Will India be the next growth region for chip production?

Cutting-edge chip making not in the cards, according to iSuppli

Advanced Micro Devices Inc.'s (AMD's) announcement last month that it would supply technology for a multibillion- dollar fab project in India spurred speculation over whether the nation is on track to emerge as the next major region for semiconductor production, after China. However, rather than following China's path to becoming a chip-making powerhouse, India is charting its own high-tech course, one that centers more on chip design and electronic-equipment production than on semiconductor manufacturing, according to iSuppli Corp.

AMD said it signed a memorandum of understanding with a new organization called SemIndia, a public/private initiative supported by the Indian government that is expected to produce x86 microprocessors based on AMD technology. The deal, which is only a roadmap at this point, reportedly involves a $3 billion investment by AMD.

If this deal comes to fruition, it would represent the first cutting-edge fab in India. Until now, the global semiconductor industry has been reluctant to locate advanced production facilities in India, due to infrastructure shortcomings, particularly in terms of unreliable supplies of power and water.

"It's pretty difficult to start a semiconductor wafer manufacturing operation in India," said Len Jelinek, director and principal analyst, semiconductor manufacturing for iSuppli. "Issues related to power and water supply are significant."

Jelinek also questioned whether there is any cost benefit in locating fabs in the nation.

"Semiconductor fabs are becoming increasingly automated, so labor costs are less of a factor, and thus India has no advantage in this area. In semiconductor manufacturing, labor doesn't count; it's all about depreciation. The prospect of India becoming a major maker of semiconductors is nonexistent."

Jelinek noted that some production is occurring in India of trailing-edge semiconductor products, such as diodes. However, he added that this does not provide a path to cutting-edge semiconductor production.

Despite the lack of semiconductor production in India, the nation's chip design industry is growing rapidly.

"India still is a small player in the global chip design industry," said Jagdish Rebello, principal analyst, communications/optical components/India research for iSuppli. "However, there are about 125 companies doing chip design in India, 90 of them multinational companies. This increase is based on the tremendous savings in labor costs by doing business in China. It's estimated that if the chip at the heart of Apple's iPod nano was designed in India, it would have been a 50 percent cost savings compared to doing it in the United States."

Rebello forecasts the total size of the semiconductor design industry in India will amount to $624 million in 2005. The industry is expected to nearly triple by 2010, when it will exceed $1.7 billion.

Meanwhile, India is emerging as an Electronics Manufacturing Service (EMS) production locality.

"India is growing as a region for contract manufacturing," said Jeffrey Wu, analyst, EMS and ODM services for iSuppli. "We are now looking at India the same way we looked at China a few years back."

Wu said contract manufacturers in India face similar infrastructure obstacles as chipmakers. However, cheap labor and tax breaks from domestic production are making India appear attractive to EMS providers. Furthermore, EMS companies are attracted to India by their desire to serve the domestic market.

Revenue generated by EMS providers and Original Design Manufacturers (ODMs) in India will expand to $2.03 billion in 2009, rising at a Compound Annual Growth Rate (CAGR) of 21 percent from $774 million in 2004, according to iSuppli. Indian EMS/ODM revenue will grow by 20.8 percent to reach $935 million in 2005, iSuppli predicts.

Thus, while India may not exactly be the next China in terms of semiconductor production, the nation is finding its own path and developing its own identity in the global electronics industry.

Jonathan Cassell is the editorial director and manager, public relations for iSuppli Corp. and the editor of the weekly iSuppli Market Watch newsletter. Contact Cassell at jcassell@isuppli.com