Fab Dreams

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Around the same time last year, Gartner Research chief analyst Bryan Lewis had re-ignited the IT industry’s age-old debate on whether India can join the foundry club, when he proclaimed, “Investing in fab plants in India does not make economic sense.” His rationale was that the world would see an excess capacity of fabs by 2009 and India would do better to focus on its strengths—design and software that goes into chips, rather than compete against those who had better economies of scale.

The same question is popping up once again, as companies like Reliance, Moser Baer and Videocon Industries unveil plans to invest about Rs 65,000 crore in chip manufacturing. Most thought India had missed the bus when Intel decided to put off its plans to set up a plant in India to manufacture, assemble and test silicon processors. Instead, it went to China with a $2.5-billion fabrication facility. Ironically, it had sought a $50-million upfront subsidy from the government. The much-talked about chip manufacturing forays of

SEMIndia or Hindustan Semiconductor Manufacturing Corp’s seem nowhere near completion. Stung by the setback, the government framed a special incentive package scheme last year for semiconductor manufacturing—following the trend of many Asian countries—offering a capital subsidy to investors setting up chip manufacturing units. The recent investment proposals are an outcome of that.

While industry is enthused about its chances of finding the missing link—manufacturing—in the semiconductor ecosystem, it continues to tow a cautious line. Manufacturing chips is a different game altogether, which requires different skill-sets and a different business environment, insiders feel.

For one, such industries are highly capital intensive and have to deal with constantly changing technologies. Secondly, a fab 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. Certainly, none of the state governments could boast of meeting these infrastructure needs.

Several questions thus arise. Is it really viable to set up fabs in India? Aren’t we a bit too late and have already missed the opportunity? Even if it commences, won’t manufacturing be restricted to lower-end? Can’t the demands of the semiconductor industry—projected to grow to $40 billion by 2016—be met from imports? In a nutshell, what could be the best semiconductor strategy for India under the prevailing circumstances?