Budget 2013 measures may attract small chip-making companies to set up units

 Budget 2013 has waived the 5% import duty on chip-making equipment and allowed companies a new tax deduction of 15% on investments above Rs 100 crore for two years.


NEW DELHI: Thrice in the last 12 years the government has come out with a policy package to attract companies to set up units to manufacture chips — the heart and mind of every electronic gadget.

Thrice it has come a cropper. Its fourth attempt, outlined by finance minister P Chidambaram in Budget 2013, might end the drought, say industry experts, but in a small rather than big way, with high-end and large-scale manufacturers like Intel, Texas Instruments and Freescale still staying away. Budget 2013 has waived the 5% import duty on chip-making equipment and allowed companies a new tax deduction of 15% on investments above Rs 100 crore for two years, thus adding two more sweeteners to a 2011 package that includes the government buying one-third of production.

"It's a step forward and the country may finally see a fab (as such units are called) announced, as early as in March," says Ajai Chowdhry, co-founder of HCL, the computer hardware company. Another senior industry official, who spoke on the condition of anonymity, adds: "Given the capital involved, you may not see a company but a consortium coming forward.

That could happen soon." To start with, it may be a slightly older technology, feels Ganesh Ramamoorthy, research director of Gartner India, a research firm. "You may not get a cutting-edge fab," he says. The smaller or closer the etching of electrical circuits on a chip, the more advanced it is.

So, for example, a 180 nanometre (nm) or 90 nm chip is used in washing machines and lowend phones, and requires an investment of $2 billion (about Rs 10,000 crore) for a set-up of scale. The latest is 28-32 nm, which are used in high-end tablets, smart phones and super computers, and call for an investment of $5 billion. "The local market is not big enough to justify a full-scale, cutting-edge fab," adds Ramamoorthy.

According to India Electronics and Semiconductor Association (IESA), an industry grouping, chip-making is a $310 billion industry globally, led by Taiwan, China and Malaysia. Indian consumers bought chips worth $7 billion in 2012. This is expected to increase to $55-60 billion by 2020, driven by sales of smartphones and tablets.

Even as it struggles to start chip manufacturing, India has established strong credentials in designing of this vital industrial input. According to IESA, there are 120 companies doing chip-design work in India, including Intel, ST Microelectronics, Texas Instruments, Infineon and Freescale. They collectively employ 2,00,000 professionals and generate revenues of $10.3 billion; this expected to grow to $60 billion by 2020.

Texas Instruments, a US-based chipmaker that has been in India for more than two decades, says its focus in India is on R&D and design rather than manufacturing. "That has not changed," its country spokesperson said in response to the latest Budget proposal.

However, PVG Menon, president of IESA, feels that, with the latest policy change, "the government has created an enabling policy framework and the market is there. It is up to businesses to respond." While they might test the waters, companies are unlikely to dive in.

"It's the right step, but does not solve all the problems, says Ganesh Guruswamy, VP & country manager, Freescale Semiconductor India, the world leader in chips for the auto industry. According to Guruswamy, infrastructure issues remain.