Bangalore: India could be relatively insulated from the worst effects of the severe downturn in the global semiconductor market, with the domestic market for semiconductors forecast to grow more than six times faster than the worldwide market.
But domestic revenues from semiconductor sales between 2008 and 2010 will grow at half the rate forecast in 2007, according a joint report by industry group Indian Semiconductor Association (ISA) and market research firm Frost and Sullivan that was released on Wednesday. Semiconductors are small devices that are at the heart of various electronic products.
Opportunity beckons: India Semiconductor Association’s Jaswinder S. Ahuja, says the country makes only 46% of the products consumed. Hemant Mishra / Mint
Local production meets only 46% of total semiconductor demand in India, and ISA terms the other 54% as a lost opportunity. “India’s manufacturing index is low; it manufactures only 46% of the products consumed, so there’s a greater opportunity for the industry (in manufacturing),” said Jaswinder S. Ahuja, chairman of ISA, and corporate vice-president and managing director of Cadence Design Systems India Ltd. The current opportunity loss of $3.37 billion (about Rs16,479 crore) is expected to rise to $4.35 billion by 2010.
The earlier ISA-Frost and Sullivan report had projected the 2008 total market to be $4.56 billion, with a compounded annual growth rate of 26.7% against the current $5.9 billion growing at 13.4%. The variance, the report says, is due to the inclusion of new products such as digital cameras, closed circuit television and power supplies. However, it’s the boom in direct-to-home, or DTH, business that has led to the surge in this segment.
The semiconductor industry is known to brace cyclical troughs— for instance in 2001, 1996, 1991. This time around the trough, which is not driven by technology but by the weak economic conditions, is much larger in scope and scale. For the first time, Chinese chip market is projected to shrink 5.8%, according to market intelligence firm iSuppli Corp., which estimates the global semiconductor market to decline by 9.4% in 2009.
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Still, semiconductor companies think the impact of the global industry downturn is less in India because of the small market base and its underserved nature. “There sure is an impact …the type of work done here will not change, but the amount of work will,” says Madhusudan V. Atre, president, Applied Materials India Ltd, a semiconductor equipment manufacturer. He is optimistic about the growing solar gear market and thinks the value of business proposals with the Indian government to manufacture solar photo voltaic cells, or PV—which are made from silicon wafers that are also used in semiconductors—ranges anywhere from $25-30 billion.
ISA president Poornima Shenoy isn’t confirming the “size” of the proposals but admits that all the resources once mustered for the “Fab-city” project in Hyderabad are now directed to solar PV. “We have approved at least a dozen projects for PV manufacturing,” she says, especially because “chip manufacturing is now not happening”.
Besides solar, semiconductor design, which is not included in the present report, is a potential growth segment. “Design has a three to four year lead time, so to that extent design companies don’t get impacted,” says Anil Gupta, managing director, ARM India, part of the UK-based company that designs chips for advanced digital products and employs about 350 design engineers in India. But the business is affected as old designs sitting on the shelves take a hit and the shipments start getting impacted, which has already happened in the last quarter, says Gupta.
According to the latest ISA-IDC report, Indian semiconductor design industry will grow 21.7% to $10.96 billion in 2010 from $7.3 billion in 2008. “There’s no slowdown in design, it’s business as usual,” says Sanjeev Keskar, country manager, sales, at Freescale Semiconductor India Ltd.
Analysts think for design services companies such as Wipro Ltd, MindTree Ltd, HCL Technologies Ltd, Tata Consultancy Services Ltd and KPIT Cummins Infosystems Ltd, it’s a good time to consolidate. There will be pressure on productivity and accountability; a design which earlier needed six months will now be expected in three months, but it’s also a time for Indian companies to hire as layoffs happen globally and semiconductor skill is not easily available, says Ganesh Ramamoorthy, principal research analyst at Gartner Inc. in Mumbai.
Ramamoorthy thinks Indian companies should also look for acquisitions overseas, just as Wipro strengthened its European presence by acquiring the Austrian chip design company NewLogic Technologies in 2006.
Learning from cyclical trends, the industry may have a lesson or two for other sectors, particularly the automotive industry. “The lesson is for all to see—keep innovating on your product…but in auto engineering, people have not been able to reach the economies of scale,” says Ramamoorthy. “To capitalize on the change that’s coming, people need super-efficient supply chains.”
However, Cadence’s Ahuja thinks the automotive industry has more challenges when it comes to regulation where the amount of testing and certification is much more than standard semiconductor products.
That doesn’t mean semiconductors can breathe easy. “We have to be sensible enough to innovate in downturn to continue reaping benefits, that’s the nature of this business,” says C.M. Menon, country manager of Analog Devices India Pvt. Ltd.
Graphics by Ahmed Raza Khan / Mint