It is a growing fear which, although spoken in hushed whispers, elicits extreme reactions. The fear is whether the $4.6 billion Indian semiconductor design industry?estimated to reach $43 billion by 2015?runs the risk of commoditisation.

Will design companies begin to emulate and copy products of each other and bring down the value and, thus margins? Won?t venture capitalists find it unattractive to invest in a fast growing breed of design start-ups?projected to rise from 710 in 2006 to 3,248 in 2015? Above all, won?t India lose the advantage in the global semiconductor ecosystem to peer countries such as China, Czech Republic, Taiwan and the USA?

While some dismiss the threat of commoditisation in the Indian semiconductor industry as unrealistic and overestimated if at all, others are candid enough to admit that the threat is real and can simply not be wished away.

?An overwhelming number of new players are entering the Indian semiconductor design space. Entry barriers for these players are significantly reduced. Anyone who has an idea of design is entering the fray. So, commoditisation will happen in the design space, and it will push the cost of semiconductor products down,? says Vivek Sharma, director?design centres, STmicroelectronics India. Not all the design start-ups will survive here, he insists.

With the dollar weakening and rising salaries of the engineering workforce, there will be pressure on these companies to remain cost-effective. They will build up their operations to a certain level and then, look for an acquisition. So, commoditisation and consolidation of the industry will happen, point out industry sources.

At the same time, Sharma says commoditisation will not happen in the manufacturing segment. ?One, it is yet to commence on a large scale in India and two, it is a risky business segment and very few players are present in it,? he says.

Clearly, in the realm of a high technology era, a start-up has to bring differentiated value or it will not survive. For that matter, even venture capitalists will find it unattractive to invest in unless there is added value in the product being offered, says Pradip Dutta, managing director, Synopsys (India).

But, in which category of semiconductor products, is the threat of commoditisation the most? Quick comes the reply from one and all?discretes and memories. ?These products are a commodity. Analog and microprocessors will continue to be application specific and differentiated with innovative architecture,? says Srini Rajam, chairman and CEO of Bangalore-based Ittiam Systems. According to him, the Indian semiconductor design industry could not risk commoditisation by investing in market understanding, better product definitions and innovative designs that create quantum jumps in performance at affordable price points.

With manufacturing yet to kick-start, the semiconductor industry is restricted to design comprising VLSI design, board design and embedded software. The design companies are spread across Bangalore, national capital region, Hyderabad, Chennai, Pune, Ahmedabad and Goa. When measured by revenue as the yardstick, nine out of the top 10 fabless companies and 22 of the top 25 semiconductor companies are present here. These include Qualcomm, Broadcom, nVidia, LSI Logic, STMicroelectronics, Freescale Semiconductor, Infineon Technologies, among others.

In the Indian semiconductor design industry, majority of the work happening is fairly high-end?logic, microprocessor and analog.

?So, commoditisation would potentially be felt in memory and discretes. We could see high-end design and potentially manufacturing for semiconductors in India continuing to grow while leaving lower-end commoditised products being imported since they would add less value,? says Huzefa Cutlerywala, director, marketing operations,Open-Silicon Inc.

Semiconductor design majors are quick to point out that the markets of peer countries like China, Israel and Taiwan are very different and have evolved in a very different way. India resembles Israel more closely on the design side than China or Taiwan. While China and Taiwan have grown into the semiconductor design space by way of excellence in manufacturing, Israel has held its own because of design and innovation and has been unable to make giant strides on the manufacturing front.

India is unique in that, like Israel it has high-end design capabilities, but like China it has a large local consumption of the silicon, too. ?If we focus on high-end designs being done in India for consumption in India, we need not fear commoditisation in a negative sense,? explains Cutlerywala.

He adds, ?in the semiconductor space, copying the work of an established semiconductor company does not easily lead to success. The smaller companies may create products in the same market space as market leaders, but they have to innovate to provide value-for-money silicon – innovate to reduce cost, improve performance, decrease power etc. At high-end, the different products that would lead to this commoditisation would be created as a result of innovation.?

Herein lie the opportunities for Indian design start-ups. Chip design is only one part of the many important functions that must be executed very well to have a successful semiconductor product business. Those include product identification, definition, marketing, application engineering and sustainable roadmap, in addition to process technology.

?Smaller companies will have to find a niche and offer highly differentiated products to succeed against the large, established companies,? says Rajam. He adds, ?What we will see is more consolidation of players than commoditisation of product offerings. There is explosive growth in electronics, but it has tremendous diversity that demands application specific solutions.?

The increasingly consumer-driven semiconductor industry is characterised by its dynamic and ever-changing supply chain landscape.

It is very important for the industry participants to step back and notice the gradual shifts and learn. There are business model challenges that need to be addressed, innovation gaps to be filled, competitive landscapes to be improved, all leading perhaps, to continued industry consolidation. A competitive, yet stable, supply chain is critical to the industry?s graceful aging as its maturation process continues.

The fabless industry in China is also still in its nascent stages, and so nimble Indian design shops do have an opportunity?especially, if they find a way to tap local demand while fending off the global competition.

?It?s a tall order but India has the brainpower to pull it off,? hopes Cutlerywala.