Tuesday, November 26, 2013: Today, our country is literally being run on semiconductor chips. They are inside almost everything that is a part of our modern life. Probably, this popularity is the reason that the department of electronics and IT wants a policy in place that can encourage setting up of semiconductor fabrication (FABs) units in India.
Another reason for it is our elaborate import bill for electronic items. If reports are to be believed, the import bill for electronic items in India is predicted to exceed that of petroleum imports by 2020.
According to engineer and entrepreneur, Hemant Kanakia, the cost of incentives for building FABs in India is likely to be large. However, success of this initiative does not simply depend on investment capital as international examples demonstrate. FABs in Taiwan and South Korea have been very successful, while those in Singapore and Malaysia have floundered. What can we learn from their experiences?
There should be focus on developing local semiconductor design and product companies along with the FAB. The reason it is beneficial is because local product companies become loyal customers, bring a steady source of revenue and are more profitable than global MNC customers. On the other hand, global customers suck out every bit of concession reducing the profit and would even move to another geography if more incentives are offered.
SMIC, a large recent Chinese FAB, is an interesting example. Although it was a late entrant to the sector, SMIC is already profitable with 46% of its capacity utilised by local product companies. Chinese government, apart from supporting SMIC FAB, also put aside several billion dollars to encourage formation of local semiconductor design and product companies. In contrast, the lack of local demand for FAB capacity may be one of the reasons why Singapore and Malaysia’s efforts fell short, Kanakia wrote in a ET report.
Kanakia adds that focusing on FAB-less semiconductors has its own set of advantages. Reportedly, about 70-80 per cent of value added is in product design and marketing. In the year 2011, the leading four independent FABs had a combined revenue of less than $35 billion, while top 25 FAB-less companies, who focused on design but used external FABs for manufacturing, had revenues of roughly $240 billion.
It is important to jump-start the FAB-less semiconductor sector for several reasons. First, establishing such a policy would be a signal to private players considering investing in Indian FABs. Second, measures needed for supporting FAB-less semiconductors are far less expensive than those needed for FABs. And, third, we have good reasons to be confident of ultimate success in this area. We already have a large pool of design engineers employed at research and development centres of MNCs. They have been designing advanced chips for parent companies located offshore and could easily help fuel domestic companies, Kanakia opined.
