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Can India become a chip powerhouse?

December 14, 2005 10:07 IST

For the last few days, Vinod K Aggarwal has been keeping a strenuous schedule -- dashing in and out of meetings with technology bigwigs -- hardly any time to catch up on his sleep.

The soft-spoken former electrical engineering professor at McGill University and chairman of SemIndia, which he founded with a group of non-resident Indians, says with a smile: "Earlier, my mobile phone used to ring once in a while. Now it refuses to stop ringing. My battery has got exhausted and I have no choice but to borrow my friend's mobile phone."

That Aggarwal's phone does not stop ringing and his being the most sought out entrepreneur is no surprise. Last fortnight, in a coup of sorts, Aggarwal's SemIndia announced it was tying up with chip-maker AMD to set up a $3 billion semiconductor fab plant in the country.

However, that is not the only reason why everyone is sitting up and listening. What makes the mega deal really hot is what Aggarwal was able to bring to the table: the US chip-maker has never earlier licensed its proprietary chip-making technology to any third party manufacturer.

But this is the first time it is doing so. Not only that, it is willing to take an equity stake in the project. Two, unlike most chip-making plants in Taiwan which make standardised products(with over 500 customers), SemIndia is taking a different track: it will concentrate on niche products and not have more than eight to 10 customers --one of them of course being AMD.

And if that is not enough, Aggarwal has successfully roped in the Indian Government which committed to invest at least 25 per cent of the equity in the new company to set the ball rolling.

For IT Minister Dayanadhi Maran, the SemIndia-AMD project is just the first step in his gamble to make India a microchip manufacturing powerhouse, replicating the success of Taiwan and China. No wonder he was beaming at the press conference wherein the deal was announced. He means serious business.

His ministry shot off letters to state governments a few weeks ago, asking them whether they would be interested in putting up a "fab city" -- the key infrastructure needed to put up chip plants. And insiders say the response has been unprecedented with states like Andhra Pradesh, Tamil Nadu, Karnataka and UP vying with each other to grab what they see is a lucrative opportunity.

His ministry is conscious that it needs to woo at least three to five fab companies without which supporting a "fab city" for just one project does not make economic sense. That is why Maran is negotiating with at least three more fab companies led by NRIs and global companies to ensure financial closure.

For instance, just a few months ago Maran announced that an NRI-led consortium -- India Electronics Manufacturing Corporation (IEMC) -- was also planning to invest $3 billion in 18 months to put up a fab plant with a capacity to produce over 400,000 wafers.

Says Rajendra Singh, an electrical engineering professor in Clemson University and chairman of IEMC based in the US: "We plan to invest $3 billion and then another $2 billion in the next two years. After four years, we will to double the plant size. We have already tied up our technology provider who is a giant in the semiconductor business."

Others are ahead in the race. In Hyderabad, a Korean-led consortium lead by June Min (who set up Nano Tech Silicon India) has already received land from the state government to set up a refurbished fab with an investment of $300 million (in the first phase).

If government officials in Andhra Pradesh are to be believed, Min is tapping big Indian companies like the Tatas and the Essar group to invest in the project, and is negotiating both with Intel as well as IBM to provide the technology. And low profile NRI Deven Verma has also put in a consortium (Hindustan Semiconductor Manufacturing Company) to set up a fab plant.

But sceptics, and they are many, say he is just creating hype. Says an IT insider with experience in the semiconductor business: "He is using fab-making as a photo opportunity. There is no firm commitment from the government as to where the money will come from. To support four fabs, the government will have to fork out $1 billion. It's all wishful thinking."

His critics also attack him for messing up negotiations with Intel -- by prematurely announcing that it would invest $400 million in a testing and packaging plant for semiconductors.

They say Intel refused as the government was unable to give it the concessions which it asked for, including financial incentives. Getting a big brand like Intel which would have come on its own financial strength would have been the opportune beginning that the country needs to become a fab location.

Maran faces other troubles too. State governments are crying foul on Maran because he wants to divert fab investments only to Chennai and Tamil Nadu. A delegation from Andhra Pradesh MPs led by CM Raj Sekhar Reddy was in Delhi a few weeks ago, demanding a "level-playing field" to set up the fab city from PM Manmohan Singh.

Says a senior government official in the Andhra Pradesh's CM office: "How can Maran expect to erect a fab plant in Chennai where there is no water -- a key input for such a project? A study has shown that Hyderabad is the best location followed by Noida for a fab plant."

Understandably, political jockeying would play a key role especially when one is talking of mega investments to the tune of $15 billion to $30 billion. These projects are undertaken at a debt to equity ratio of 1:1, so for a $3 billion project, one would need about $1-1.5 billion by way of equity. Aggarwal says that companies like GE Capital finance fab plants in addition to the many specialised agencies.

However, everyone agrees this is the best time for India to join the semiconductor manufacturing club after its success in the software space.

Says Rajendra Kumar Khare, chairman of Indian Semi Conductor Association and CEO of Broadcomm (a fabless chip company which farms out chip making to third party manufacturers): "India currently consumes over $2 billion worth of microchips and it is projected that the market will grow to $36 billion by 2015. That is a large domestic base especially as mobile phone companies come up with their manufacturing units in India, triggering a growth in the consumer electronics' sector."

Adding to the Indian advantage is the fact that the country already has over 120-130 top chip-designing firms working on leading edge technology to support the industry.

