April 2007
  Incentives Deal of the Month

Expats' $4.5-Billion Start-Up
Could Signal India's
'Fab Club' Entry
Infineon Munich
Infineon ChipHeadquartered in Munich (pictured above), Infineon, the world's fourth- largest manufacturer of computer chips, is providing the licensed technology that will power HSMC's Indian operation.

Site Selection Executive Editor of Interactive Publishing
jack.lyne bounce@conway.com

rawn by the drumbeat of Asia's massive markets, chip-makers are barreling into the region with jumbo- size blueprints.
   Just two days after Intel announced plans for a US$2.5- billion Chinese fab, a $4.5- billion semiconductor project surfaced in India on March 28th. The Indian venture consists of a pair of fabs, both running on technology from Germany's Infineon, the world's fourth- largest chip- maker. /
   But the company that's going to build and operate those plants is hardly a household name. It's a name, in fact, that most have never heard before – Hindustan Semiconductor Manufacturing Corp. (HSMC), a start- up that had been in stealth mode for about a year. Now, though, the largely unknown newcomer has skyrocketed to India's corporate vanguard in one big fell swoop: HSMC's fabs will be India's first private- sector chip plants.
   Moreover, the start- up's oversized lift- off could significantly elevate the whole country's high- tech profile.
   HSMC's leaders, a group of Silicon Valley-based expatriate Indians, are openly embracing the role of national economic catalyst.
   "This initiative will lead India to become a destination of choice for the future of high-tech manufacturing," HSMC Board Chairman Deven Verma asserted at the projects' announcement in New Delhi. "While India's GDP is [currently] around 9 percent, the development of semiconductor manufacturing
HSMC Board Chairman Deven Verma
Photo: ClearSpeed Technology
will help catapult the GDP to approximately 10 to 11 percent per year."
   HSMC's fabs will produce "systems- on- chip," Verma explained, including semiconductors used in automotive products, direct- to- home TV set- top boxes, mobile phones and smart cards. Known as Fab City, the semiconductor complex will include two foundries, a chip design center, a testing facility and space for equipment suppliers.
   Significantly, the dual fab announcement came less than a week after India's generous high- tech incentives went into effect. If HSMC implements its entire Indian plan, it would qualify for whopping subsidies of between $900 million and $1.13 billion.
   India has a handful of existing fabs, but all are small, government- owned operations like Semiconductor Complex Ltd.

Infineon Link Boosts India's High-Tech Push
   HSMC's plans materialized after a number of leading chip- makers had already considered Indian manufacturing operations. The nation has very strong semiconductor draws in its well- regarded skilled labor and its huge market. To date, though, top- tier chip players have passed on opening an Indian fab.
   Two common concerns have figured significantly in those deferrals: One has been India's substandard infrastructure system. The other has been the nation's prior lack of a national policy promoting semiconductor manufacturing. (China, by comparison, already provides new semiconductor plants with a 100- percent tax break for its first five years,
Indian Minister for Communication and Information Technology Thiru Dayanidhi Maran sees major potential for Infineon's products in the nation's market.
Infineon's licensing agreement with HSMC "positions us as a reliable partner for the Indian semiconductor market," said Infineon CEO Wolfgang Ziebart.
and a 50-percent break for the next five years.)
   Consequently, HSMC's licensing agreement with Infineon Technology adds a measure of world- class credibility to the Indian projects. HSMC's entire Indian operation, in fact, will run on the Munich-based company's technology, Verma explained. "We strategically selected Infineon [as] a leading supplier of chip sets for mobile phones, smart cards and automotive applications," he said.
   The Infineon connection also dovetails with India's technological ambitions – a point that government officials were eager to emphasize in New Delhi.
   "Most of Infineon's products have large market potential for India," Indian Minister for Communication and Information Technology Thiru Dayanidhi Maran noted. "This is in line with my vision for the semiconductor industry. The domestic demand for semiconductors is projected to reach $36 billion by 2015, riding on booming electronic goods manufacturing. We need the fabrication industry in India to complete the full semiconductor ecosystem."
   Infineon already has an R&D center in Bengalooru (formerly Bangalore), a 600- employee operation focused on hardware design and software development. The company, however, took no equity interest in the Indian fabs.
   "We think it is not a very good idea for a semiconductor manufacturer to have shareholding in a foundry," Infineon CEO Wolfgang Ziebart explained in New Delhi. But the company regards the alliance as considerably more than a source of licensing revenues. Infineon sees the Indian venture as an avenue to strengthen its foothold inside the world's second most populous nation.
   "With this cooperation with HSMC, we position ourselves as a reliable partner for the prosperous Indian semiconductor market," said Ziebart. "By bringing our process technology to the Indian market, we help build the foundation for integrated-circuit production for the Indian market in the years to come."
   HSMC's licensing agreement extends beyond using the European firm's 130- nanometer CMOS basic process technology in chip manufacturing. In addition, the Indian operation will have access to Infineon's process technologies for embedded flash chips for smart cards and automotive applications, as well as its process technology for producing radio frequency chips.
   The partnership could also help accelerate HSMC's product development. The agreement calls for Infineon to license its design libraries to HSMC and to advise the Indian venture on fab setups and technology transfer.
   HSMC is planning to start fab production within two years.

