Trend Spotting - Chip and Best...

16 July 2020, Mumbai

Chip and Best...

As per a report by CEAMA (Consumer Electronics and Appliances Manufacturer's Association), the Indian consumer electronics industry had an estimated market size of Rs 76,400 crore in 2018-19, in which Rs 32,200 crore was contributed from domestic manufacturing. Product categories that are considered in this category were air conditioners, refrigerators, washing machines, television (TV) and audio. 

During the Pre-Corona period, there had been a steady rise in disposable income of an average consumer. That coupled by aspirational values and availability of online and large format retail markets, demand for consumer electronics had been increasing steadily at an average rate of 10-11% pa. As per the earlier estimate the market would have grown at an annual rate of 11.5% pa till 2025.

What is important to note that, as per CEAMA, the domestic value addition to products under scope was around 35%, which would grow to 50% by 2025. This speaks of growing localization and availability of raw materials locally.

Having said that, one of the most important part of any CE product (or IT Hardware, Telecom and Industry automation and machinery) is integrated circuits or printed circuit boards or mother board. Typically, the mother board would constitute 20-35% of making cost of an electronics product. Sometime, it could be even higher. Typically, the life of a CE product is 10-15 years, during which most have at least one breakdown involving the circuits. Thus, the demand for these ICs is twofold - OEM and replacement.

So, in simple terms the value of ICs in the overall CE market would be Rs. 15000-20000 crore. This is just one segment. There are numerous products wherein ICs are required - from a simple remote to mobile phones to kitchen appliances to medical devices to automotive and transportation (railways, aviation, naval) to industrial automation to education to defense to space expeditions to smart cities to sensor based smart agriculture, list will be endless. 

Industry 4.0
Industry 4.0 means the fusion of digitalization with traditional industrial processes. This results in intelligent value chains and product lifecycles that start with development, go through manufacturing, assembly, product delivery and maintenance, and end with recycling.

Sensors and other devices are used to connect objects of the material, physical world with virtual networks. The basis for digital production lies in intelligent (smart) systems. 

The Internet of things is a system of interrelated computing devices, mechanical and digital machines provided with unique identifiers and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction.

Internet of Things (IoT) too  is being embraced in the country faster, particularly after the Pandemic, when remote manufacturing has become more a necessity than a statement.

Smart Products 
Smart products are products that can be flexibly adapted to the needs of the user and can also be connected to other systems by means of intelligent networking. For example, a sensor based lighting system or a washing machine that can be programmed and operated virtually. 

Mobile India..

India is the second-largest mobile phone manufacturer in the world after China. From just two mobile phone manufacturing units in 2014 to 268 mobile handset and accessories manufacturing units in 2019 tells the remarkable story of mobile manufacturing in India. According to ICEA (Indian Cellular & Electronics Association), the manufacture of mobile phones in India has grown quite rapidly in the past few years with the total production reaching 225 million units in 2017-18, as compared to 60 million units in 2014-15.

India has achieved tremendous success in mobile phone and component manufacturing in the last four years with more than 95 per cent of domestic consumption now being produced in India. After domestic market saturation India has set a target of Rs 7.7 lakh crore of exports by 2025.

Almost all electrical, electronic, electro mechanical kdevices need an IC, in a way, Our life is controlled by ICs.

So tell me, what are ICs?

Integrated circuit, commonly referred to as an IC, is a microscopic array of electronic circuits and components that has been diffused or implanted onto the surface of a single crystal, or chip, of semiconducting material such as silicon. It is called an integrated circuit because the components, circuits, and base material are all made together, or integrated, out of a single piece of silicon, as opposed to a discrete circuit in which the components are made separately from different materials and assembled later.

ICs range in complexity from simple logic modules and amplifiers to complete microcomputers containing millions of elements. In an integrated circuit, electronic components such as resistors, capacitors, diodes, and transistors are formed directly onto the surface of a silicon crystal. 

ICs could be simple or complex - depending on the desired functionality. Like any product (for example textiles) design is the first stage and is the critical part, followed by fabrication. 

What makes a chip?

Pure silicon is the basis for most integrated circuits. It provides the base, or substrate for the entire chip. The silicon must be so pure that only one out of every one thousand crore atoms can be impure.

Silicon is almost never found in a pure state in nature, and virtually always comes as a compound with other elements. It’s most commonly found as a silicate and silica. As per Indian Bureau of Mines (IBM), India has sufficient reserves of silica

Fabrication..

Hundreds of integrated circuits are made at the same time on a single, thin slice of silicon and are then cut apart into individual IC chips.

Where does India stand in the IC arena?

As had discussed in an earlier post - Make Maharashtra Great Again, Economically ( https://windcheck.blogspot.com/2020/06/make-maharashtra-great-again_7.html ), as of now IC making in India is very limited. At best we have design centers of Intel, Texas Instruments and several smaller ones. But IC making is like making the whole cake in-house.

• As of today, India mostly imports ICs from Singapore, Taiwan, USA, Vietnam, South Korea, Japan and China.
• According to data from the United Nations Comtrade (UN Comtrade) database, annual IC imports into India in 2018 jumped by 281 percent to $8 billion.
• This is after consistently modest annual imports ranging from $1.5 to $2 billion from 2014-2017.
• The increase in integrated circuit (IC) imports into India from the world in 2018 was dramatic and hard to ignore.
• The largest increases in India’s IC imports were from China.
• In 2017, China was already the leading source of Indian IC imports, accounting for 30 percent of all Indian IC imports, and that share grew to 64 percent in 2018.

The reasons for increase could be some firms are trying to re-balance their supplies and some firms may be taking advantage of India's dual import policy - for example, Mobile phones have higher import tariffs as compared to its parts, so, for some players, assembling in India could be a viable option. 

