Will overcapacity foil India's push into chips?

Hyderabad, India -- India may be making a major push into semiconductor manufacturing at the very moment the chip industry encounters a glut of manufacturing capacity. A rush into leading-edge production could contribute to global overcapacity and would not serve India well in the long run, according to an analyst attending the India Semiconductor Association's Vision Summit here last week.

"I don't think they are ready to go straight to a state-of-the-art fab," said Bryan Lewis, research vice president and the chief semiconductor analyst at Gartner Inc.

The Indian government will announce details of a package of financial incentives for the semiconductor industry "in one or two weeks," Y.S. Rajasekhara Reddy, chief minister of the state of Andhra Pradesh, disclosed in his keynote address here. The incentives are expected to include outright cash grants to induce companies like Intel Corp. and Advanced Micro Devices Inc. to build state-of-the-art facilities in Hyderabad's proposed "Fab City" zone.

Reddy said that India's goal is to establish "self-sufficiency in semiconductors" before the end of the decade. Currently, all integrated circuits fueling India's booming equipment-manufacturing market are imported.

But analysts remain skeptical about this emerging nation's ability to develop and sustain a state-of-the-art fabrication facility anytime soon. "It's a question of timing," Lewis said. "My advice is that they would be better off going to 0.18 or 0.13 [micron]," and not directly to 90- or 65-nanometer processes.

Lewis foresees a glut of semiconductor manufacturing capacity coming online, and pointed out that plenty of manufacturing capacity can be purchased elsewhere.

Instead, Lewis advised, "I'd like to see them develop their system design and system-on-chip design capabilities. In the end, when [the national and regional governments] see the true cost and the full economic picture, I think they will end up being cautious and taking a go-slow approach."

However, momentum is building in the region to turn India into a world leader in semiconductor manufacturing. Earlier this year, Prime Minister Manmohan Singh signed an "agreement in principle" outlining a series of national initiatives targeting domestic semiconductor industry investment. The package, approved by India's Union Cabinet, would, in principle, provide special financing for investments in chip manufacturing.

Several semiconductor projects await final approval for funding by the national plan or by regional incentive programs. Among them is the $3 billion Semindia Fab City project in Hyderabad, which would install 200-mm and 300-mm wafer fabrication facilities based on technology from AMD. Intel too is said to be negotiating with regional officials to build an advanced testing and manufacturing unit in India, and is reportedly awaiting a final OK from the government's semiconductor initiative. Several Taiwanese companies are also said to be interested in setting up manufacturing bases in India.

A number of initiatives emerged late last year designed to create a complete industry "ecosystem" capable of attracting and sustaining new investments in chip making. "It is the right time for India to showcase its capabilities and draw global attention to the potential of this market," said Poornima Shenoy, president of the ISA trade group. "At ISA, our goal is to have India become a global brand in the electronics and semiconductor industry, driven by technology and quality products."

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