JPMorgan report on chip manufacturing
Chip design is also an opportunity: India clearly has
an opportunity to build an eco-system that can lead it to the same path as Taiwan,
a powerhouse in chip design. India already has a very large and growing pool
of experienced IC design engineers, and hundreds of expat engineers are returning
to India every year (like Taiwan in the 80s). The investment in eco-system can
start at the grassroots level with a modification of education to make it targeted
more at problem solving and creativity, and continue with infrastructure and
financial support for R&D centers that focus on enabling technologies of
Indias semiconductor manufacturing: Too latejust
dont bother The Indian government is drafting a semiconductor policy,
which is likely to be manufacturer-friendly, following the trend of many Asian
countries. The chip manufacturing unit requires all sorts of infrastructure
including basic things such as uninterrupted water and power supply in addition
to the land provided at attractive rates by the government. The policy has seen
delays due to a standoff between the finance and IT ministries on the issue
of the fiscal incentive package for investors setting up fabrication units.
The finance ministry had suggested that investors could choose a mix of incentives
(equity participation, interest subsidy, tax exemption, duty reduction) for
setting up their project, with the overall cost of incentives restricted to
20-25 percent of the total capital expenditure on the project. This policy and
incentives are still under review by the ministries.
In order to attract foreign and domestic investors, the Indian
government is also encouraging Electronic Hardware Technology Parks (EHTP) to
foster electronics manufacturing in the country. Some of the benefits of the
- Foreign equity is permissible up to 100 percent.
- No duties are levied on the import of capital goods,
raw materials and components.
- Access to the Indian domestic market is allowed
up to 50 percent of the free-on-board value exports.
- An EHTP unit can be set up for both software and
hardware operations in an integrated manner.
Anyone starting an IC fabrication facility in India will first face the dilemma
of choosing a technology level. If the fabrication is of mature technologyit
will be in direct competition with the large capacities built-up by China and
other countries that are themselves struggling for profitability. Profitability
in such a scenario is almost unachievable. On the other hand, building a state
of the art fab requires, other than financial and physical resources; access
to technology, skilled manpower with experience on foundry process, and customers
willingness to devote resources to switch over to a new entrant. In either scenario,
the possibility of success is minimal.
According to a recent news story, the government is planning to revise the draft
Fab policy to extend fiscal incentives to other technology products such as
LCDs, OLED, plasma panel displays, storage devices and solar cells. This is
a favourable approach compared to just focusing on semiconductors as it provides
incentives to a larger array of manufacturing and assembly options within the
technology industry rather than restricting it to the capital intensive semiconductor
IC assembly, packaging and test, challenging, but a viable
option than front-end manufacturing: IC assembly involves a different and
lower order of complexity than what is required in front end wafer processing.
IC assembly is functionally separate from the other stages of production even
when performed in close proximity to fabrication. With final testing the finished
chips can be shipped directly to customersa large part of which are in
IC assembly business dominated by a few players: The
four dominant players in IC assembly space are ASE, SPIL, Amkor and STATS ChipPac.
These companies have built up significant technological leadership in the advanced
packaging/testing capacities and the high initial investment required is a natural
barrier to new entrants. Advanced packaging already forms close to 70 percent
of the packaging market from revenue stand point.
Turnaround after disastrous 2001-02: Following disastrous
performance in 2001-02 time-frame, the industry has seen some consolidation.
Unlike the foundry sector, with cautious capital expenditure, the industry has
restricted capacity addition in recent years, which has turned out to be good
for the industry as a whole.
Location and technology: Indian backend companies
would need to develop strong packaging and test capabilities along with capabilities
of direct shipment to end customers. Local IC assembly operations could come
up adjacent to hubs of electronics contract manufacturing industry. Initially,
in the absence of foundries, Indian houses could partner with packaging houses
from Taiwan, Singapore or Malaysia for technological knowledge, especially on
advanced packaging techniques.
Raw material supply security: Another important factor in
the packaging industry is securing supply of substrate and raw material that
will help reduce manufacturing costs and maintain profitability. Big companies
such as ASE and SPIL have managed to secure substrate supplies. The absence
of any sort of ecosystem is likely to be a problem area for Indian backend companies,
as they will have to import most of the raw materials.
Niche plays may be viable, new technology and R&D
costs could be prohibitive:There are many small backend companies in Asia
that are just about profitable. The key for these companies has been focus on
specific, growing market opportunities, such as memory and display drivers and
establishing long-term contractual relationships with key potential clients.