Why are we not making ICs in India? 

A full-fledged IC making unit requires massive infrastructure (including a foundry for silicon), some say at least Rs.15000 crores (two billion USD). But given the size of businesses in India, and amounts of investments that are being made recently, this should not be the only barrier. The key barriers could be strategic, or diplomatic. As smaller countries like Vietnam, Taiwan have invested heavily to become the silicon foundry of the world, strategic, trade and diplomatic compulsions may have been instrumental in the slow progress of this sector in India. 

But now, Times have changed...

Given the geopolitical developments in and around India, and the global Pandemic, it is paramount the sourcing of critical parts is strategized. It is ideal to have least dependent of such parts on hostile partners. Many countries too are rethinking of their strategy of procuring or making this critical component from one country. Time for Indian government to do a rethink. 

In India, we have a large pool of electrical and electronics engineers in India. The risk-taking ability of Indian entrepreneurs is seen globally - Tata acquired Jaguar Land Rover and many such global events. Thus, capital, manpower is not anymore, a critical issue. Albeit, semiconductor making needs massive supply of purest form of water, and committed supplies of silicon.

Why the need for local semiconductor fabrication? 

As of now, almost 100% requirement of ICs in India is fulfilled via imports (barring a very few government agencies like SCL which supply to critical users like ISRO, DRDO, BEL etc). 

As per some estimates, an Indian semiconductor fabrication facility can offset semiconductor imports of US$ 8 billion over the projection period and have a further multiplier impact of US$ 15 billion on the Indian economy. An Indian semiconductor fabrication facility would enable India to join a handful of nations with such capacity. 

India is already world's fourth largest economy. Should the dependency of imports reduce, more power will get added to the value of Indian rupee. It will also add more credentials to India's global image. India is among world's best space programme provider, so our capabilities are proven. 

World's semiconductor biggies like Intel, ST Microprocessors, Qualcomm, ARM  already have presence in India - but in design, not manufacturing. It is matter of forward and backward integration. 

When it comes to this integration, who can beat Indian conglomerate Reliance Industries. It is time that the flag-bearers of Indian economy take a calculated yet big risk and set up a brownfield semiconductor facility in India. Friendly countries like Israel could also be useful in this expedition. 

As a country, we have to move up the value chain, otherwise even smaller countries could take us hostage, economically.

While, chip making is not a cheap proposition, however, when many foreign companies trying to re-balance supply chains out countries like China, it becomes a critical and worth making behind the envelope calculations for a future leap.

Government Impetus 

The National Policy on Electronics 2019 has set the target of promoting domestic manufacturing and export in the entire value-chain of ESDM to achieve a turnover of Rs 26 lakh crore by 2025. This includes a targeted production of one billion mobile phones by 2025, valued at Rs 13 lakh crore, including 600 million mobile handsets valued at Rs 7 lakh crore for export.

With the announcement of Rs.50,000 Crore package for ESDM (Electronics System Design Manufacturing), we seemed to be moving in right direction, although a lot more steam would be needed to create a real impression.

Maximize the Sunrise 

Semiconductor, and photo voltaic cells (for solar panels) are going to be like oil. By successfully setting up 750 MW solar farm in Rewa(Madhya Pradesh), India has not only set Asia's largest solar energy project but has also announced to world that it has capability for large scale setups. And Scales will only take us to higher positions in global arena.

Time to Rise for Maharashtra

Google, Intel Cap, Qualcomm Ventures have taken strategic investment in India's Reliance Industries (yet massive enough to make a company having annual turnover of Rs. 6.5 lakh crore, and market capitalization over USD 150 billion (over 11 lakh crore), fully debt free). One hopes this would Open the door for Reliance Industries to venture into some of their product or value chains.

Traditionally, southern states of India have been attracting investment in the semiconductor sector, including its association, India Electronics and Semiconductor Association (IESA). As per the association's website it doesn't have a chapter in Maharashtra, quite surprising. 

Magnetic Maharashtra 2.0 
Maharashtra is home to many large sized automobile, automotive parts, consumer electronics and appliances manufacturing companies. 

It is time the government of Maharashtra recognizes the critical importance of this value-based industry, and takes speedy steps to encourage the biggies to set up India's biggest semiconductor fabrication facility in Maharashtra. 

Caution - only serious or natural players should be allowed to enter (like JayPee associates which had no prior experience in this field had announced and later pulled out).

Self Reliant.. 
Once we have an in-house fabrication facility in India, many downstream applications and manufacturing units will automatically get created. Many young startups and engineers can create cost effective products, which otherwise are imported from China and sold on e-commerce platforms. From a simple amplifier unit or insect repllelent to ventilators, our current generation has the desired intellectual capability. 

This could be similar to what RIL achieved after taking over the raw materials  supply of plastics and textiles - which eventually led to further harnessing of the ecosystem of plastics and textiles industry in India.

It will not only augment well with the Make in India 2.0 and “Atmanirbahar Bharat” programme, but also catapult the state of Maharashtra on global rankings. A few weeks ago, in one of his interviews, ex-chief minister of Maharashtra and current leader of opposition, Mr. Devendra Fadnavis too had emphasized that the state government must give priority to create high value jobs while resurrecting the state's economy. 

Somebody has rightly said,

"We never know how high we are

Till we are called to rise;

And then, if we are true to plan,

Our statures touch the skies."

Till then, take care. Stay Safe, Stay Strong.

Dhananjay Deshmukh, Mumbai 

dhan1011@gmail.com 

(The author is an independent market research and business consulting professional. Views are personal. Data presented is collected via online secondary research).