Information Technology

October 5, 2006
Electronic Manufacturing? Destination India

Runa Mukherjee

NEW DELHI -- A report by ISA and Frost and Sullivan that focuses on analysing the potential of the Indian semiconductor market with application segments and product categories has been published recently. The markets researched are consumer electronics and durables; telecom, IT hardware; industrial, automotive and strategic electronics. The report analyses the impact of semiconductor technology-driven industries on the Indian economy. This impact will demonstrate the contribution of the semiconductor industry on GDP and employment generated in related and support industries.

Convergence Plus spoke with Vidya Mulky, research consultant, Indian Semiconductor Association on the trends of the semiconductor industry. Some excerpts:

Convergence Plus: Does India have the ability to become a competitive electronic manufacturing location?

Vidya Mulky: The ISA-Frost and Sullivan Reports 2006 states that the electronics industry drives the demand for semiconductors in various application segments as detailed below:

• Major end user segments are communications, IT and consumer electronics. Together, the important product sub-categories that would drive the semiconductor market in India are mobile handsets, wireless equipment, especially BTS equipment, which is gaining momentum, set-top boxes, and smartcard terminals;
• In the communications segment, mobile handset is a large market offering high volume growth potential. Within the wireless equipment sub-segment of communications, BTS equipment is gaining momentum;
• In the consumer electronics segment, there is a large market for set-top boxes in India.Another high growth potential market is the smartcard terminal. This has, so far, been dominated by large MNCs;
• In IT, a major sub-segment is desktop computers. This is a large segment of opportunity for semiconductors today, especially microprocessors and memory modules, and will continue to be a large segment even in 2015. Motherboards are a major sub-segment category that is imported; these come assembled with some of the components. Processors and memory, which account for almost 50 percent of the total cost of components on a motherboard, are purchased in India. This sourcing strategy is followed in India due to the different duty structure for plain PCBs, and PCBs populated with components.

CP: What ails the growth of electronic components’ manufacturing in India?

VM: India lacks a strong manufacturing base for either silicon or electronic products. Though the country has made significant progress in this field as an end market as well as in designs, it still does not have a chip manufacturing facility.

The Indian silicon market has grown by leaps and bounds in the last decade, and constitutes just one percent of the global market. According to the ISA-Frost and Sullivan report, this figure will reach six percent in 2015. The country’s proximity to the high growth Asian market will fuel world leaders’ interest in India. With the country’s handset market reaching 55 million units last year and expected to reach 100 million in 2008, major companies such as Nokia, Motorola, Dell, etc. are investing in manufacturing facilities in India as well as designing products for the Indian market.

India is being perceived as a cost-sensitive and quality-conscious market. This is changing. With GDP growth, an increasing population of middle class, and the availability of gadgets employing latest technologies, the average Indian today opts for the latest that technology can offer.

The world can no longer ignore India as a destination for producing electronic products or for sourcing designs. This country will be equally known for its silicon design capability in a matter of five years, much in the same way that the country is known for its software development abilities.

CP:What factors would drive the growth of electronic manufacturing in India?

VM: Given the strong interlinking between the electronics and the semiconductor industry, the expected demand for electronics industry is a strong indicator of the potential demand for semiconductors in the country.

The demand for electronics products in the country is expected to touch US $155 billion by the year 2015, which in turn would result in domestic demand for semiconductors to reach US $36 billion by the same time.

Globally, the electronics manufacturing industry is US $1300 billion today and is growing at a rate of about six percent. By cultivating the domestic semiconductor manufacturing industry, India has the potential to cater to not only its domestic market but also participate in the large global electronics market and thus create a domestic semiconductor and electronics manufacturing industry in the country of well over US $100 billion in the next 10 years. This reflects the enormous opportunities it can create for the economy in terms of infrastructure development and creation of technology talent in the country.

The latest step for supporting the opening of the electronics sector for global players was the signature of the information technology agreement (ITA-1) of the WTO, which came into force in April 2005. Since then the “Zero Customs Duty” principle applies for all electronic components. This represents a great opportunity as well as a challenge to domestic and foreign manufacturers.

Fiscal, investment and trade policies for the electronics sector have also been liberalised. All components, raw materials and capital goods are freely importable. Sector specific schemes have been introduced to attract foreign investment and provide a duty free environment for export of electronic hardware and software under the export oriented schemes.

CP: Has the era of hi-tech manufacturing begun in India?

VM: With the strengthening trend of IC design activity moving to India, country is already seen as the top choice for complex IC design, with most top multinationals present in the country and several home grown design service and product start-ups on the horizon.