And global companies are also keen to hedge their bets by spreading their geographical risks away from just China and Taiwan. Argues Singh: "From an FDI point of view, the current geopolitical conditions favour India over any other country."

Also if we don't take the plunge, experts say we would miss the bus forever. Says Aggarwal: "We are 20 years behind, and we need to get in to chip manufacturing so that we have a role to play in future technological innovations which will rule the world like nanotechnology."

He adds that fab plant investments go up every year -- unlike in other businesses -- so the cost of a $3 billion plant will double if we go for it three years later. By that time, the investment needed would make the project unviable.

There is another good reason -- the potential for employment in high tech areas for those who would otherwise prefer to work abroad.

Says Ajay Marathe president of AMD India: " Each fab will generate 2,000 jobs, but the spill-over effect is that for every job you create, there are 10 more ancillary jobs. So the total employment generation of skilled technical people could be as high as 30,000 per fab. And that is big."

Moreover, while India might not have any cost advantage over China in terms of labour costs (which comprises 15 per cent of the fab cost), it would make India self-sufficient for this crucial component which powers all high tech products.

However, the key challenge is how to finance these mega projects? Will there be one "fab city" or will politics dictate that the project gets scattered all over the country, raising costs and making them unviable from the beginning.

After all most of these projects have a long gestation period and experts say that the break even point could take anywhere between eight to 10 years. Indian fab manufacturers like Aggarwal and Singh, however, say they can do it in two years with a $1 billion annual revenue.

One thing, of course, is pretty clear -- a fab revolution cannot happen without the government's active participation. The location of a chip plant is crucially dependent on government support in terms of financial incentives.

Intel, for instance, decided to set up a fab plant in Israel recently after the government offered over $580 million by way of financial incentives.

The chip-maker is setting another plant in the state of Arizona in the US because it was allowed to calculate taxes based purely on the state sales, thus saving them large monies.

China has offered sops like protection from imports, 10-year tax holidays apart from other incentives for chip-makers to grow. And even Mexico supported Intel by raising bonds payable after 20 years with minimum interest. You, of course, have the Taiwanese model -- the Hsinchu Science Park outside Tapei supports over a dozen odd fab plants.

The government, however, supports companies in the park through lower interest rates, promoting technical universities around the park, creating reservoirs for water supply and even offering French villas for expats who want luxury.

So were does India stand? Some tentative steps have been taken -- one being that the central government will participate in the equity of the fab companies and offer to pay cash. And the IT ministry has already started talks with the finance ministry to work out modalities of the funding.

The government has also hinted that it will provide a one-time financial grant to the state which puts up a fab city which will include giving it a special economic zone (SEZ) status. It might also look at a "package" including a training grant (for employees who need to be trained in chip-making), interest subsidies among others.

But fab companies are still far away from any financial commitment. Says Aggarwal: "More important than the equity participation, we need infrastructure support and other financial incentives. The government has to take a decision. It is not about one fab but how to develop and support the entire semiconductor industry."

Even commitments of equity from partners are tied to various pre-conditions. Says AMD's Marathe: "Our decision to invest and buy will depend on some conditions like whether we achieve the targeted market share in India; whether the government offers a level-playing field amongst others."

Aggarwal claims he is also talking to Broadcom as a customer, but Khare merely says: "That decision for fabless companies to buy from Indian fabs would depend upon whether they will get the same quality and price."

Surely, most companies are looking at financial support from the government apart from various incentives before they can take off.

Says Singh: "If the government invests about $1 billion in semiconductor manufacturing and provides us equity of $250 million and takes care of certain incentives, we can break even in two years."

It has a long list of demands as a pre-condition for setting up the plant: provide electricity and water at global rates; fund educational and health facilities in the fab city; provide interest subsidy on loans; pay for the running cost of tool suppliers who set up warehouses; and set up the infrastructure.

Many of these demands might depend on state government incentives. SemIndia says it will set up a high-level team to scout for the best location for their plant but surely it has to be in a SEZ zone where it gets many incentives. Singh has already opened a dialogue with Tamil Nadu, Andhra Pradesh, Karnataka and Uttar Pradesh in this regard.

The Andhra Pradesh government has, perhaps, taken the first concrete step in this direction. It has already committed Rs 350 crore (Rs 3.50 billion) to the Korean chip-making consortium as interest subsidy on loans the company would raise in commercial terms.

It has also earmarked 1,500 acres in the Rajiv Gandhi Nanotechnology Park in Hyderabad for fab companies. And work is on to set up a Rs 2,000-crore (Rs 20 billion) venture fund which will be used to fund the initial investment in the semi-conductor industry.

Says a senior government official in the CM's office: "What fab companies are looking for is not equity which can be raised easily. They are looking for infrastructure as well as financial incentives."

The Andhra Pradesh government claims it is already offering incentives. It has assured 60 million gallons of water for the fab pant by bringing in the Krishna waters to the park. Second, it has also put up a 440 KV transformer generating station so that fab plants can get uninterrupted power without any spikes.

Only time will tell Whether these incentives and political lobbying would be enough for Hyderabad to get a fab city.

The timing for Maran is right. The question, however, is whether he will be able to get the government and the states on his side. We should be able to tell you more in a year's time. Watch this space.
Surajeet Das Gupta