The Hindu Business Line : Some light on the horizon

One thing led to another, you could say. The electronics sector grew during boom times, and with it grew the semiconductor industry, whose components are at the heart of your PC or set-top box, mobile or laptop.

Indian software vendors too were on a high, with a slew of high-end projects, such as chip design, to enable semiconductor clients roll out innovative products in a short space of time.

And then came the downturn. The electronics sector faltered, and so did the semiconductor segment. But now, industry watchers believe, the electronics sector is beginning to show some signs of recovery, which augurs well for the semiconductor segment.

Muted figures

According to research firm Gartner, the global semiconductor revenue is forecast to reach $194.5 billion in 2009, a 24.1 per cent decline from 2008 revenue of $256.4 billion. The industry is expected to return to positive growth in 2010, growing 7.5 per cent, followed by additional growth through 2012. Even with three years of increased revenue, the semiconductor industry will fail to return to 2008 revenue totals. In 2012, the worldwide semiconductor revenue is projected to reach $253.4 billion, still below 2008 revenue of $256.4 billion.

The recovery in the semiconductor industry will happen only when the electronics industry improves. There are indications that the electronic industry is recovering, in countries such as Taiwan, but not at a great pace. Indian companies should start pitching for more high-end work such as chip design, says Ganesh Ramamoorthy, Principal Research Analyst, Gartner, who tracks the semiconductor and electronics design and manufacturing market on the Indian subcontinent.

There are two categories of Indian IT players serving the global semiconductor industry. The first category consists of vendors providing just the basic services, such as IT maintenance and support, with the standard packages.

The second category concerns companies such as Tata Consultancy Services, KPIT, HCL and Mindtree offering high-end services. While the client gives the idea, the vendor delivers the project in a short span of time — for instance, an American company planning to launch a smart card may outsource the entire design to the Indian firm. Business for Indian vendors in this category, could 1-2 per cent of revenue. The third party outsourcing market for chip design services out of India alone is estimated to be around $350 million, says Ramamoorthy.

The global recession slashed research and development budget for companies from all sectors, including semiconductor. This affected outsourcing to third party vendors. However, interestingly, while the number of orders went down, the value of the work from semiconductor clients did not get reduced. Indian companies continued to get good value for their chip designs, he says.

While the recovery in the semiconductor industry will happen soon, the challenge for Indian companies is building skills and capabilities to offer end-to-end services. If a company does not have this, it should acquire a company with these capabilities or merge with a bigger company, he says.

There are over 350 companies globally that do chip design and Indian firms are yet to make a major impact in the semiconductor industry. Design service vendors that position themselves as providers of specialist integrated circuit (IC) design skills need to expand their capabilities to include verification and integration. They should look to become a one-stop shop for all services relating to semiconductor design, he stresses.

Tough cycle. but...

According to S. Janakiraman, President and Group CEO, Product Engineering Services, MindTree Ltd, who is also on the Executive Council of the Indian Semiconductor Association, the semiconductor industry is, in general, cyclical. But in the current cycle, the industry went through the worst of the slowdown. The main reason is the drastic reduction in discrete spend by the end-consumer, which, in turn, reduced the offtake of semiconductor products by consumer appliance industries such as cell-phone and audio/video entertainment equipment.

The current business cycle was a bit unusual since the industries that are not normally prone to slowdown, such as automotive, took the brunt of the slowdown, in turn reducing consumption towards infotainment, navigation and in-car communication electronics. The combined effect led to two sequential quarters of negative growth.

The revival [in semiconductor industry] seems to be already in sight. The semiconductor fabrication utilisation has shown a sharp positive swing in the last two months in Taiwan. Inventories have reached low levels and hence manufacturing is showing signs of improvement. “We believe the semiconductor industry will reach back to normal status within the next two quarters, and the recovery is likely to be ahead of the rest of the industries,” says Janakiraman.

The IT services/solutions companies will be expected to take total turnkey responsibilities for building end-to-end products. Customers will also look for more risk-reward models. This needs to be seen as an opportunity rather than a problem and as a process of maturity in the relationship with customers. Customers will also expect a high level of expertise to fill the time lost during the slowdown, he says.

Time to get ready

Echoing Jankiraman’s views, Abhishek Vanamali, Head – Marketing and Strategy, Engineering and R&D Services, HCL Technologies, says, “We see a recovery starting as early as December quarter 2009 or early 2010 when there will be an increase in sales and in subsequent investment in anticipation of a global economic recovery.”

Inventories of most of the semiconductor companies are fast reducing and with no new investments in new semiconductor fabrication plants, probably these will lead to cyclical turnaround in 2010 as demand will outpace supply, he adds.

Spending will still be a concern for six months to one year and the focus will be on sustenance and reducing the total cost of ownership. Also, a lot of vendor consolidation is happening and companies are pressing for more reduced rates. IT Services/solutions companies need to provide end-to-end solution capability with assured quality and timelines at an economical price.

They need to addresses issues such as new product introduction challenges, time-to-market pressures, keeping under control the cost of research, development, engineering, minimising the risks involved and overcoming the skill shortage faced by original equipment manufacturers and product companies, he says.

Factor in stagnant spending

Typically, semiconductor sales tend to lead IT spending by a quarter or two. Semiconductor sales growth has decelerated significantly in recent quarters. Such a move has historically preceded a slowdown in IT investment. In semiconductor industry, the cost pressure is much higher and non-discretionary projects have been reduced. The effect of this will be felt in the coming months, feels Nagaraj Ijari, Head, Hi-tech Industry Unit, Tata Consultancy Services.

IT vendors should plan for business and consumer spending to be stagnant during 2009 and for a slow, recovery during 2010. At the same time, they should be alert to opportunities to help customers reduce costs, comply with new government regulations and retain customers.

The impact of the financial crisis will result in the semiconductor industry experiencing revenue declines in 2009. The industry is expected to return to positive growth in 2010, he says.

‘How far can you run for me’?

The 2007 economic environment did not impact the semiconductor industry significantly as the consumer index for semiconductor consumption was still healthy. The memory device industry within semiconductor was impacted more due to cost sensitivity and creation of large manufacturing capacities, says Praveen Acharya, Vice-President – Semiconductor Solutions, KPIT Cummins Infosystems Ltd.

Customers are facing challenges of uncertainty pertaining to their business outlook. They are focusing only on strategic IT and research and development areas and discretionary IT spends have declined. The semiconductor equipment spend (capital expenditure) too has been impacted. There has been a focused attempt by semiconductor companies to extend life of existing capex for new manufacturing processes, thus driving down new purchase/investments, he says.

Semiconductor companies (a few in fabrication) have reported a slight improvement in production capacity utilisation in the first quarter of 2009 as against the last quarter of 2008. This is a good indicator. New designs in chip space are being started, and that is another trend to be watched. The semiconductor industry cycles are more complex when compared to generic IT industry and hence the industry will follow the other economic metrics, he explains.

“Play up the core competencies to support the semiconductor industry/customers. When the revival starts, the semiconductor companies will be cautious in taking new investment decisions and will still be smarting under low earnings/losses. They will need continued sensitivity towards cost control and strong commitment to make every R&D-buck deliver the maximum bang,” he advises.

Pure services have least impact today; “I tell, you do” has hardly any takers from the industry. Instead “How far can you run for me” and “joint point of view building with the customer” to leverage the value proposition is what customers want. Product engineering services/packaged solutions are required, he stresses.

raja@thehindu.co.in

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