This is exactly what any start-up in this sector will have to do to generate
profits and have some sort of buffer against the cyclical nature of the industry.
A start-up would need to spend significant amount of resources to enter the
advanced packaging market, which forms over 70 percent of the total packaging
market. Moreover, the top four dominant players enjoy a considerable lead in
advanced packaging, so even intensive R&D cannot guarantee commercial competitiveness
and profitability. Hence we believe that smaller players would have to target
the niche market to be profitable.
IC design is a better option than IC manufacturing in
should focus on opportunities that require less monetary investment but more
human capital. The semiconductor design process is skill intensive, and requires
only Electronic Design Automation (EDA) software. Fabrication, on the other
hand, needs a huge fixed investment (of the order of $3 billion) to build and
operate a fabrication plant that holds a wide variety of expensive equipment
and that meets extreme requirements of cleanliness. Assembly and test also requires
expensive equipment, but the overall costs of plant and equipment are much lower
than for the fab, as are the average skill requirements. Overall, worker skill
requirements go down along the value chain and upfront investment costs are
highest for manufacturing.
Reason why India can be a favoured destination
India has certain advantages over China, including superior technical education,
high number of English-speakers and IP protection laws and belief boosted by
the successful Indian software sector. The fact that India has no chip foundries
should not matter as much since most big companies are used to designing in
the US for foundries in Taiwan. Some of the design companies value the opportunity
to design on a 24-hour cycle because of the pressure to reach the market ahead
IC Design is already picking up in India
According to iSuppli, Indias design services industry grew from revenue
of $511 million in 2004 to $623 million in 2005. India has about 125 companies
doing design, including multinationals, domestic companies such as Wipro and
Sasken, and a handful of Silicon Valley startups with Indian R&D centers.
In 2005, giant multinationals like TI, Intel, Cypress, Infineon, and STMicroelectronics
comprise about 70 percent of the total semiconductor design industry in India
and about 30 percent was produced by homegrown companies.
In 1985, Texas Istruments became the first multinationals to open a design center
in India, to work on its design automation software for internal use. TIs
India center designs at 90nm and has begun doing 65nm and also designs for DSP
devices, the companys flagship product line. TI India has been awarded
the highest number of patents (225) for any R & D center in India.
Wipros VLSI team has evolved from job shop to full design services, with
1,400 engineers, including more than 840 IC designers. It began to win business
in ASICs and SOCs five years ago and in the last two years has taped out 125
designs in automotive, consumer, industrial and other segments. About 25 percent
were 130nm and 10 percent were 90nm. It recently taped out its first 65-nm design.
STMicroelectronics India design center was established in 1992. Among
the multinationals, it has one of the largest staffs: 1,650, mostly in Greater
Noida, with 50 in Bangalore. About two-thirds work on hardware design.
Intel Indias Bangalore operations include the Intel India Design Center
and sales and marketing operations. Intel India employs over 2,500 people and
more than half are design engineers.
Investment should also be targeted at the grassroots level,
Quality education is key to employment generation
From the point of view of employment generation and environment friendliness,
the IC Design industry is a much better choice than IC manufacturing. There
is high demand for experienced engineers in the VLSI sector, and the demand
will only grow as multinationals source more designs from India.
One challenge is the supply/demand gap for qualified professionals, despite
a strong education network in India. The quality of engineering education plays
a key role in creating interest for large multinational companies and developing
a local IC design industry. Japan, Korea, and Taiwan score well in this area
due to the existence of large number of good quality colleges. Taiwan and Japan
have most likely moved closer to Western style education (focus on problem solving
and creativity rather than information reproduction). While India has some great
institutions, average quality is not good enough. Instead of wasting money on
subsidies for $30mn a piece of lithography equipment, India can spend the same
money on higher education and that includes incentives for attracting the worlds
top universities to open campuses in India.
TI, STMicroelectronics and most other large multinationals are already engaged
in university programs to help build design expertise in India. TI India, for
example, has a University Relations program under which it works with several
Indian universities and has helped to establish many DSP labs which train more
than 1,500 students in graduation and post-graduation studies every year.
||IC Assembly and test
||Very high skill level required.
||Mix of very specialised and difficult to find process
skills and relatively moderate skill level to operate the equipment.
||Mix of relatively specialised packaging technology
skills and quite moderate skill level to operate the equipment.
||Low. Requires expensive EDA tools. License may be
per design engineer.
||Very high. Plant, equipment and land all push the
fixed cost to order of $3bn for a fab.
||High. Plant and equipment costs are not as high as
that of a fab.