After it services, many see the burgeoning semiconductor market as the next big opportunity for India's it industry. While some countries such as Taiwan and China may have edged ahead in the manufacture of semiconductors, India retains its edge in areas such as chip design. Also, in the last couple of years, the country has become a large consumer of chips as well. According to a recent study by the Indian Semiconductor Association (ISA) and research agency Frost & Sullivan, the total market for semiconductors in India is worth $2.69 billion, of which telecommunications, information technology, office automation and consumer electronics segments account for 82.6 per cent. Propelled by the growth of these industries, the total market for semiconductors is expected to reach $5.49 billion in 2009, growing at a CAGR of 26.7 per cent.
While Texas Instruments was the first to set up base in Bangalore back in 1985, the ensuing two decades have seen a raft of companies ranging from global chip giants to home-grown design start-ups set up shop in the country. To discuss the evolution of this market and future trends, BT assembled in Bangalore recently a high-powered panel comprising S. Janakiraman, President and CEO (R&D Services), MindTree Consulting (and Chairman ISA), Poornima Shenoy, President, ISA, Sanjeev Keskar, Country Sales Manager, Freescale Semiconductor India, Biswadeep Mitra, MD, Texas Instruments India, and Anand Rangachari, Head, Frost & Sullivan. Business Today's Venkatesha Babu moderated the discussion.
Excerpts from the round-table:
BT: Everyone knows that India has been a big centre for chip design. But, Mr. Janakiraman, what's happening in the semiconductor market? Has there been a surge in chip consumption?
S. Janakiraman: ISA and Frost & Sullivan have just released the second report on the Indian semiconductor industry and we see this market is experiencing high growth and is likely to make a significant difference to the Indian economy as a whole over the next 10 years. There are major changes taking place in the total market and the total available market. In 2006, the total market was $2.69 billion and this is likely to grow to $5.49 billion in 2009, which is CAGR of 26.7 per cent; tam, or total available market, which is local procurement and assembly, was estimated at $1.26 billion in 2006 and is likely to grow to $3.18 billion in that time.
The market is led by telecom and handsets, followed by it and office automation. The global share of India was 1.1 per cent in 2006 and likely to grow to 1.6 per cent. We believe that tam is growing faster than tm, and it's a clear indication that semiconductor manufacturing is growing faster because India's consumption is rising; 20 per cent of mobile handsets are sold here. Policy changes such as SEZs and vat are favourable to manufacturing. Global players don't have fear of IP theft. Key sectors like cellular telephony have taken time to start but blossomed once they got set, and this is also the case with semiconductors.
Towards the end of 2005 or early 2006, ISA had put out a similar report on the semiconductor industry, with predictions until 2015. So, I have two questions: One, what was the need to come out with another report so soon and, two, there seem to be several revisions in numbers. What was the need for it?
Poornima Shenoy: Let me step back a little. When we started ISA in November 2004, we realised there was hardly any data on the semiconductor industry. We got together with Frost & Sullivan and said we need to start getting numbers on the Indian market and we got our first report in February 2006. This was a very arduous process, the first time we were collecting data like this and it took longer than expected. Once we announced the numbers, we found that many companies were incorporating them into their business plans and the statistics were having a global impact. So, you had companies in the entire ecosystem looking at India. This is a very dynamic evolving industry, and everything doesn't remain static. (The new report) is a very practical check on where we are headed over the next two years.
Sanjeev Keskar: Our industry is really dynamic … there are new products getting launched every year in all the verticals we covered (telecom, consumer, industrial, automotive and it). These solutions are covered by new chips, which are part of the roadmap of all semiconductor companies. Technology is changing so fast that average selling price (ASP) of semiconductors drops rapidly. When semiconductors are launched, there is a lot of upfront investment in R&D and manufacturing, and costs are high. But once the product matures and sales grow, prices automatically drop. ASP changes and new applications such as an iPhone or digital clusters for two-wheelers are driving new demand. Finally, government regulations change dynamics of electronic equipment consumption. For instance, if Euro 5 pollution norms are implemented in India, all seven million two-wheelers (produced annually) in India will need electronic control units to regulate emission. This will add $15 (Rs 615) to the electronic bill of materials of each vehicle.
