The Asian countries, especially China, now compete with each other in promoting the industry, writes Ar Rm Arun

Semiconductors are materials that behave as conductors at certain temperatures and as insulators at other temperatures. Commonly used semiconductor materials are silicon and gallium arsenide, Silicon, the most popular semiconductor material, is obtained from silicon dioxide which is nothing but common sand.

Semiconductors are used to make “transistors” (which act like on-off switches). Millions of transistors are built together to form an Integrated Circuit (IC or semiconductor “chip”). ICs are at the heart of every electronic device / appliance that we use in our daily Lives. Semiconductors have hence made a monumental impact on human society.

Myraid applications

There are two main kinds of semiconductor ICs - Memory and logic. Memory ICs, as the name implies, are used to store various kinds of data / information such as documents, spreadsheets and photographs. Logic ICs, on the other hand, are used to process the data / information. An example of a logic IC is a microprocessor.

Both kinds of ICs are used in computers, mobile phones, hand held devices. The complexity of an IC varies according to the functions that it is supposed to perform.

Advances in semiconductors make it possible to miniaturise electronic devices such as mobile phones. Not only do these devices take up less space, but they are also able to perform multiple functions, work faster and consume less energy.

Global scene

Traditionally, semiconductor companies controlled the entire semiconductor process, from design to manufacture. Those were the days of the “Vertical Industry” and the companies were termed IDMs (integrated device manufacturers). However, it became expensive for one company to incur the huge investments to sustain all the processes. Due to this limitation, the transition into the “horizontal industry” started – a separate set of Companies formed to concentrate on specific semiconductor processes, with each company outsourcing its non-core activity so that it can concentrate on its core. This meant focused attention going into each process, a lot less capital for one company to invest, faster time to market and significant cost benefits to the consumer. Companies now outsource their manufacturing and, while doing this,are getting leaner and efficient.

SPEL semiconductor plant at Maraimalainagar near Chennai

The Semiconductor industry consists of the following four broad processes:

IC Design: This refers to the process of defining the particular logic that has to go into an IC and later using expensive CAD tools and workstation to “draw” the circuit.

Fab (short form for fabrication, referred to as “foundry” when it is not for captive usage): This is the process where the drawn circuit is “etched” multiple times on a very thin wafer (thin polished slice of monolithic semiconductor, varying in diameter from 6” to 12”) Each etch is now called a “die”. Fab is the most complex semiconductor process.

Assembly: This is a sequence of processes ranging from dicing the die out of the wafer to encapsulating it in a plastic material to protect its circuitry. The dimensions of the final product (or package) depend on the application (computers, mobile phones, etc.) that the IC is to be used in. The various stages within the assembly process usually consist of die preparation , die attach, wire bonding, encapsulation or sealing, deflash, lead trimming / forming, and lead finish.

Test: The assembly IC is tested to ascertain if it can perform the required functions. The ICs are then packed in shipping tubes (or tape and reel format) and are ready for shipment.

For all practical purposes, the semiconductor industry can be broadly classified as: design, and manufacturing (fab, assembly and test). It thrives by a simple creed smaller, faster and cheaper. As applications converge, the newer chips have more functions packed on to them. This makes for increased convenience to the user, better speed of the final device and cost savings.

Asian Dominance

The Semiconductor food chain is strongly established in Asia – Including design, IP firms, fab, assembly, testing and most importantly, consumption. Asia’s position in semiconductor production will continue to strengthen. With the foundry business centred in Taiwan, and major memory makers located nearby in Japan and South Korea, China is expected to drive the next manufacturing growth wave in Asia. The Asian countries, especially China, now compete with each other in promoting the industry. In addition to government incentives in Asia, companies also benefit from the growing demand for semiconductors in the region itself.

Worldwide IC sales volume is expected to grow from 135 billion in 2006 to 216 billion in 2011 with an expected CAGR of 9.5 percent. Sales revenue will grow from $249 billion to $306 billion. The global semiconductor market is expected to touch $269.9 billion in 2007.

The Chip design industry has evolved over the last two decades from digital signal processors to ultra-low power microcontrollers, analogue and radio-frequency (RF) designs and emdedded systems/software.

