Our Special Correspondent

HYDERABAD: “India should learn to walk before trying to run with the big boys of the semiconductor industry”, Bryan Lewis, chief semiconductor analyst and vice-president, research, at global IT research and advisory firm Gartner Inc, warned on Sunday.

Attempts to set up the latest generation semiconductor chip manufacturing unit in India by companies other than giants like Intel and AMD could burn a deep hole in investors’ pockets, says Lewis, a veteran in the semiconductor industry. His observations come a day ahead of the annual jamboree of the India Semiconductor Association (ISA), which will be attended by Indian and multinational semiconductor players and potential investors who are talking upwards of $6 billion in investments in India on manufacturing facilities over the next few years. The conference is also significant as the industry awaits the fineprint of the National Semiconductor Policy (NSP), cleared by the Union Cabinet last month. The industry has asked for a host of sops, including a subsidy to the extent of 25% of the project, 26% equity participation by the government of India, and R&D grants up to a certain percentage of local value addition. While the extent of the freebies from the government is uncertain, an alternative for Indian companies would be to stick to the Chinese model where several small units costing just about $1 billion each based on older generation 0.5-0.18 micron technologies have been set up.

In India, there is talk of at least four consortia wanting to set up semiconductor fab projects all in the range of $3 billion each. These include SemIndia, NanoTech Silicon India, India Electronics Manufacturing Corporation (IEMC), and Hindustan Semiconductor Manufacturing Company (HSMC).

But it is not clear what kind of chips they will roll out though SemIndia, which is hoping to set up a $3 billion project in Hyderabad is said to be looking at 0.9 micron chips.

According to Lewis, while it is expensive to set up a 0.9 micron fabrication unit, these chips constitute just 10% of the market in the US, which is by far the only place to sell them across the world. Moreover, a $3 billion unit needs revenues upwards of $5 billion to be viable, he points out. Given the extreme competition in the chip market, that seems highly unlikely, he adds.

In fact, talk of capacity addition in India comes at a time when the market is expected to go through a slowdown in 2007. Going by the first quarter 2007 numbers so far, Gartner expects the year to end with a growth rate of just 5% plus compared to the earlier projection of 9% at $283 billion. The chip market grew at 10.4% in 2006, with total sales of $260 billion.

More worrisome is that 2009, which is the time when the expected capacities in India will be ready to roll out, is projected to be a negative year for the global chip market with a fall of 1%. There is fear of overcapacity looming large over the industry, Lewis said. “The market is clearly slowing.”

Technology integration, where three chips are going into one, and consolidation in the industry for scale, operations and marketing, are driving down chip prices globally while there are fears that inventories are building up with customers and distributors.

Enumerating a strategy for India, the Gartner analyst felt India should continue with the development of intellectual property while graduating to second generation system-on-a-chip technology (2G SOC). It should also develop a design and manufacturing infrastructure ecosystem by utilising older manufacturing processes to set up local fabs to target sectors like industrial and consumer electronics, automotive and military development.

“Most importantly, it should say no to state-of-the-art fabs of 0.90 microns and lower for at least another five years”, he reiterated.