Projects Will Clarify India's
New Semiconductor Subsidies
   The fledging company had been negotiating for more than a year with Indian President Abdul Kalam's administration. Government officials said that Verma has also repeatedly championed India's semiconductor development during meetings with Minister Maran over the last year and a half. Verma is a general partner in Redwood Ventures and Edgewood Ventures, two Silicon Valley venture capital firms he founded. Earlier in his career, he served as senior vice president at Loral Space & Communications and worked as an executive at Intelesat.
   Chip- makers are offered the richest subsidies in India's new high-tech initiative – and they're required to make the biggest investments as well.
Nagoya, Japan-based Owari Precision Products is one of the many firms with facilities (pictured) in Bidani outside Bengalooru (formerly Bangalore), where one of India's special economic zones will be set up. Other companies with a major presence in that area include Coca-Cola, General Electric, Pepsi-Cola and Toyota Motor Corp.
For semiconductor manufacturers that invest at least $550 million, the program provides incentives over a 10-year period that equal 20 to 25 percent of a project's total capital expenditure.
   India is also offering a broad range of other high-tech sectors manufacturing subsidies that total the same percentage payouts for investments (for details, see accompanying chart, "India's Technological Targets"). "It becomes imperative [for] the government to create a conducive environment . . . [to] help bridge the viability gap due to [India's] lack of adequate infrastructure and ecosystem," said the bill that enacted the nation's high- tech drive. India's Union Cabinet authorized the incentives for projects that are announced through March 31st, 2010. Further subsidies afterward would require reauthorization.
   HSMC will serve as a test case of sorts for India's semiconductor subsidies. Initially approved on Feb. 22nd, the incentives have rekindled several chip- makers' interest in establishing an Indian fab, according to national officials. To date, though, full details on exactly what incentives India will provide haven't been clear. HSMC's project will flesh out some of the program's particulars.
   The initiative specifies that the government can offer equity participation totaling as much as 26 percent of a chip project's total capital costs. The balance of India's assistance "will be in the form of interest- free loans, tax subsidies and concessions," Maran said in February.

Expansion Site Still Unspecified
   It will be several weeks, though, before HSMC's final incentive package will be nailed down. First, the company will select a site for its semiconductor complex.
   "We will be filing the [subsidy] application immediately, and about four to five weeks later we will be
HSMC's second fab will use 300-millimeter wafers (pictured) and will cost between $3.2 billion and $3.5 billion.
finalizing the location of the fabs," Verma said at the project announcement.
   HSMC's site decision will factor into the company's incentives total. India's program awards companies that locate in one of the nation's special economic zones (SEZs) with subsidies equaling 20 percent of a project's capital investment. Subsidies for firms that choose a site outside the SEZs increase to 25 percent of investment, and include a 10-year exemption on capital goods duties.
   HSMC's final site negotiations will be also affect the local assistance it will receive. India's states can provide their own separate subsidies, including low- cost land, electricity and water.
   The first of HSMC's two fabs will be the most basic and the least expensive. That $1-billion operation will use 200-millimeter silicon wafers and will primarily utilize used equipment, said Verma. The second plant, which HSMC describes as "far more advanced," will involve an investment of between $3.2 billion and $3.5 billion and will use 300- millimeter wafers.