Galloping Indian market

India’s electronics consumption was $28.2 billion in 2005. With its growing middle class population, consumption is likely to reach $363 billion by 2015 growing at a CAGR of 30 percent. Indian electronics production projects an opportunity to touch $155 billion in 2015. Global brands have successfully ventured into India and are now looking at their Indian manufacturing units as an export hub.

Based on this, India’s semiconductor demand is likely to exceed $36 billion by 2015. Growth in office automation, consumer electronic, medical electronics, tele communications or industrial automation, will drive this demand. Important product sub-categories that drive the semiconductor market are mobile handsets, wireless equipment, set-top boxes and smart card terminals, which are gaining momentum.

The global semiconductor industry is now viewing India as a new manufacturing hub. In addition to the existing design base, huge investments are being planned in India for fab, assembly and test. India has an enormous appeal for different parts of the semiconductor value chain. From chip / board / systems design to finished electronic products. It should focus on furthering its success in IC design to build on its lone assembly and test plant, thereby becoming an attractive destination for semiconductor and electronics manufacturing.

Dynamic design segment

India has been quite successful in semiconductor design. With a projected turnover of $43 billion by 2015 it will provide jobs to 7.80 lakh professionals growing at a CAGR of 30 percent. As many as 18 of the top 25 chip companies have set up chip design centres in India, making it an emerging worldwide leader in chip design.

Services-wise, the semiconductor design work can be divided into three major types:

Embedded software: The increase in demand for software content in electronic devices has resulted in greater volumes of embedded software activity globally. The already acquired software supremacy is helping India maintain a constant lead by revenue. This sector accounts for 50 percent of the total semiconductor services industry in India bu contributing $1074 million in 2007-08

IC design (VLSI design): This is the second rapidly growing segment after embedded software in the semiconductor industry. Apart from indigenous non-captive players, all major global players have their centres in India. The $853 million VLSI design area, unlike embedded software, has remained by and large with captives and pure play services firms – the captives accounting for as much as 62 per cent. This can show a huge jump, once manufacturing activities start.

Board & Systems design: Theses services involve activities such as analog/digital circuit design, board and reliability, and system/board testing. In most cases, the VLSI design service companies, typically, carry out board as well as systems design. Though the contribution from this segment has increased due to the industry focus on chip designing, the growth has been more or less the same over the years. It accounted for revenues of $205 million.

Big talent pool

Semiconductor companies are attracted to India by the large talent pool with a cost arbitrage. Other key factors driving this growth include rapidly growing local markets, short product lead-times, reduced barriers to entry and rising government support. For may of the leading multinational companies, the aggregate cost savings from offshoring design activities to countries like India and China typically ranges from 25 to 50 percent, while the cost reduction due to lower employee salaries ranges from 80 to 90 percent.

The chip design industry has evolved over the last two decades from digital signal processors to ultra-low power microcontrollers, analogue and radio-frequency (RF) designs and embedded systems/software. India has ‘spec to silicon’ chip design services. ASIC Solutions & Services portfolio includes advanced design and verification IP (intellectual property) to accelerate customers’ design cycles, front-end design, verification and physical design services. These are predominantly used in digital consumer electronics, telecommunications, computers and electronic devices used in healthcare and security. Indian firms continue to demonstrate skills in part lifecycle services such as design, verification and front-end/back-end services. There is need to push the envelope in chip design to work on higher value-added projects and specific product development.

The growth of the semiconductor design industry and the emergence of a surging market in India for consumer electronics, wireless communications and automotive products provide attractive opportunities for global players. However, there are challenges for companies seeking to expand semiconductor design activities in India.

The IC design industry will continue to be a primary driver of growth for India’s electronics industry. Having made remarkable progress so far, it should work to consolidate its position further. The industry must work closely with the academia to ensure that IC design courses are part of electronics, communications and computing curriculum. The syllabus should be created with an industry focussed approach, in order to churn out more professionals who are ready to lead rather than follow.

India is well-positioned to play a leading role in the global semiconductor design industry. The government, industry and academia will have to work in concert, to sustain the factors that have helped the industry grow thus far. The country needs to build further on its strengths in availability and scalability of talent and advantages in talent and operating costs. There is also the need to upgrade the quality of its technical education system, and shore up the business environment and physical infrastructure.

The low number of IP registrations out of India is another concern. India needs to demonstrate its IPR in action. The number of IP registrations out of India is the second lowest among the peer countries. There is a growing need for industry to increase awareness and get more Indian IP-related work registered. This will facilitate the process of IP registration in terms of time lines and cost.

