Goutam Das, senior associate editor, Business Today
Just a day before the cricket world cup flags off, a chip manufacturing start-up called Cricket Semiconductor with a logo that resembles the traditional red leather ball, announced it would set up a Rs 6,000-crore fabrication unit in Madhya Pradesh.
The fab would manufacture analog/power chips that can go into products such as mobile phones, UPS inverters, smart meters, automotive as well as other industrial products.
The announcement appears interesting from many directions.
India as a country was always good at semiconductor design. But the country has no fabs to manufacture chips just as yet - they are mostly manufactured in Taiwan, Singapore, Malaysia and China.
Local hardware product companies have to import these chips. India's growing appetite for electronic goods imply that the country, one day, will be faced with a huge electronics component import bill. Here are the numbers: According to the India Electronics & Semiconductor Association, the Indian electronic system design and manufacturing (ESDM) market will grow from $76 billion in 2013 to $94 billion in 2015.
The industry is expected to touch $400 billion by 2020. However, local production and services is estimated at only $100 billion. This implies a demand-supply gap of $300 billion.
Consumption of semiconductors, in the meantime, has also steadily climbed. It is projected to grow from $7 billion in 2013 to $10 billion in 2015.
Therefore, any announcement towards creation of semiconductor manufacturing capacity is great news. Cricket Semiconductor, in fact, is the third company to announce a fab investment in a year's time.
On February 14 last year, the Union Cabinet approved two semiconductor manufacturing facilities - one led by Jaiprakash Associates and the second by Hindustan Semiconductor Manufacturing Company (HSMC). Cumulatively, the two companies proposed to pump in more than Rs 63,000 crore, one of the biggest investment announcements so far in the domestic manufacturing sector.
In comparison, Cricket's investment of Rs 6,000 crore appears low. The difference is because of the nature of fab proposed. Both Jaiprakash Associates and HSMC are probably targeting the "Logic" fab, which comprises CPUs, GPUs, baseband chips and application processors among others. These products demand constant upgradation of manufacturing processes and are capex-intensive. On the other hand, an analog foundry, which Cricket wants to build, need not be on the leading edge and requires far less investment.
A second aspect is the interest foreign entrepreneurs are taking in India - a testament of India's manufacturing potential. India's design expertise, legal system and cost arbitrage bode well. China, in the meantime, is fast losing its cost competitiveness because of rising wages. Cricket Semiconductor is spearheaded by two former executives from US chipmaker Texas Instruments, Lou Hutter and Mark Harward.
The Chairman and CEO of HSMC is Devendra Verma, a US -based venture capitalist (VC) and entrepreneur. Their network with investors abroad may help in faster financial closures.
There are question marks, too. While there is local demand for electronic goods, one is not sure if the Made in India chips can compete on costs with those imported from other Asian countries.
Large economies of scale are required to drive down costs. Lou Hutter, Cricket's CEO, says he has done the math. His fab will produce 60,000 wafers per month - at this sort of volume, the fab could become cost competitive.
Government support also goes a long way in making a fab competitive. In 2006, SemIndia, a company formed in the US by Non Resident Indians (NRIs), attempted a fab in Hyderabad at an estimated $3 billion investment.
It never materialised since the incentives offered were too little for a project this size. By 2009, the plans were shelved.
However, the incentive landscape appears to be changing both at the centre and state levels now. Madhya Pradesh, where Cricket wants to go, approved a semiconductor investment policy that provides for free government land and reimbursement for the cost of building the shell of the manufacturing unit.
It also promises power supply from two separate power grids as well as water for a price fixed for 10 years. The support is available to fab investments over Rs 3000 crore.
While the intent is encouraging, it would take a few years before these fabs can be built. HSMC is progressing well on the financial closure part, but Cricket is yet to decide on the location in Madhya Pradesh. These are early days.