Indian Semiconductor Industry Evolution & Opportunities


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Indian Semiconductor Industry Evolution & Opportunities

  1. 1. Indian Semiconductor Industry: Evolution & Opportunities Detailed analysis of the semiconductor policy, market outlook and technology factors indicates that the Indian semiconductor industry could move into eco-system units in the short to medium term and into fabrication units in the longer run. The industry could have a unique evolutionary path attracting investments of approximately $ 30 Bn over a 10 year time horizon, say K. Raman, Practice Head – Telecom, Media & Technology, and Kaustav Ganguli of the Tata Strategic Management Group. The Indian semiconductor industry is at a nascent Amongst the eco-system units, various factors stage. Most of the players in this industry are seem to favour investment in photo-voltaic (PV) focused on fabless chip design and there are no units in the short term. Some of these factors are: players with capabilities in semiconductor 1. Lower Capex requirement: Typically, fabrication (fab) or in ‘eco-system’ manufacturing. capex requirement for PV units is lower than (See Exhibit 1 for definitions of various that for fabs. semiconductor units). 2. Lesser technology obsolescence risks: Technology life cycles for PV units tend to be The Semiconductor policy, key points of which much longer than that in fabs. have been summarized in Exhibit 2, was expected to create incentives for players to invest 3. Initiatives by the government: There have in semiconductor fabrication. been various initiatives by the government providing incentives for production and usage The policy provides comparable incentives for of solar energy in India. development of both fab and eco-system units. Exhibit 2: However, the incentives make investments in eco- Semiconductor Policy : Overview system units more attractive. Exhibit 1: • Semiconductor Manufacturing Policy announced in February 2007 Type Description ­ 20% capital subsidy for the first 10 Design Unit Semiconductor chip design years for an SEZ unit facility; does not involve ­ 25% capital subsidy for the first 10 actual fabrication or years for a non-SEZ unit packing ­ Exemption from CVD for both fabrication and ecosystem Fabrication Semiconductor wafer manufacturing for non-SEZ units Unit fabrication facility; • Threshold Investments includes ATMP (Assembly- ­ Fab Unit – INR 2,500 Cr Test-Mark-Pack) units ­ Eco-system unit – INR 1,000 Cr • Non-refundable fee of INR 25 La kh to be Eco-system Manufacture of submitted along with feas ibility study report Unit semiconductor displays (e.g. LCD, OLED, PDP, Source: Indian Semiconductor Association other emerging displays), 4. Projected growth in photovoltaic storage devices, solar cells, photo-voltaics, and capacity: India’s photo-voltaic capacity is other micro and nano expected to increase at a CAGR of almost technology products 48% over the next 4 years (Exhibit 3) Source: Ministry of Communications & Information Technology 1 As published in ELCINA Electronics Outlook Magazine October 2008 edition
  2. 2. Exhibit 3: TVs & PCs for LCD panels, Mobile Phones for Forecasted capacity addition for Photovoltaic OLEDs. Power Generation in India (in MW) This strong growth in local demand for products requiring FPDs creates the foundation for FPD 730 manufacturing to take off in India. As domestic demand grows, some TV manufacturers may 540 400 backward integrate into FPD production. For 300 example, Videocon has already announced plans 150 for a FPD unit at Taloja, Navi Mumbai. Technological expertise gained from PV production is transferable to FPD on account of synergies 2008 2009 2010 2011 2012 between the manufacturing processes for different Source: EPIA (European Photovoltaic Industry types of eco-system units. This would facilitate Association) growth of FPD production in India. Thus, there is strong likelihood of investments in FPD in India This short-term focus on PVs is exemplified by the amounting to about $ 10 Bn over the next 6-7 fact that players like SemIndia and IEMC have years catering to approximately 55%-60% of postponed their fab unit plans and instead decided domestic demand in India. to focus on PV units. Over the next two to three years PVs could attract investments of about $ 10 Long Term Potential: Will investments Bn. Out of this, $ 2.6 Bn worth investments have finally move to fabs? already been approved with a further $ 7.4 Bn worth of projects under consideration. The semiconductor industry is made up of four The question to answer at this juncture is – main product categories as illustrated in Exhibit 4 would there be opportunities