Global Semiconductor Companies Turn to India for GrowthPublished: December 16, 2010 in India Knowledge@Wharton
Twenty-five years ago, Texas Instruments (TI) spotted India's rich talent pool and became the first multinational technology firm to establish a research and development center in India. The operation started small, creating software to automate chip design, but has grown to become the company's largest R&D center outside the United States, designing chips end-to-end.
In recent years, TI has looked to India with new eyes -- as a market for its products. It has opened several sales and support offices, even in such smaller cities as Nashik (in Maharashtra) and Coimbatore (in Tamil Nadu). "We see India as a big growth market," says Biswadip (Bobby) Mitra, president and managing director, TI India. "It has important top management attention, and we are betting big on it."
Over the years, global chipmakers including Intel, Qualcomm, Broadcom and NXP, and electronic design automation firms such as Cadence Design Systems and Synopsys have established a strong R&D presence in India. They, too, now see India as a market.
A June 2010 study by the India Semiconductor Association (ISA) and research and consulting firm Frost & Sullivan explains why. Last year was among the global semiconductor industry's worst. Amid tightening belts and uncertainty about future demand, the global semiconductor market shrank 11%, from US$259 billion to US$230 billion. During the same period, the Indian market grew by 15.6%. The global market was expected to recover by more than 22% this year, with India remaining in the forefront. "India is one of the fastest-growing semiconductor markets globally," says Poornima Shenoy, ISA president.
Of course, this growth comes from a small base. Sales in 2008 in the Indian semiconductor market totaled just US$4.66 billion. Even now, at an estimated US$6.38 billion, India's share in the global semiconductor market is minuscule. But India's huge potential excites semiconductor players. "Very few regions in the world are growing at this pace," says Rahul Arya, marketing director, Cadence Design Systems (India). "So although the current market size is small, we have to be here from a strategic perspective to understand the market and build relationships."
Electronics at the Core
Technology infrastructure, semiconductor players point out, is central for any country to transition from an emerging to a developed economy. Electronics is core to technology infrastructure, and semiconductors are a key component of electronics products. "With India poised for the transition from an emerging to an emerged economy, electronics, and therefore semiconductors, will necessarily play a vital role," says Mitra, who is ISA's chairman.
Neeraj Paliwal, vice president and country manager, NXP Semiconductors India, points out that 10 years ago, China's consumption of semiconductors was around 5% of global production. Today, it is close to 20%. For most global semiconductor companies, he says, China accounts for a fifth of revenue. "We expect semiconductor consumption in India also to explode in the next decade," Paliwal says.
Sanjeev Keskar, managing director, sales, at PMC-Sierra India, notes: "A lot of the local demand for electronics in India is currently being catered to by imports. As the demand for electronics products grows, many global players, both original equipment manufacturers (OEMs) and electronics manufacturing services (EMS) firms will look at manufacturing within India itself. This will automatically lead to an increased market for semiconductors."
According to ISA, electronics sales in India, which totaled US$40.7 billion in 2009, will increase to US$58.4 billion in 2011 and US$400 billion by 2020. At present, local manufacturing accounts for about 40% of consumption and could increase to 80% by 2020. Indeed, many global OEMs and EMS firms, including Samsung, LG, Nokia, Toyota, Hyundai, Flextronics, Jabil, Foxconn, Sanmina, Elcoteq and Celestica, have set up manufacturing facilities in India in recent years.
Companies across sectors realize that India's vibrant domestic market has unique needs by way of both cost and features, ISA's Shenoy says. "We are slowly seeing products made specifically for India, in India." Juzer Vasi, professor at the Indian Institute of Technology, Bombay, adds: "There is a lot of innovation that we can do from India in hardware and embedded software. We have strong capabilities in these and we can leverage it to the fullest if we have the manufacturing also done here."
Riding on the domestic demand, key drivers for the semiconductor market in India include telecom infrastructure equipment, wireless handsets, notebooks and other IT and office automation products, set-top boxes and smart cards. ISA expects semiconductor consumption related to telecom infrastructure in India to grow by 132% from 2009 to 2011. Consumption related to smart cards is expected to grow by 50%. Growth sectors including health care equipment, automotive, consumer goods and industrial goods -- all of which increasingly use electronics -- are also expected to boost semiconductor consumption in India.
