Semiconductors: Seminal Conductors of Indian IT

Recollect those days when mobile phones resembled lackluster, bulky bricks and computers took after ramshackle mammoth air-conditioning machines. But technological advancements have essayed a tremendous paradigm shift – so much so that cell phones have vied to elbow out computers today. This transition owes itself to the climbing semiconductor content in the electronic devices. In fact, devices such as digital cameras, DVD players, PCs and set-top boxes have semiconductor content ranging from 25 per cent to 35 per cent.

The surge in the semiconductor industry is affecting many countries worldwide. The Semiconductor Industry Association (SIA) reported that the net worldwide semiconductor sales reached an all-time monthly record of $20.5 billion in August 2006 – an increase of 10.5 per cent from the $18.6 billion reported in August 2005. The semiconductor-driven industry includes various domains such as Electronic Design Automation (EDA), product architecture, embedded software, validation and debugging, VLSI design, process technology and assembly and testing.

Countries in the Asia-Pacific region such as Japan, Taiwan, China and India would be impacted most by this semiconductor industry growth in the coming years. Each country has identified its key strengths in this space and is leveraging them to the fullest. Taiwan’s focus is on value-added IC design, productization and advanced IC manufacturing, while China banks on its low-cost manufacturing and regional distribution. India is also a frontrunner in this race with its expertise in the chip design and software domains.

India has a credible IPR framework and excellent track record in Intellectual Property Protection. The ISA–Frost & Sullivan reports predict that the electronic equipment consumption will grow to $363 billion by 2015 growing at a CAGR of 29.8 per cent. Recognizing this trend, major electronic manufacturing companies such as Flextronics, Nokia, Motorola and Samsung have started their operations in India.

What drives the Sector Crazy?
In the last few years, rapid liberalization of several segments of industry and commerce combined with sustained GDP growth and world-class software and services export business has pushed IT and communication product consumption in the country. Added to this, the rising living standards and increasing disposable incomes have seen a surge in the consumption of consumer durables and hence the demand for semiconductor products.

The major semiconductor user segments are mobile phones, communication infrastructure products, IT products such as computers, printers, display systems, networking products, televisions, industrial automation, process controls, point of sale terminals, audio equipment, washing machines, microwaves, energy meters, security systems, automotive electronics, defence electronics and space programmes.

Telecom at the Driver’s Seat
The early 1990s saw rapid expansion of telecommunication networks in India. This along with indigenously manufacturing of switching and transmission equipment was the primary driver of semiconductor demand. The other key segments which supported the growth were indigenously designed computer systems and the television industry.

However, with the growth of wireless communication and slower expansion of terrestrial networks, manufacture of communication products declined. At present, most communication infrastructure equipment such as switches, base stations and transmission systems are imported. Along with this, the entire range of mobile handsets used in the country is imported. As this market has grown at a phenomenal rate, foreign suppliers are considering local manufacture of these products to serve the market more effectively and also reduce costs.

In the years to come, telecommunication along with wireless mobile phones, will drive the demand for semiconductors. In these segments, India will also become a net exporter of manufactured products.

Electronic sparks directing the Silicon Drama
Consumer electronics is another fast-growing segment. A number of international majors along with several local companies are competing to provide the latest products to the Indian consumers. This will call for domestic production of electronics products and demand for semiconductors. Rapid computerization of trade and commerce and the exponential growth of software and services industries have led to massive demand for IT and networking products.

With high consumption levels, manufacturing these products locally makes economic sense. Already, a number of international and domestic companies have commenced their operations in India.

The growth in consumption of electronic products and the recent changes in regulation by the Department of Communications to encourage local manufacture for infrastructure products have attracted a number of foreign companies to establish manufacturing facilities in India. Vinod K. Agarwal, President & CEO of SemIndia, also signed a Memorandum of Understanding for setting up a Rs.13,500-crore Fab City in Hyderabad recently.

It is worthwhile to note that India is a leader in design, manufacture and deployment of digital energy meters. It has also led the way in electronics voting machines (EVMs) manufacturing and their use in a massive way.

With the explosive growth of the automobile industry in India and stiffer enforcement of environmental and safety regulations, another user segment for electronics is emerging in a big way. Automotive electronics such as engine management, cluster controls and safety systems will be the key drivers for semiconductors. A related area is infotainment and telematics in the automobile segment. These require complex DSP and analog semiconductor products.

Television and entertainment is huge business in India. This is also a major source of entertainment for large sections of the Indian society. This segment is another major consumer of semiconductor products. This will continue to grow.

The Road Ahead…
The next logical step to complete the semiconductor ecosystem in India would be to support the electronic manufacturing, chip design, EDA, testing and other activities with semiconductor manufacturing in the country. But as the chip-manufacturing segment requires heavy investment, industry members are debating its viability in India. Some members feel that India should initiate this process by starting a two-three generations old fab. Others believe that it does not make business sense for the country to start semiconductor manufacturing in India. Many others strongly feel that countries that lead in chip manufacturing have done it with strong Government support and hence one should look at the Government to take part in this process through investments and tax exemptions.

Notwithstanding the debate on semiconductor manufacturing, industrial and political leadership are at one regarding replicating the IT success in the semiconductor field in India. This has brought the country to the threshold of a revolution in the semiconductor industry. On the contrary, India’s shortcomings such as poor infrastructure, technical educational infrastructure and lack of long-term government policies, may result in investors turning to competitors for their activities.

Thus, it should be realized that cost can no longer be a competitive advantage in this domain. To make India the hub for the semiconductor-driven industry, the emphasis should evidently be on quality and innovation. Only these can make India move up in the value chain. India’s expertise in EDA, products, VLSI design, validation, debugging, embedded software, system hardware and low- cost advantage for assembly and testing manufacturing can make it the preferred destination among investors. If the focus is not put on these areas now, the supply-demand gap for skilled workers will w iden and lead to cost escalation, compelling investors to turn to other low- cost geographies.

As the industry experts say, the semiconductor industry is set to make a direct contribution by over 6.83 per cent to India’s GDP by 2015. Keeping this in view, the Government should do everything it can to make it globally competitive for attracting FDI. It has already initiated over 200 Special Economic Zones (SEZs) and is working on a policy to promote the semiconductor and related industries. What disturbs the industry leaders is the fact that already established units are getting little or no support from the authorities. Government can also provide support by allowing access to soft loans, investing in Indian product companies and strengthening the infrastructure required for this ecosystem.

Quintessentially…
The opportunities are immense for the semiconductor players. The Indian semiconductor is growing by leaps and bounds and the promising future supported by the government will surely take India to the position of a global leader within this space. India will be a major consuming as well as a producing country in the near future and the trends are already there to see. No major global semiconductor producer can ignore India as a market. What started up as a whimper is happily making bangs all the way. Long live the bangs!