How much have these numbers changed in the last two reports and how did you capture these changes?
Rangachari: The first report was really comprehensive … just to give you a perspective, we met with 400 different entities across different segments to capture a wider picture. We spoke to production people to find our production levels, marketing guys to get a pulse on the latest trends, R&D guys for an insight into the latest technology and purchase guys for issues like electronic bill of materials. The first report was a roadmap for the industry, but it is such a dynamic industry that we had to issue a second updated version. It's a big challenge to get a feel of the right market size. There has been a huge drop in the ASP for mobile handsets. There are things we can monitor: one is the number of semiconductors that go into each of these products; that is close to what we had forecast in 2005. There has been a drop in revenue due to a decrease in ASP. And that is hard to predict.
Dr Mitra, TI was one of the first chip design companies to set up shop in India. Where do you see the semiconductor market going from here?
Mitra: The Indian market, for all of us participating in it, is truly a one-in-a-generation opportunity. It is not just the size of the market, but also the transition in electronics sector. When we came here we were alone, but over the last 22 years, a semiconductor ecosystem has truly been formed. While that ecosystem continues to strengthen, the seeds of an electronics ecosystem is being sown. The electronics ecosystem, of course, includes the semiconductor industry, but also incorporates manufacturing companies, industrial design houses and testing firms. Another notion this report seeks to dispel is that India is a purely low-cost market. This report shows there is a new class of consumers called Aspirers. We can't miss the fact that there is a wave coming.
How about demand in the domestic market and what have been the growth numbers there?
Keskar: The CAGR for the tam is 36 per cent and it clearly shows that the domestic market is growing faster than the global market, which is growing at 8-9 per cent. This is the highest growing region globally. There are growth drivers in each segment we covered; around 70 million mobile phones are consumed in India and 19-20 million handsets are made in India. To support this, you require investment in wireless infrastructure, like the $2-billion deal Airtel signed with Ericsson. Over five million desktops have been produced here and notebooks are growing thrice as fast as desktops.
Mr Janakiraman, will the recent influx of captives affect the fortunes of third-party chip design companies?
Janakiraman: I think it will only add to the growing ecosystem. Ten years ago, India was best known for its software industry and less for its semiconductor market. There was limited outsourcing happening in this field initially, but today no one is questioning whether semiconductor design can be done here. That itself is adding more traction to the industry, and when companies want to do this outsourcing, it's split between the two and complexity of work done by third parties is increasing. There are companies that have a policy of splitting work between captives and third parties. Bangalore has become a design hub, Hyderabad is a manufacturing centre and Chennai a node for electronics manufacturing.
Dr Mitra, I would like your view on this for one simple reason: You were perhaps the first to set up shop here in India. But given the fact there are sensitivities involved in IP-related work, are companies comfortable outsourcing work to third parties?
Mitra: I have a very strong and direct view on this: We have been here for 22 years and we've had zero IP-related issues in India. We rely heavily on partners and the focus on IP doesn't happen by chance. The focus is clearly on deep competency of your centres.
ISA has been very vocal on the semiconductor policy. Where do things stand today and are there issues the government needs to address?
Shenoy: Semiconductors have been the unseen heroes of the Indian electronics industry. The government has been extremely positive in accepting ISA's inputs for the semiconductor policy. What is needed is for them to release a set of guidelines for investors to take a call and make decisions. When we talk about investments, it's not only in chip manufacturing, but investments in a whole new ecosystem. This is something that we haven't seen until today. We're talking about things like solar fabs, we're talking about 5-6 entering the country in the next few years. We need a lot more infrastructure to be put in place. Investors aren't putting money in India for patriotic reasons, they want to see ROI (return on investment) and we need to give them a platform to make a comparison with other locations.
