Thanks to heightened consumer demands for electronics, mobile phones, television set-top boxes, auto infotainment...
Thanks to heightened consumer demands for electronics, mobile phones, television set-top boxes, auto infotainment and industrial electronics, the demand for semiconductors is expected to top the list of the import bill, very much closing on oil. It is expected that by 2020, the import of electronics is expected to exceed $400 billion— an astronomical figure!
Taking cognisance of this, the government of India rolled out its new National Policy of Electronics 2012 (NPE 2012), offering fiscal and infrastructure incentives. In addition, the government has also expressed preferential access to locally-manufactured electronic products. To attract domestic and global investments for the promotion of electronic system design and manufacturing (ESDM) sector, the government introduced a package of approximately $1.62 billion via its modified special incentive package scheme (M-SIPS). The packages include capex subsidy, reimbursement of excise/ countervailing duty, and reimbursement of central taxes to ESDM units. Though this scheme has elicited positive response from many multinationals for potential investments of about R5,000 crores, it still seems to be a long journey before we see significant results.
China is also exactly in the same position with ever widening supply-demand gap for semiconductors. China accounts for about 45% of the worldwide demand for chips with most of these are provided by firms such as Intel, Samsung, Freescale and Qualcomm. The consumer demand for hardware is also moving towards China, due in part to Lenovo’s acquisition of IBM’s PC and server divisions and Motorola Mobility from Google. With privatisation of semiconductor companies, and the various incentive schemes announced as part of State Council Rule 18 of the Tenth Five Year Plan in 2000, the China semiconductor industry has made tremendous strides over the last 10+years.
However, the supply-demand gap still persists in China. As per the recently released McKinsey report, there is a shift in policy
focus for semiconductor manufacturing in China from the traditional top down government mandated bureaucrat-led schemes to a more market oriented approach. The government funding plans and incentives with previous focus on research and academia have now shifted towards a decentralised provincial level investing entities for the creation of industry clusters.
Though similar thoughts including the setting up of 200 electronic manufacturing clusters have been documented in NPE 2012, it seems to be a long haul considering the slow speed with which these are happening in the country. On the other hand, a simple incentive scheme such as tax holidays for firms locating in software technology parks set up in 1991, has resulted in a $110 billion IT services industry in India. Similar disruption is happening in the new age start-up eco system in India. With absolutely no help from the government, start-ups in Bangalore, Delhi, Pune and other cities in the country have attracted a significant sum of about $1.26 billion from private equity and venture capital firms just in the first half of 2014!
One might argue that the entry barrier for IT services and the so called “app economy” related ventures in e-commerce and web services is very low; they do not require large scale initial investment; and the lead time for product fruition is often months, which is not the case in semiconductor and chip manufacturing. However, it is time that we think differently and leverage our strengths rather than complain on our weaknesses of not having the required infrastructure and support for hardware manufacturing.
One of the areas which we have completely missed out and not mentioned in NPE is fabless. Fabless on a broader term include chip and system design, branding and marketing while component manufacturing is normally outsourced. More than 25% of semiconductor firms in the world are fabless. Leading fabless companies include marquee names such as Qualcomm, Broadcom, and AMD, with companies such as MediaTek (Taiwan) and Spreadtrum (China) not far behind. In their just released book on “Fabless: The transformation of the semiconductor industry” the authors—Daniel Nenni and Paul McLellan argue that the future of global semiconductor industry is fabless for sustaining Moore’s law.
There are as many as 120 engineering R&D firms (ERD) firms in India who have been providing fabless semiconductor design and testing services and India is in the top five semiconductor design locations in the world. Though these firms have been providing outsourced design services for multinationals, they have the capability to design and create intellectual property (IP) for domestic consumption as well. However, this talent pool and capability has not been sufficiently leveraged, as seen by the fact that there are only a handful of Indian fabless companies (compare this with the 600 plus fabless companies in China). In the booming smartphone, tablet and digital cable TV markets, Indian brands have resorted to outsourcing product and hardware designs, and thereby much of the design and manufacturing of semiconductor products, to
For accelerating the development of the ESDM sector in India, there will need to be focus on all parts of the electronics products chain—product companies, system and hardware design companies, and (fabless) semiconductor companies. While foundries for chip fabrication and component manufacturing units in India as laid down in NPE 2012, will definitely complement our design and fabless capabilities, we should not once again miss the bus as new opportunities emerge.
India and China are in unique positions to complement the capabilities of fabless and manufacturing respectively. Given the unique consumer preferences, market conditions, governance structure, and the resultant chaos in India, can our design and fabless firms create Indian IP relevant to the local market, and which can then be taken to other parts of the world? Can we successfully innovate in the semiconductor products space as we have done in IT and telecom services?
Both the writers are professors at the International Institute of Information Technology, Bangalore