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In 2005, when the Indian Semiconductor Association (ISA) and Frost & Sullivan came up with the industrys first report card expounding on its potential, it sounded like a big dream. Now with almost all major semiconductor companiesIntel, AMD, Texas Instrument, Freescalealready in India, it is no more a dream unrealizable. But it needs some serious government support in terms of policy initiatives.

The global opportunity for manufacturing semiconductors is a $200 bn. Unlike product manufacturing, in other areas semiconductor manufacturing is more tightly integrated with the design work, less logistics-intensive and more technology-dependent. This means with some serious attempt, India can actually make it big in manufacturing. Which would in turn pull up design services.

That the government was not going to let loose the opportunity was evident when finance minister P Chidambaram, in his 2007 budget speech, made it amply clear that it was a priority area for his government. "With the spread of IT and ITeS, the time is ripe to make India a preferred destination for the manufacture of semiconductors and other high technology IT products," said Chidambaram in his Budget speech on February 28, 2007. He did not stop there, and declared that the government would announce a semiconductor policy soon.

And it did. In February 2007, the government announced a semiconductor policy that contained a host of incentives for the industry if the manufacturing was done in India (see box). The projects already announced since then include a $3 bn project from SemIndia; two $250 mn projects each from Moser Baer and Videocon; and two $50 mn projects from Freescale Semiconductor and Cypress Semiconductors.

The Present
Approximately 200 semiconductor companies, which include all the global top 10 fabless companies and 19 out of the top 25 semiconductor companies, are operating their facilities out of India. Also, the action has moved out of Bangalore to almost all major cities, including Delhi (NCR), Hyderabad, Chennai, Pune, Ahemedabad, and Goa.

The total semiconductor design services industry in India stands at Rs 8,527 crore. However, this figure represents only a part of the total industry, as it does not include the embedded software (or VLSI design) revenues of most multi-services IT firms, which now contributes significant revenue. Forecasts say that the total semiconductor industry size in India will be around $12 bn by 2010 (ISA-F&S). According to Nasscom-McKinsey study, embedded system design is expected to generate exports of Rs 41,000 crore by 2008.

Segmenting the Market
The semiconductor industry consists of three types of players:

Integrated device manufacturers (IDMs): who manufacture chips as well as sell them; fabless companies: who design and sell their chips but manufacturing is outsourced to foundry companies; and foundry companies: who manufacture chips designed and sold by others.

IDMs now have started outsourcing their requirements to foundry companies rather than making heavy investments in upgrading their existing fabs. Many of the semiconductor companies are expected to go fabless in the coming days, thus providing more work and revenue to independent foundries.

Semiconductor Services Industry (FY 06-07)
Segment Revenue (in Rs crore)* VLSI 3,411 Hardware/Board design 819 Embedded Software 4,297 Total 8,527
*Does not include non-captive embedded software revenue
Source: DQ estimates CyberMedia Research
VLSI remains by and large the domain of captives and pure play semiconductor design services firms

Services-wise, the semiconductor design work can be categorized into three major types:

Embedded software development: The increase in demand for software content in electronic devices has resulted in greater volumes of embedded software activity globally. The already acquired software supremacy is helping India maintain a constant lead by revenue. This sector accounts for 50% of the total semiconductor services industry in India by contributing Rs 4,297 crore (we have excluded the revenues from non-captive players like Wipro and TCS) in the year FY 07.

VLSI design: This is the second rapidly growing segment after embedded software in the Indian semiconductor industry. Apart from indigenous non-captive players, all the major global players have their centers in India. The Rs 3,411 crore VLSI design area, unlike embedded software, has remained by and large with captives and pure play services firms, the captives accounting for as much as 62%. This can show a huge jump, once manufacturing activities start.

Hardware and board design: Design services involve activities such as analog/digital circuit design, board layout and routing, design for testing, manufacturing and reliability, and system/board testing. In most cases, the VLSI design service companies, typically, carry out hardware and board design. Though the contribution from this segment has increased due to the industry focus on chip designing, the growth has been more or less the same over the years. It accounted for revenues of Rs 818 crore.

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