to non-disclosure agreements. We are eyeing revenue of $400-500 million in the first phase and $1.5-2 billion in the second phase from our project,” adds Verma.

SemIndia, promoted by an NRI consortium and headed by Dr Agarwal, is another company betting big on India’s semiconductor potential.

It announced a $3-billion project in 2006, including a $100-million ATMP facility. The project is located near New Hyderabad Airport. SemIndia has already concluded the financial closure from its various investors for the ATMP and the project is expected to take off by mid-2008.

“Semiconductor manufacturing will allow players like us to not only meet the global demand for contract manufacturing but also leverage a huge opportunity from the domestic consumption point of view,” says Dr Agarwal, adding that the company is looking at billion dollar worth of revenue over the next two-three years.

Others too, such as Reliance Industries, and consumer electronics maker Videocon Ltd, are set to jump into the fray. According to sources, Reliance Industries is planning to invest up to $6 billion over five years to set up a facility to manufacture not just silicon chips used in devices such as mobile phones and computers but also liquid crystal display units and solar photovoltaic cells.

In addition, Moser Baer has announced its plans to establish a thin film solar fab in Noida SEZ at an investment of $250 million, while California-headquartered Signet Solar is gearing up to invest $2 billion to manufacture solar photovoltaic modules in India.

“We are expecting one-two more proposals to come up in the photovoltaic space,” adds Nambiar of the IT Department.

Issues and Challenges

Even as the industry remains upbeat about Semiconductor Policy 2007, saying it would open the doors to global investors in both chip manufacturing and its ecosystem and related hi-tech manufacturing, players are seeking certain clarifications on the guidelines issued recently.

One such concern pertains to the discount rate used for calculation of the net present value of the project.

Another issue pertains to financial closure or a commitment of equity holders and debt financiers to provide or mobilise funding for the project.

“Government has specified that such funding must account for a significant part of the project cost, which should not be less than 90 per cent of the total project.

This needs to be clarified as the incentives have been pegged at 20-25 per cent,” Verma adds.

The players are also emphasising on the need to create a strong infrastructure to back billions of dollars of investment commitment.

But Nambiar points out that a draft policy on setting up Information Technology Investment Regions (ITIRs) is already under preparation.

The ITIRs would be larger than the IT SEZs in terms of format and include residential, office and commercial space, in addition to schools and hospitals.

More importantly, as much of India’s success in positioning itself as a preferred destination for electronics hardware manufacturing would depend on the level of manpower preparedness, the Government is considering roping in hardware association MAIT to undertake a comprehensive study that would project the manpower skill-set demand and supply in the electronics hardware manufacturing space, including semiconductors, IT hardware, consumer electronics, components and strategic electronics.

moumita@thehindu.co.in

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New chip on the block