The Fab Debate and the Solar Sunrise

The discussion around fabs has been going on for well over a year now, since the Semiconductor Policy was announced in February 2007. While there was a spate of announcements regarding investments in fabs in India in 2007, the pulse of the industry currently appears to be more cautious. In a recent online poll conducted by the India Semiconductor Association, 63.8% of respondents felt that industrial scale semiconductor fabs in India will remain a myth. It left me wondering as to what are some of the reasons for this skepticism? Or, is it based on true wisdom?

The reasons stem from business and technology concerns. To make a fab successful you need investments, process technology, customers, an ecosystem and a constant stream of volume to keep the fab loaded. To give a historical background, semiconductors were both designed and manufactured by Independent Design Manufacturers (IDMs). While this business model is still prevalent, the late ‘80s saw the rise of the dedicated foundry model (pure-play fabs) due to time-to-market pressures, high investments and economies of scale.

Currently, the fab lite model is gaining currency. In this model, IDMs retain the manufacturing of key products in-house while outsourcing the others to pure-play foundries. The impetus behind the fab lite model is that IDMs are reducing their capital expenditure and de-risking themselves from market volatility. In addition, the IDM and the foundry share the cost of process migration giving both a better return on investment.

From the technology perspective, a potential investor must decide whether to go for a 90nm fab, cutting-edge low process node like 65 or 45nm or an older mainstream process node. The economies of scale for both of these are different, and the company must analyze which segment it wants to address and whether this investment makes the most business sense.

In addition, the investor must identify a technology partner who will provide the technical expertise and support for the fab.

The Debate

Semiconductor companies would gain considerable benefits if they locate their manufacturing and design operations close to end-customers, keeping in mind India’s potentially huge domestic market for electronics equipment. With a favorable duty regime, this could translate to a cost benefit for system companies with local presence. Local semiconductor manufacturing will save India valuable foreign exchange, which would otherwise have gone in imports.

The flip side is whether even the potential local demand would justify the billions of dollars of investments required to set up a state-of-the-art fab. A company would have to do their math very carefully to work out the ROI. Globally, most fabs are not fully loaded and this has considerable financial repercussions.

In addition, the semiconductor industry is very dynamic and cyclical in nature. The industry has witnessed ups and downs over the years, and is perhaps more sensitive than other markets to macroeconomic forces. In this scenario, issues that fabs have to face, such as ongoing capital investments, capacity allocation, and moving to new process nodes take on great significance and impact.

The Solar Sunrise

If semiconductor fabs have been slow to take off, the same cannot be said of ATMP plants and solar fabs.

In a consumption-driven market like India, ATMP makes sense for companies as they can quickly and cheaply get products out into the market. For example, Tessolve Services has invested $200 million into an ATMP plant near Chennai, in addition to its existing $17 million testing facility in Bangalore. There are several companies, including giants like Intel and Reliance Industries, that have announced intentions of setting up ATMP plants in India.

In the ISA poll results to the proposition “solar PV has potential in India”, almost 90% of respondents either agreed or strongly agreed. With the worldwide focus on alternative energy systems, India has witnessed the mushrooming of several companies investing in PV fabs. It is prudent for India to ride the Solar PV fab global wave and take lead to evolve as a region with cluster of PV fabs.

ATMP facilities led the development of semiconductor ecosystem in countries such as Taiwan and South Korea, and it could herald the same in India as well. Solar PV fab activity will help build up the ecosystem, infrastructure and manpower base that is required for the more resource intensive semiconductor fab plants. They are points on the continuum. All semiconductor hubs today have taken their own routes to develop their semiconductor ecosystems, and ATMP plants and solar PV fabs could be the route for India.

You can reach Jaswinder Ahuja at communications_india@cadence.com.