Source: Frost & Sullivan
Monday, March 29, 2010 03:06 PM IST (09:36 AM GMT)
Editors: Business: Business services, Electronic appliances & components, Energy companies, Information technology; Technology
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Does India's Semiconductor Policy Need an Extension?- A Frost & Sullivan Insight
Mumbai, Maharashtra, India, Monday, March 29, 2010 -- (Business Wire India) -- India's progression up the value chain in the Electronics and Semiconductors industry depends to a large extent on the development of an industry favourable ecosystem in the country. The Indian Semiconductor Policy of 2007 was precisely structured to aid this cause.
Organizations such as the India Semiconductor Association (ISA) have worked with the Government to initiate favourable policies to encourage investments in semiconductor manufacturing. Thus, was born the 'Semiconductor Policy' of the Government of India in 2007, aimed at improving the country's semiconductor ecosystem in a structured and planned manner.
After being in operation for the past 3 years, this policy is due to expire on 31st March, 2010. During this period, proposals for investment have been submitted under the policy; however, the key objective of the policy is yet to be completely realized. The global economic downturn of 2008-09 resulted in declining demand from electronics OEMs, forcing semiconductor companies to curtail production and defer investment decisions. This economic scenario adversely impacted the success of the semiconductor policy.
Need for the Semiconductor Policy
With India's electronics industry growing at a gargantuan rate, the need for policies and incentives becomes significantly crucial. While the growth rate of electronic products in advanced geographies is stagnating, the demand in India is witnessing exponential growth. A recent task force report, recognized by the Department of Information Technology (DIT), Government of India, highlights that the domestic consumption for electronics is likely to reach $400 billion by 2020 and that to meet this demand local electronics production needs to be scaled up to $320 billion. This massive growth in local electronics production is expected to amplify the demand for semiconductors thus triggering the need for local chip fabrication.
The cost to set-up a fab is a key factor in determining the financial feasibility of the project. In 2005, when SemIndia Inc proposed to set-up a fab, the estimated investment was $3 billion, which doubled to nearly $7 billion by 2008. The drivers for the cost of fabs are increased wafer diameters, increased complexity of process due to shrinking line-widths, and output volume capacity on a monthly basis. The capital expenditure for setting up a chip fabrication plant has increased while the price per chip has declined over the years. Further, despite the high level of automation in fabrication units, chip manufacturing does require its share of skilled labour. Yet another critical requirement for setting up a fab is the presence of world class infrastructure facilities.
Currently, India has the intellectual potential in terms of skilled workforce. The semiconductor design industry in the country is mature with a strong IP policy. Though the country's infrastructure needs a lot of improvement, periodic initiatives have been taken to raise the level of infrastructure in the country. Even in the recent budget announcement for fiscal 2010-11, the Government has provided INR 1,735.52 billion for accelerating the development of high quality infrastructure such as roads, railways and ports. Further the Government has more than doubled its plan allocation to the power sector to INR 51.3 billion compared to the previous fiscal year.
From all the above factors, it is evident that the presence of an exclusive policy that alleviates, to a certain extent, the financial burden involved in setting up a fab apart from offering other incentives, is the right initiative for promoting chip production in the country.
Semiconductor Policy and Current Status
In February 2007, the Government of India announced the much awaited Semiconductor Policy for India. The policy included an incentive package for the manufacturing of semiconductors, displays including Liquid Crystal Displays (LCDs), Organic Light Emitting Diodes (OLEDs), Plasma Display Panels (PDPs) and any other emerging displays, storage devices, solar cells, photo voltaics, other advanced micro and nanotechnology products, and assembly and test. Under the policy, projects have been classified under two categories, Fab unit and Ecosystem unit.
Figure 1-1 gives a summary of the semiconductor policy of India introduced in 2007.
| Type of Unit | Threshold NPV of investments | Incentive in SEZ (%) | Incentive in Non-SEZ (%) |
|---|---|---|---|
| Fab Unit | INR 2,500 Crore | 20 | 25 + exemption from CVD |
| Ecosystem Unit | INR 1,000 Crore | 20 | 25 + exemption from CVD |
Since the announcement of the policy, 18 companies have submitted proposals with a total investment of INR 1.48 trillion under the policy. Out of the proposals submitted one is for an LCD project by Videocon and one for a semiconductor chip project by Reliance Industries Limited. The remaining proposals are for solar PV manufacturing. The initial expectation was for 2-3 fabs and around 10 ecosystem units, but currently there are not enough proposals for fabs. The Department of Information Technology, DIT gave in-principle approval to 12 companies in June 2009, but the final sanctions for the proposals are expected to come when the appraisal committee completes evaluating the proposals based on the financial closures of the companies submitted. The committed investment from these 12projects is approximately INR 70,000 Crore
Recommendations
Solar PV manufacturing
Major investments for solar PV under the semiconductor policy are for solar cell and module production. Major proportion of the value-adding activity occurs outside the country. In the short-term it is a good start to see the investment in the solar PV sector but in the medium-term the Government should address the two issues of backward integration and providing incentives to medium-scale enterprises. Demand stimulating policies such as the National Solar mission have come at the right time.
Incentives and Policies to Encourage Domestic Electronics Production
Incentives provided by other Asian countries are more attractive compared to India. To encourage domestic production, rationalization of import duty on electronic goods, tax subsidies and easy access to finance among others should receive priority. Figure 1-2 below, succinctly compares the support provided by India versus China and Taiwan for electronics and semiconductor manufacturing.
To view the table, please click on the link below:
Table
Apart from tax subsidies, customs duty on essential raw materials for electronic products manufacturing needs to be significantly lowered to facilitate local manufacturing.
Marketing of the Policy
The Semiconductor Policy needs more marketing muscle. The salient features of the scheme need to be promoted far and wide. The Government must partner with associations such as the ISA, CII, and so on to take the benefits of the scheme across shores to major electronic hotbeds such as Taiwan, the U.S., China, Japan, Singapore, and European majors so as to educate companies globally of the existence and benefits of the policy and thereby, attract investments into the country.
More State Policies
Apart from Karnataka that recently announced a state semiconductor policy, none of the other state governments have been proactive in coming up with their own additional incentive schemes that boost investment in the semiconductor industry. If more states initiate such policies, there is likely to be more interest and participation from across the semiconductor value chain for investments to pour in.
Extension of the policy to Design Houses
The primary motive of the semiconductor policy in its current form, has been to promote investments in chip fabrication in the country. Whilst this is very desirable, it might be worthwhile to extend the policy to design houses so as to further encourage and strengthen the design industry: since India has established its dominance in design,. Further, emphasis can be made through the policy to encourage design-led-fabrication. This can be done by mandating that design houses that avail of the policy incentives need to partner with independent fabs or electronics manufacturing services (EMS) companies to locally fabricate the chips that they design.
Final Verdict on the Semiconductor Policy
Having analyzed the merits, requirements and performance of the Semiconductor Policy, it is seen that the Government should continue with the semiconductor policy until 2012 or better still up to 2015 to develop this industry and tap evolving growth opportunities.
About Frost & Sullivan
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Support_ISP.pdf
CONTACT DETAILS
Ravinder Kaur Corporate Communications - South Asia, Frost & Sullivan, +91 (44) 42044760, +91 9940141714, ravinder.kaur@frost.com
Amrita Nandi Corporate Communications - South Asia, Frost & Sullivan, +91 (33) 4009 9337, +91 9903433364, amritan@frost.com
KEYWORDS
BUSINESS SERVICES, ELECTRONICS, ENERGY, IT, TECHNOLOGY
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