The Semiconductor food chain is strongly established in Asia – including design, IP firms, fab, assembly, testing and most importantly, consumption.

Manufacturing

Semiconductor manufacturing is expected to open the floodgates for foreign direct investment in the country and encourage exports. For a country which imports almost 60 per cent of its electronic goods today, the chip manufacturing facility could ensure that a substantial portion of this demand is satisfied through local manufacturers. In addition, it will also provide domestic manufacturers as opportunity to participate in the $ 1,300 billion worldwide market for electronic goods. The growth of the semiconductor industry will provide a further impetus to the chip design industry through increased domestic demand. This in turn will have a significant multiplier effect on the growth of the software industry.

Chip manufacturing in India is still in its nascent stage. The state-owned units namely SCL & SITAR are far from being a commercial success. Attempts by various other players have also not been encouraging.

Having a Fab would mean that India has arrived as a semiconductor powerhouse, but absence of Fab cannot be seen as a major hindrance. A Fab has many intricacies. A state-of-the art Fab costs about $3 to $4.5 billion to construct. It has a 7-10 year breakeven period, needs constant investment in equipment and technology, has very stringent infrastructure requirements and needs the ecosystem to be developed for it to be operational.

A Fab revolution cannot happen without the Government’s active participation in equity, policy & long-term strategy. Intel, for instance, decided to set up a Fab plant in Israel after the Government offered significant financial incentives. China has offered sops like protection from imports, 10-year tax holidays apart from other incentives for chip-makers to grow. Mexico supported Intel by raising bonds payable after 20 years with minimum interest.In Taiwan, the Hsinchu Science Park outside Taipei supports over a dozen Fabs. The Taiwan Government supports companies in the park through lower interest rates, promoting technical universities Around the park, creating reservoirs for water supply and even offering French villas for expats who want luxury. Singapore’s foray with a Fab has been successful mainly because the Government has supported the venture in every way possible.

India has taken some tentative steps – one being that the central government will participate in the equity of Fab companies and offer to pay cash. There is a Semiconductor Policy but whether it is enough to bring in the required investments is a big question mark, considering the lack of global luster.

Fabs should be initiated by the Government in partnership with global players to ensure the longevity of the project. We should of course be thrilled if a serious semiconductor firm like Intel, TI or IBM voluntarily chooses to build a Fab in India. This will depend on how well we develop the infrastructure such as roads, water electricity and airports.

In comparison, Assembly & Test requires lesser Government support with faster return on investment. Countries such as china have been significantly investing in assembly and test, while not really pursuing Fabs. Assembly and test will be a reasonable way to enhance the momentum in manufacturing, especially considering that it only takes about $100 million to setup a state-of-the art facility. Having already been recognized globally for its semiconductor design capabilities. India would be better off to create the ecosystem for semiconductor assembly and test manufacturing, and Fab will follow in the natural course of necessities.

Assembly & Test

The semiconductor assembly & test services (SATS) market consists of the IDMs which do their own assembly & test. It also includes the outsourced semiconductor assembly & test (OSAT) companies to which all Fabless (those which do only design and no manufacturing outsource their manufacturing.

As the market soars toward higher-density smaller devices, companies are investigating better packaging materials and assembly techniques. They are on the look out for new interconnecting technologies to meet the need for increased input/output (I/O) counts in semiconductor devices. R&D is focusing on the production of better materials to support greater speed and performance requirements. Moreover, with the market heading toward leadless packaging, efforts are underway to develop different lead-free alternatives.

It is predicted that by 2011 china will be adding 71 per cent of the total assembly & test capacity in Asia. The OSAT market is growing at a rapid pace and is expected to outgrow the semiconductor industry. Taiwan continues to dominate the global OSAT market. In 2006, OSAT volumes of 43.8 billion and revenues of $13.6 billion were achieved. Between 2006 and 2010 revenues will grow at a CAGR of 12.3 percent.

In India, SPEL Semiconductor is the lone player with impressive and successful track record. Having successfully sustained and grown through global competition, it has carved a niche for itself with its 30 plus customers. Its long term approach has encouraged many of its customers to find investing in SPEL a worth wile exercise. The company has been increasing its attractiveness with continuous into expanding its portfolio and capacity, giving it a clear 3 year lead over any new entity wanting to come in. In the last 18 months, SPEL has continuously been adding new packages to its portfolio and has increased its capacity to achieve record revenues of $2 million in November 2007. SPRL is a classic example of the Indian claim to enter the assembly & test market.