Deepa Doraiswamy, South Asia and Middle East industry manager at Frost & Sullivan, lists the semiconductor products expected to be most in demand: memory, driven by intelligent consumer electronic appliances, telecom infrastructure equipment and higher-capacity add-on cards in imaging products; application-specific standard products driven by system-on-chip solutions for mobile handsets, LCD TVs and LCD monitors; and microprocessors driven by wireless handsets and telecom equipment.
It is critical that semiconductor firms make their capabilities known to OEMs seeking partners for their products. Because of India's strong capabilities in electronics system design, many global OEMs have set up captive design centers in India. These include networking OEMs such as Cisco, Juniper, Alcatel and Ericsson; automotive OEMs including Delphi, Continental and Bosch; and industrial OEMs such as Honeywell, General Electric and ABB. The OEMs also work closely with Indian services firms such as Wipro Technologies and MindTree, which have R&D capabilities.
Over the years, the captive centers of both the OEMs and their outsourced service providers have honed their expertise, moving up the value chain to take a greater role in product creation. So while product manufacturing may occur elsewhere, much of the activity around embedded software and hardware and product development is generated by teams in India. Now, with companies increasingly looking at a "made for India" strategy, through which product cost comes down without compromising quality, more work around product design and specifications is expected to occur in India.
"Most of the semiconductor selection decisions for their next products are now happening out of India, and if the OEMs or the third-party service providers are not aware of our road map we will lose the opportunity to partner with them," says Keskar, of PMC-Sierra. "Therefore it is critical for semiconductor companies to have a strong presence in India." Mitra, of Texas Instruments, says, "We need to be close to our customers from the design stage itself so that we can co-innovate with them, and in India we are in fact working on applications that have not existed before." Citing the example of energy meters, Mitra says, "In India these need to be tamper-proof, so now we are looking at whether we can include that particular requirement when we are creating a chip that goes into an energy meter."
Mitra adds that India has some 2,000 small but innovative electronic system design companies working on products such as ultrasound, X-ray machines, LED systems, uninterruptible power supply and inverters. "So naturally the demand for semiconductors is growing," he says.
Their biggest challenge, semiconductor players say, is to reduce time to market for their customers. Earlier semiconductor companies would simply provide a silicon sample and technical specifications and leave it to the customer's R&D team to develop a product around it. Now, with every OEM wanting to be the first in the market with the latest technology, semiconductor firms must give their customers a reference design that is nearly production-ready. "This, in turn, means that having strong technical support teams in India is becoming crucial," explains Keskar. "We are willing to make the necessary investments to tap into this market." Echoes NXP's Paliwal: "Investment will not be a constraint."
Arya, of Cadence, sees India also as a gateway to other economies. "The unique needs of India in various sectors -- be it telecom, health care or education -- can be easily leveraged for other emerging geographies and even for developed nations."
A 'First-mover Disadvantage'
None of the global players, however, is currently looking at setting up a semiconductor fabrication plant, or "fab," in India. It typically costs around US$3 billion to set up a fab, and a top-of-the-line fab could cost as much as US$10 billion. The semiconductor ecosystem in India, although growing, is not yet fully mature. Current volumes don't make fab creation a compelling proposition.
India has 11 fabs, but they're owned by the government and are non-commercial. They are used primarily for the defense and aerospace sectors. In 2007, the government of India announced a semiconductor policy and some private players considered setting up fabs. Talk in the industry suggests that the government itself may be looking at setting up a commercial fab.
"Most semiconductor companies have already invested heavily in setting up fabs in other countries like Taiwan and China, and it is easier for them to simply ship the chips to India," notes Frost & Sullivan's Doraiswamy. Adds Vasi of IIT Bombay, "Unlike in other sectors where one can look at a first-mover advantage, in the case of setting up a fab in India there is a first-mover disadvantage." The equation could change, however, because of the growing domestic market, Vasi says. "It is now more feasible for companies to look at setting up a fab in India. But for this to happen, the government also needs to come up with enabling policies."