Mitra: Electronics manufacturing is something we need to focus on. There is a visible opportunity in this market. We are working with the government and OEMs (original equipment manufacturers) to tap this market.
Janakiraman: India is growing in complete product development, including areas such as mechanical design, power supply and plastics. Companies such as Tejas Networks and EMS companies like Flextronics will drive this next wave.
Do you think a fab will be a reality in India in the next five years?
Shenoy: I will say it won't be impossible.
Rangachari: We should have one by 2012.
Keskar: The first phase has to be electronic manufacturing in India and parallely domestic demand will lead to an ecosystem beginning with test and validation, and then leading to fab.
Janakiraman: I tend to agree with Sanjeev, the test and assembly and packaging will take off in the next two years. This will be a starting point. India will surely have a fab; we may want to attract one "queen bee" and take it forward.
Mitra: The next 20 years will see India emerge as a significant semiconductor market and we are clearly in the early stage of an electronics ecosystem in India.
Some people argue that Taiwan and China are so far ahead that India should focus on its inherent strengths in R&D. Is that an argument the industry here buys?
Keskar: India definitely has the potential to emerge as a manufacturing destination. We are late with this activity but we are going to quickly catch up. TAM growth rate has changed from 29 per cent to 36 per cent in 12 months.
Janakiraman: We are doing complex design-led work from India, so when semiconductor manufacturing happens from here, we could undertake it not for toys but highly complex products instead. So, the kind of manufacturing we get done could be of a different dimension. We may have actually started at the right end. Now, it's only money (in terms of investment) that is required to enter manufacturing in India.
While growth numbers may be impressive, are there enough engineers available to support this growth?
Rangachari: Manpower availability is going to be a challenge. This is something the government needs to address immediately and companies need to work around.
Janakiraman: It is getting increasingly difficult to hire good people on the ground. In the '93-'94 timeframe, when it began taking off, what solved the people crunch was private engineering colleges. Without them we could not have generated enough people. In semiconductors, finishing schools have been started in engineering colleges. (Companies) need to get embedded at an early stage so that the engineering colleges have the right curriculum, teaching staff and also encourage more such finishing schools. The issue is how many engineers are ready for employment in the semiconductor industry?
What are the specific initiatives being taken by ISA to solve these issues?
Shenoy: When we look at manpower it's at three levels-design, manufacturing and research. Our design talent comprises some of the best and brightest engineers from premier engineering institutes. What we need to address is building faculty to train engineers to guide the semiconductor industry today and tomorrow. Another emerging area is manufacturing and here we need a different set of skill sets related to automated processes and we require diploma holders and ITI graduates. A third emerging area, mooted by people like C.N.R. Rao, is the area of basic research, which we are just beginning to take note of. In the West, much of the research happens in university labs and India, too, needs to develop clusters nationwide to try and foster such an innovation culture.
Mitra: The fourth area I would like to add is sales and application. This pool is extremely small and as the market grows, we need to groom people and increase visibility and increase career options for them.
Janakiraman: From an ISA perspective, we believe talent is going to be an extremely important issue. In fact, our next executive council meeting will be dedicated to addressing talent-related issues.
Aside from talent, are there issues that can trip up the India Semiconductor story?
Keskar: The overall roadmap looks very exciting … infrastructure could be an issue, but it is unlikely to become a major roadblock.
Janakiraman: We aren't portraying a positive face about the progress we've made on infrastructure. In cities such as Kolkata, it's an order of magnitude change and we're not projecting this level of improvement. What we need to be worried about is increasing wage costs. If this continues, we may be outpriced by lower cost destinations such as Vietnam.
Mitra: I believe the focus in R&D needs to move from sheer numbers to the depth of skill and competence of engineers. While there is a huge market to be tapped, Indian companies have a lot of hard work ahead if they're to remain competitive. But there's no mistaking the opportunity.