Chip Ripples
   India's chip- design industry will pay particularly close attention to where HSMC locates. The country has about 125 companies that design chips. Many are multinationals, including Cypress Semiconductor, Intel, Infineon, Texas Instruments, and STMicroelectronics. About one- third of the companies, however, are homegrown, according to the Boston- based research firm iSuppli.
Wipro, which has its headquarters (pictured) in Bengalooru (formerly Bangalore), is one of India's largest homegrown chip designers.
   Locally based chip designers will likely get a major leg up from private- sector fabs located inside the country. Designers that collaborate with HSMC's complex will be able to test and package products at an Indian site. In addition, the fab's location means that designers will be paying prices that apply in India, not elsewhere. (A software engineer there, for example, makes about $8,500 a year on average. In the U.S., the average is $64,000.)
   The Indian Semiconductor Association is predicting that today's $3- billion- a- year chip- design industry in India will grow into a $40- billion- plus business by 2015.
   "By bringing Infineon as a technology partner, HSMC aims to further facilitate innovate designs by Indian engineers and augment the development of affordable new products within reach of the common man," Verma said.
   "The current perception in the world is that India Inc. is for software development and design, while China is for hardware manufacturing," he continued. "We want to change this perception [with] the semiconductor foundries. This will be the single most gratifying achievement for us NRIs [non- resident Indians]."
   India's has strong market demand for the kind of chips that HSMC will make. More than six million mobile phones, for example, are now sold every month, and total mobile phone sales have exceeded 150 million. Demand is also bullish for chips used in consumer electronics and automotive products.
   The nation's high-tech sector as a whole is also getting a boost from the country's swelling ranks of venture capitalists. More than 40 new funds formed in India in 2006.
   "Asia-Pacific, especially India and China, are becoming attractive destinations for venture- capital and private- equity funds," Intel Capital Managing Director Michael Scown told the India Semiconductor Association's 2007 Vision Summit in Hyderabad in February. "Studies show that VCs have invested $515 million in India in 2006, logging a near 74 percent year-on-year growth. Of this, 70 percent goes to the IT sector."
   India's high- tech labor pool continues to deepen as well. An estimated 780,000 students will receive their degrees in engineering and information technology during 2006-07. The number of graduates in those fields during 2007-08 is projected to increase to 840,000.

More Fabs on Tap?
   While HSMC will remove India from the world's fab-less ranks, its arrival raises another question: Which other semiconductor manufacturers will follow suit?
   Intel is one possibility. India planned to reopen fab negotiations with the world's No. 1 chip- maker,
Indian demand is surging for chip sets in used in automotive applications.
Photo illustration: Infineon Technologies
Maran said shortly after the nation's semiconductor subsides took effect on March 22nd. Before those discussions could begin, though, Intel on March 26th announced its plans for the company's first Chinese fabrication facility. Intel has only commented that it would reconsider an Indian manufacturing plant in light of the nation's new subsidies.
   Texas Instruments on April 2 cemented a relationship with the Indian Institute of Science as one of four Leadership Universities, joining TI's global research network. "India is recognized for its progress and needs similar higher education research programs to sustain intellectual credibility and advancement of the industry. TI is committed to the long term goals of the industry," said TI President and CEO Rich Templeton. However, in other reported comments, he said the company is not planning on establishing manufacturing in India anytime soon, preferring to maintain it as an R&D base, where the company first set up shop in 1985.
   SemIndia is a much stronger fab possibility. That investor consortium, which is also backed by non- resident Indians, in late 2005 announced plans to set up a $3-billion Indian semiconductor plant, running on process technology licensed from Advanced Micro Devices. The SemIndia project, however, has since stalled, reportedly due to insufficient government subsidies. The venture could well resurface now. Two other Indian companies, Nest Technologies and Videocon, have also expressed interest in opening local foundries.
   No Indian fab, though, can expect a ready-paved path to success.
The deferred SemIndia-AMD project is the most likely candidate to emerge as India's next fab.
Analysts say that plant utilization has to run about 85 percent of capacity to turn a profit in a commodified chip industry in which cutthroat pricing rules. Add to that the possible downturn many anticipate in the ever- cyclical chip industry in 2009. Then there's the long economic shadow cast by Intel's Chinese fab, which the company says will be its lowest-cost operation.
   There's another "if" as well for Indian fabs: Not every semiconductor company that decides to manufacture in India will automatically get the nation's generous new incentives. A newly established national appraisal committee is reviewing all fab proposals for subsidy approvals, and it's vowed to be selective. For that matter, India isn't looking for an incoming stampede of semiconductor plants during the three years in which the hefty incentives are available.
   "The Indian ecosystem can accommodate two to three semiconductor fabrication units," said Maran, "each with an investment of $2 billion to $3 billion. We have the choice to pick the best."
   With HSMC as a starting point, India's fab picking process is underway.



©2007 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.