As the semiconductor world transitions to 90/65 nanometer process technologies, semiconductor manufacturing and IC design are becoming increasingly interdependent as neither activity can be carried out without in-depth knowledge of the other.

Coupled with this is the fact that embedded software forms a significant part in the design of today’s system-on-chips, where India is already seen as a leader.

In the new paradigm of strong interdependence of IC design, semiconductor manufacturing and embedded software capability, India is uniquely positioned to become one of the most ideal destinations in many ways for the future of semiconductor manufacturing but for the serious infrastructure related challenges.

Geo-political factors also favor India as an alternate destination to minimise the risks associated with semiconductor manufacturing which has recently been getting concentrated in China and East Asian countries.

CP: What steps do we need to take to put India on the right path to success in the electronics industry?

VM: In order to attract foreign and domestic investors, the Indian government is encouraging Electronic Hardware Technology Parks (EHTP) to foster electronics manufacturing in the country. Some of the benefits of the EHTPs are:

• Foreign equity is permissible up to 100 percent;
• No duties are levied on the import of capital goods, raw materials and components;
• Access to Indian domestic market is allowed up to 50 percent of the free-on-board value

exports;

• An EHTP unit can be set up for software and hardware operations in an integrated manner.

The government has also reduced taxes. For the fiscal years 2005-2006, the effective corporate income tax rate for domestic companies has been cut from 35% to 30%. In the fiscal year 1994-1995 the tax rate for domestic companies had still been 40 percent and 55 percent for foreign companies. Today companies incorporated in India, even with 100 percent foreign ownership, can be considered as domestic companies under India's laws.

According to the Tenth Five Year Plan, the cumulative investment requirement during 2001-02 to 2005-06 has been estimated at US $156 billion. Of this, 40 percent is required in the power sector, 11 percent in telecom and around 14 percent in roads and railways. With US $38 billion already invested between 2001-02 and 2002-03, there exists a target of US $118 billion to be met over the next three years. All the infrastructure sectors need sufficient funds for expansion and maintenance of existing facilities. To address this need as well as improve efficiency, a number of policy measures have been initiated recently. In order to create an adequate provision of various public goods, the Government has changed its role from direct producer of public goods and focuses on facilitating and encouraging public-private partnership, including Foreign Direct Investment.

The increase in demand of the software content of electronic devices has led to an increase in the volume of embedded software activity globally. The presence of a large cost-effective engineering workforce in India is expected to encourage global participants to choose India as the destination of such activity. The pressures placed on companies to emerge successfully from a skills shortage is high at present and will only increase with time.

The challenge could reduce in the coming few years through government initiatives, better collaboration between industry and academia, higher participation of experienced professionals in training activities and greater flexibility in recruitment policies of companies.

EDA companies (both product and service) are the starting block for the VLSI and hardware/ board design market. They are one of the most important links in the semiconductor value chain. EDA companies have taken the lead in developing engineering human resource for the industry in India.

CP: Is development of smart chips with embedded software the way ahead?

VM: According to the ISA-Frost and Sullivan Reports 2006, the increase in embedded software content in end- user products has led to increase in embedded software development. This factor is expected to impact the Indian embedded software industry positively.

The total revenue from the embedded software industry has been estimated at $2.5 billion in 2005. It is expected to reach US $36.3 billion in 2015 at a CAGR of 30.5 percentage over the period 2005 to 2015.

The contribution of the embedded software market to the total revenues of the design market is also expected to increase from the current 78 percent in 2005 to 82 percent in 2010 and 84 percent in 2015.

The number of engineers in the embedded software space is estimated to be around 60,220 in 2005. The estimated engineering workforce required in achieving the forecast revenue in 2010 and 2015 is 241,000 and 669,885, respectively.

It is expected that the development of VLSI design industry, hardware/board design industry and embedded software development in India would be imminent in the near future. In the period 2001 to 2005, it involved only support work and sustenance engineering. Currently, embedded software development service offering is limited to activities such as various components of embedded software such as BIOS, API development and DSP programming.

The ISA-Frost and Sullivan Reports 2006 state, it is expected that during the forecast period (2005-2015), activities such as element management, chip/board diagnostics, codecs, and device drivers would be outsourced to the service companies in India.

It is expected that the embedded software development companies will increase their volume of business in the area of telecommunications, automotive electronics, consumer and medical electronics. Globally, these markets are growing rapidly and this trend is expected to drive the Indian embedded software development market.

With non-computing equipment such as cell phones and other hand-held devices expected to grow rapidly, India is likely to emerge as a hub for the embedded software market.