Possible players who could be invited to setup assembly & test facilities in India are the IDMs and/or the larger OSAT companies. This is also attractive for NRIs backed with adequate funding channels and the necessary credibility – though we have seen a lot of talk, we are yet to see action being taken to progress on this front. Having other assembly & test units in India will bring in the required eco-system and help India consolidate its presence in the global scenario.

The major constraints for assembly & test are two fold. Since the country has not seen much in this spectrum, there is a lack of low-interest funding and specific tax incentives. While the policies to bring in the mighty investments for Fab are tempting, assembly & test presents a more viable option ( at a lower investment) for the growth of the semiconductor industry in India.

Infrastructure is the second constraint. Assembly & test requires cost-effective and more importantly, continuous supply of power and water. The cost of power in India is quite high compared to competing countries in Asia. Being a price sensitive industry, the cost of power has a bearing on profitability. For a country that hopes to tap the semiconductor market these become critical.

Policy gaps

After witnessing good growth in embedded software and semiconductor design, manufacturing is now the buzzword. A dedicated semiconductor policy is a positive step towards firmly establishing the industry in India. This industry certainly needs good government support especially during the initial years. Te announcement of this policy is definitely good news for global semiconductor manufacturers as it demonstrates the Government’s commitment.

Having a two slab structure for capital subsidy of Rs. 2,500 crore and Rs. 1000 crore is important as all non-Fab related manufacturing does not require investment to the tune of Rs. 2,500 crore. The Rs. 2,500 crore slab justifies the entry of Fab, but the limit of Rs. 100 crore may be a burden for “eco-system” units. Assembly & test requires only about Rs. 600 to Rs. 750 crore and this can be considered to bring in more players.

While the 20-25 percent capital subsidy shows the Government’s commitment to the industry, we should also recognize that other countries are providing higher incentives. The Government should hence increase its options towards enhancing the level of incentives especially during the first few years. It would be beneficial if the Government can look at 20-25 percent capital subsidy + tax incentives + low-interest loans ( at say 2 percent) (this will be better than interest free loans as it will ensure mutual commitment, as done in other countries) rather than all incentives bunched together at 20-25 percent.

The policy has been designed with a pre-requisite fro investment to be in place first, and then incentives to follow. This may not attract prospective players. Announcements made initially have not yet seen the light of the day, since it is the incentives that will lure in investment and not vice versa.

Last, the Government should continuously review the policy and its impact. If the response is not encouraging amendments may be needed to provide a more conducive environment. There is also no specific mention of infrastructure development within an SEZ or outside of it.

It can be hoped that India will learn from the positive examples set by Taiwan, Singapore and China. Commitment to a priority industry would mean establishing the required groundwork-power, water, logistics, financing and tax incentives. The following will facilitate the Indian semiconductor industry to grow exponentially:

First, Intellectual Property (IP) protection will be the key driver to the growth of semiconductor industry. While India is good at services, it should aim for products. The industry is knowledge intensive to make a significant mark. It must focus on creating an environment that helps the rapid creation of IP that will propel the country to global leadership.

Second, India is emerging as a major electronic products consuming country. Telecommunications along with mobile phones will drive semiconductor demand. The country should become a net exporter of manufactured products in these segments.

Manufacturing hub

This will in turn make every major global semiconductor player to look at India as a major market. We should work towards a day when products will be conceptualized, designed, manufactured and first sold in India. This will truly mean that India has progressed from being an outsourced services hub to a manufacturing hub. Last, India must be proactive about the areas of collaboration with countries such as Taiwan which have set the standards in the semiconductor space. The large engineering and technical manpower makes India an ideal destination of global players. Academic collaboration between universities in countries such as Taiwan should be addressed to facilitate research and training.

This along with the market potential will give India a distinct advantage in the electronics manufacturing space. If this advantage is fully exploited, it will create a number of new jobs and business opportunities for the future.

The Author is Vice Chairman, SPEL Semiconductor Limited

THE HINDU SURVEY OF INDIAN INDUSTRY 2008