Analysis: Demise of India's IC manufacturing dreams

India's chip manufacturing dreams appear to be doomed as SemIndia's $3 billion-fab project is likely to die a premature death as will another fab planned by India Electronics Manufacturing Corp. (IEMC). In addition, Korean investor June Min's plan to set up India's first fab in Hyderabad has been abandoned in favor of making photovoltaic products.

India had made major strides in the last year, announcing a chip manufacturing policy. The incentive policy was intended to help launch state-of-the-art fabs in the country over the next few years.

But the high expectations here for a domestic chip industry have faded as financial realities reemerge. Both SemIndia's fab, which would use technology from Advanced Micro Devices, and IEMC's fab with partner Infineon Technologies, appear to be dead in the water.

Venture capital firm Sandalwood Partners, Wall Street fund Empire Capital Partners and contract electronics manufacturer Flextronics, which together have pumped more than $30 million into the SemIndia venture, are uncertain about SemIndia's fab strategy, according to sources close to the project.

"There are many uncertainties in the Indian context," said one industry source. "In particular, since the semiconductor industry is a very dynamic and cyclic—with periodic downturns and a highly intensive capital industry—it becomes imperative that any company involved in this area has to be able to manage its investments, capacity allocation, new factories and phasing out of the old technologies in a shorter timeframe.

"This is crucial to the survival and growth of the semi industry. It is not clear that it is yet possible to manage this dynamics in India," the industry source added.

Shifting gears
Despite the uncertainty, SemIndia's Systems unit is emerging as the company's flagship, and its manufacturing capability has bolstered the company's financial performance. Similarly, IEMC outlined revised plans focusing on the photovoltaic market where CEO Rajendra Singh is an expert.

The $25-billion conglomerate Reliance or other deep- pocketed suitors may also be considering a buyout of ailing chip makers like AMD, say industry observers.

Its investors have a simple strategy for SemIndia: From the start, grow SemIndia Systems into a profitable venture. It is the first Indian manufacturer to ship over 1 million ADSL2+ broadband modems in its first year of production. Annual revenues surpassed $25 million in 2007, and its run rate for 2008 is an estimated $80 million.

The Indian manufacturer has overtaken established companies such as D-Link, Huawei, ZTE and other Chinese companies that have long supplied Indian companies.

SemIndia Systems has also recorded substantial growth in less than two years, and investors are forecasting as much as 50-fold growth within the next three to four years if it sticks with back-end manufacturing rather than chip making.

"It is precisely because of this that SemIndia is attracting the attention of many funding institutions, and is likely to announce a substantial additional funding from a handful of U.S. VCs and Wall Street funds," a source said.

New plans
India's electronics market is expected to reach $363 billion by 2015, and domestic demand for semiconductors alone is forecast to reach $36 billion, according to market researcher Frost & Sullivan.

"Sometimes when you are too close to the project you are not able to see where you are going," said one investor. "That was precisely the case with the SemIndia project. Now, we have realized that we were wrong, and to straighten things out we are requesting for the company to change the business model."

IEMC executives have also shelved its fab plans. "We are not planning to set up a fab in India for the time being. We have other plans," said an IEMC executive who asked not to be named.

A key reason is soaring fab costs. The $3-billion investment which SemIndia envisaged in October 2005 now stands at $7 billion. And the question now is, why spend $7 billion when a company could buy an existing chipmaker for the same amount?

According to industry analyst Y. Shashidar, "India has to take smaller steps and move in a right direction. If Indian companies can buyout fabs, they should check out the technology and see whether their business plans could integrate" a fab.

Industry analysts also blame the Indian government's delayed and murky chip policy for the failure to launch a fab here. Policy makers were offering a special incentive package scheme to encourage fab investments, including a 25-percent subsidy on capital expenditures for manufacturing outside special economic zones and 20 percent inside these zones. "However, the form in which the government will provide this subsidy is unclear," financial advisor Deloitte concluded in an internal note on semiconductor investments in India.

Industry experts also wonder what an India chipmaker could offer the global market that Chinese manufacturers can't. With Intel Corp. planning a 65nm fab in China, most observers here agree with an IEMC executive who said India's "big fab story is truly dead."

- Sufia Tippu
EE Times