beyond PV below. units in eco-system manufacturing in the medium term? Exhibit 4: Main Product categories in Semiconductor Industry Memory Memory Commodity IC Commodity IC Complex SOC Complex SOC Micro-processors Micro-processors Temporary data store- Known as ‘standard SOC (System on a Chip) are Central processing hous es exchanging chips’, they are used semiconductor chips with units that contain Description information with for routine embedded compo nents that the basic logic to computer d evices’ processing purposes enable chips to function as perform tasks brains standalone systems Average Operating ~ 20% ~ 20% ~ 26% ~ 30% Margin1 This is a nascent market Cumulative Market with many existing & new Share of Top 2 to 3 83% 86% 95% semiconductor players players venturing into this area Critical Success Economies of scale Economies of scale Flexibility in modification & Continuous Factors re-use of chip design innovation Toshiba, Samsung, Chip manufacturers Various – located globally Intel, AMD Key Players Hynix in Taiwan, Korea, China Note: 1. Average operating margin of top 2-3 players As illustrated in above, commodity IC and memory Flat Panel Display (FPD) units represent a significant portion of eco-system manufacturing. segments have low profitability and are dominated In the medium term, there would be a significant by players having large economies of scale and best-in-class manufacturing processes. The growth in demand for products requiring FPDs viz. microprocessors segment is almost completely 2 Tata Strategic Management Group
  3. 3. dominated by Intel thriving on their continuous Thus it seems probable that in the long run, innovation on new generation chips. The SOC investments in fab units could be in the range of $ segment on the other hand is an emerging 9-10 Bn over the next decade focused on Complex segment with many existing and new players SOC fabrication while the overall Indian Chip making a foray and one that relies on modification Demand Market could be approximately $ 50 Bn and re-use of chip design for its success. SOC by 2017. chips find applications in embedded systems in consumer durables, mobile phones, home Implications automation, automobiles etc. Considering that Over the next 10 years, the semiconductor India has developed significant capabilities in chip industry could attract investments to the tune of $ design (including SOC design) and that it has a 30 Bn (Exhibit 5). Timely regulatory large domestic market for products requiring interventions by the government would be a embedded systems, there could be opportunities critical enabler for the growth of this industry. for players to initiate fabrication of SOC chips in However, the evolution of this industry in India India by leveraging proximity to chip design will be different from the experience in other houses on the one hand and the domestic base countries. Investing in the right technology at the load demand on the other. right time is critical for profitability in this industry. Investors desirous of reaping rewards from the This potential development of chip fabrication in growing demand for semiconductor chips and India could be further aided by transfer of components need to monitor the unique technological expertise developed by managing evolutionary path of this sector and time their eco-system units. investment accordingly. Exhibit 5: Expected Investments in Indian Semiconductor Industry $ 10 Bn Ecosystem FAB $ 10 Bn Chip Manufacturing Flat Panel $ 10 Bn Manufacturing Photovoltaic cells & Modules Manufacturing Current Medium Term Long Term Ⓒ Tata Strategic Management Group. All rights reserved. 3 Tata Strategic Management Group
  4. 4. Tata Strategic Management Group is a leading management consulting firm in South Asia. Set up in 1991, Tata Strategic has completed over 500 engagements with more than 100 Clients across countries and industry sectors, addressing the business concerns of the top management. We enhance client value by providing creative strategy advice, developing innovative solutions and partnering effective implementation. Business Portfolio Review Competitive & Growth Strategy, Country/ India Entry Strategy Business Due Diligence and Valuation for M&A Aligning Organization to Business Strategy Integrated Cost Reduction Strategy Managing Organization Change Marketing & Supply Chain Optimization Formulation Performance & Talent Management Business Process Improvement/ Outsourcing Organization Competitiveness Effectiveness Enhancement Analytics Solutions Quantitative Modeling Algorithm Design Optimization Rules Nirmal, 18th Floor, Nariman Point, Mumbai - 400021, India. Tel 91-22-6637 6712 Fax 91-22-6637 6600 URL: e-mail: