Local production of semiconductors remains in slomo

Tags: Knowledge

The market is likely to touch $13.3b by 2016. But this output will still fall short of demand

As India’s economy moves into the digital age, demand for integrated circuits is bound to rise. The local market however, continues to meet its demand with imports as big semiconductor manufacturers shy away from setting up fabs citing poor infrastructure and small market size.

According to research firm Gartner, the total addressable market (TAM) for semiconductors in India at the end of 2012, is expected to be about $8 billion. This figure is projected to grow to $13.3 billion by 2016, a compounded annual growth rate (CAGR) of 12.4 per cent.

A total addressable market worth $8 billion at present is not enticing enough for companies like Infineon. “We have fabs all throughout the world except in India,” says Arunjai Mittal, member of the management board at Infineon, a German company with close to $ 4 billion revenues and 26,000 employees.

Total addressable market is defined as the revenue opportunity available for a product or service and provides a quick measure of the underlying potential. Fabs, short for fabrication plants are units where semiconductors like chips are manufactured.

In several conversations with top honchos of leading semiconductor manufacturers, the lack of an ecosystem to support the setting up and running of a fab was a recurring theme. An ecosystem that consists of design, application engineering, packaging and infrastructure. As an input to the process of manufacturing semiconductors, the lack of basic infrastructure like roads, airfreight, ports and other logistics trumps market size.

Mittal says that a state of the art fab costs about $3 billion, and once installed, it must be run on full throttle or not at all. “You cannot install and run it on 10% productivity. Also, all products must reach the customer fast,” he maintained.

Excellent infrastructure like roads and air transport helps move end products to a volatile market quickly. “Wherever we are, we have to have excellent infrastructure in place. Our markets are very volatile. This means your reaction times between design to manufacture to sell has to be very fast,” Mittal said.

Ajay Kumar, joint secretary with the department of electronics and information technology (DeITy) and one of the top government officials spearheading the effort to increase domestic electronics manufacturing admits that quality of infrastructure is poor.

“Quality of the inputs like power and water has to be assured. You have to create systems that the quality of infrastructure delivered is top-notch and this needs to be worked out,” he said and added that the onus of providing infrastructure lay on state governments.

Infrastructure aside, the Indian semiconductor market remains small, which is unattractive to potential investors. Mittal said that a fab must service not only the global market, but also the local market, and do it cheaper than elsewhere. “If we have to feed to a local market, then it has to be of a certain size which is still embryonic in this country,” said Vinay Shenoy, Infineon India managing director.

By way of explanation, Mittal said that one of the reasons why the local market was small in India was because the government had chosen to look at the end product rather than components, a clear reference to the ITA agreement that push import duties on electronic goods down to almost zero. He added that this made companies reluctant to produce components in India.

Ganesh Ramamoorthy, research director at Gartner India said that it was wiser to rely on semiconductors produced elsewhere until the market size hit US $ 100 billion.

Government has been making an all out effort to encourage companies to set up fabs in India. It appointed consulting and technology outsourcing company Accenture to review fab proposals. Kumar refused to comment on the number of proposals received or the participants, citing confidentiality. He did however say that the government was happy with the response received and that it was progressing well.

With infrastructure challenges remaining unsolved, low market size and private industry currently in a cyclical phase of excess capacity, India seems to have missed the boat on getting a fab set up, despite the government’s best efforts.

Ramamoorthy was blunt and said, “There was never a boat to begin with.” Mittal praised government policies as being a step in the right direction but it was still early days and a lot will depend on how these policies are implemented.

“You miss one boat and catch the next one,” said Kumar striking an optimistic note. He said that the setting up of a fab was a near certainty as India was in a good position to capitalize on its strengths, which lay in design and development services. “As technology advances, the share of design and development of a chip as a proportion of the total cost has increased to between 50-60 per cent of the total cost. With lower costs for manpower, a difference can be made in the whole value chain,” he adds.

Mittal and Shenoy are quick to point out that India’s traditional advantages of labour arbitrage come into play not in the capital-intensive part of setting up a fab, but in the assembly test and packaging (ATP) segment. “This segment employs large number of people. 85-90 per cent employees are women,” says Shenoy.

Kumar appeared more sanguine about the ATP’s prospects in India. “We have all major electronics manufacturing services (EMS) companies in India with another 30-40 companies largely for the defence sectors. The companies operate on tight margins and have not flourished because the same work can be done outside,” he said.

With fabs not likely to be set up in India anytime soon, the most that the central government can do is improve the policies and infrastructure. Given the large and expanding size of the market, it would be only a matter of time before the first plunge takes place and others follow.



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