The microprocessors segment is almost single-handedly dominated by Intel thriving on their continuous innovation on new generation chips.
By: Tata Strategic Management Group
Monday, 19 January 2009: Detailed analysis of the semiconductor policy, market outlook and technology factors indicate that the Indian semiconductor industry could move into ecosystem units in the short to medium term and into fabrication units in the long run. The industry could have a unique evolutionary path attracting investments of approximately $30 billion over a period of 10 years, say K. Raman, Practice Head-Telecom, Media and Technology, and Kaustav Ganguli of the Tata Strategic Management Group.
The Indian semiconductor industry is at a nascent stage. Most of the players in this industry are focused on fabless chip design and there are no such players with capabilities in the semi-conductor fabrication (fab) or in the sector of ‘ecosystem’ manufacturing. (See Exhibit 1 for definitions of various semiconductor units)
The Semiconductor policy, key points of which have been summarized in Exhibit 2, was expected to create incentives for players to invest in semiconductor fabrication.
The policy provides comparable incentives for development of both fab and ecosystem units. However, the incentives make investments in ecosystem units more attractive.
Amongst the eco-system units, various factors seem to favour investment in photovoltaic (PV) units in the short term. Some of these factors are:
- Lower capex requirement: Typically, capex requirement for PV units is lower than that for fabs.
- Lesser technology obsolescence risks: Technology life cycles for PV units tend to be much longer than that in fabs.
- Initiatives by the government: There have been various initiatives by the government providing incentives for production and usage of solar energy in India.
- Projected growth in photovoltaic capacity: India’s photo-voltaic capacity is expected to increase at a CAGR of almost 48 per cent over the next four years (Exhibit 3)
This short-term focus on PVs is exemplified by the fact that players like SemIndia and IEMC have postponed their fab unit plans and instead decided to focus on PV units. Over the next two to three years PVs could attract investments of about $10 billion. Out of this, $2.6 billion worth investments have already been approved with a further $7.4 billion worth of projects under consideration.
The question to answer at this juncture is-would there be opportunities beyond PV units in eco-system manufacturing in the medium term?
Flat panel display (FPD) units represent a significant portion of eco-system manufacturing. Exhibit 4 shows that in the medium term, there would be a significant growth in demand for products requiring FPDs viz. TVs and PCs for LCD panels, mobile phones.
This strong growth in local demand for products requiring FPDs creates the foundation for FPD manufacturing to take off in India. As domestic demand grows, some TV manufacturers may backward integrate into FPD production. For example, Videocon has already announced plans for a FPD unit at Taloja, Navi Mumbai. Technological expertise gained from PV production is transferable to FPD on account of synergies between the manufacturing processes for different types of eco-system units. This would facilitate growth of FPD production in India. Thus, there is strong likelihood of investments in FPD in India amounting to about $10 billion over the next six to seven years catering to approximately 55 to 60 per cent of domestic demand in India.
Long term potential: will investments finally move to fabs?
The semiconductor industry is made up of four main product categories as illustrated in Exhibit 5 below. As illustrated in Exhibit 5 above, commodity IC and memory segments have low profitability and are dominated by players having large economies of scale and best in-class manufacturing processes. The microprocessors segment is almost completely dominated by Intel thriving on their continuous innovation on new generation chips. The SOC segment on the other hand is an emerging segment with many existing and new players making a foray and one that relies on modification and re-use of chip design for its success. SOC chips find applications in embedded systems in consumer durables, mobile phones, home automation, automobiles etc. Considering that India has developed significant capabilities in chip design (including SOC design) and that it has a large domestic market for products requiring embedded systems, there could be opportunities for players to initiate fabrication of SOC chips in India by leveraging proximity to chip design houses on the one hand and the domestic base load demand on the other.
This potential development of chip fabrication in India could be further aided by transfer of technological expertise developed by managing ecosystem units.
Thus it seems probable that in the long run, investments in fab units could be in the range of $9 to $10 billion over the next decade focused on complex SOC fabrication while the overall Indian chip demand market could be approximately $50 billion by 2017.
Over the next 10 years, the semiconductor industry could attract investments to the tune of $30 billion. Timely regulatory interventions by the government would be a critical enabler for the growth of this industry. However, the evolution of this industry in India will be different from the experience in other countries. Investing in the right technology at the right time is critical for profitability in this industry. Investors desirous of reaping rewards from the growing demand for semiconductor chips and components need to monitor the unique evolutionary path of this sector and time their investment accordingly.
