A fab fever is on the Indian horizon. Driving the trend are a host of third party manufacturing vendors such as SemIndia, Hindustan Semiconductor Manufacturing Corporation (HSMC), Nest Technologies, Videocon and India Electronics Manufacturing Corp. Many of them are being promoted by Indians, with the big semiconductor companies providing the technology.

This is a trend very similar to the Taiwan model, and is not a planned one. In fact none of the big semiconductor companies are ready to set up shop in India, at least not in the next few years. Both Intel and IBM announced recently that they will not set up chip manufacturing plants in India. And other global majors like Texas Instruments and LSI Logic are looking towards fabless operations in India.

“Apart from Intel, there are very few semiconductor companies globally who can afford to set up captive manufacturing plants in India or elsewhere on their own. They are trying to go towards the route of actively supporting third parties with their technology and money,’’ says Indusedge Innovations CEO Rajendra Kumar Khare.

While Intel has a turnover of $35.29 billion, companies like TI, Infineon, LSI Logic have revenues in the range of $4-14 billion. According to estimates, setting up newer generation (0.65 micron and above) fabs currently costs anywhere between $3-6 billion.

Stating that the third party trend is not restricted to India and that consolidation is happening worldwide, S Janakiraman, ISA chairman and president (R&D services) of Mindtree Consulting, said, “This is the equivalent of a trend seen in the electronics manufacturing services sector where the last decade saw electronics companies outsource their manufacturing to vendors like Solectron and Foxconn.”

He said no company will think about setting up a captive plant now unless it can utilise the entire capacity. “India is still not big enough for captives to sell volumes. That’s why it is natural to see more of the third party vendors here than the big names,” he added. However, he also said companies like IBM or Intel could look at setting up small units for test assembly and packaging in India in future.

SemIndia India MD BV Naidu says India will slowly emerge as a major destination for third party manufacturing. He said India has already made major strides in other areas of semiconductor sector — design and electronic manufacturing services (EMS).

Experts though feel that the refusal of Intel and IBM to set up fabs here could have some impact. “Imagine Intel had set up a fab here; it would have had a ripple effect and the ecosystem would evolve much faster than when third parties set up units. It’s like Nokia’s setting up the plant in Chennai, which resulted in a whole supply chain being developed there,” an industry source said.