This is an excellent article on Semiconductor industry in layman terms written on Chowk.com. Though its essentially written keeping Pakistan in mind, it gives a good idea on how to proceed for India as well.
Neo, i hope you read and reply to this, as Adux said, responsible posters have a responsiblity or some such $hit
What has been Pakistan's approach to this industry?
The Seventh Wave - Pakistan’s Chance to Achieve Escape Velocity
Imran Mustafa
September 3, 2006
Among the many favorite and much maligned sayings of our leaders is one that goes something like this “Pakistan will stand high and tall in the comity of nations” – true only if the comparison is limited to the Sub Saharan African region, for if they were even remotely referring to the first world or even the developing countries they would be kidding no one except themselves and of course the 150 million unfortunate souls that they lead, for what they don’t (want to) realize is that we as a nation are standing on the ground while the countries they refer to have sky rocketed into a totally different orbit altogether (India et al Included). The least that these ‘Enlightened Amir(s)-ul-Momineen’ can do is to provide an enabling environment that will empower people to harness their latent entrepreneurial zeal to fuel the Industrial and technological growth required to take us there, of course with a little help from our Chinese friends. As it stands now our Industry, though officially growing in double digits does not possess the necessary ‘oomph’ to take us to the next level of development, at max it will allow us to maintain the status quo and help impede the impending recession in the face of a massive population growth surge. What then is necessitated is a truly novel approach – a ‘solid’ fuel technology if you may, for us to achieve that coveted status we so keenly desire. Our “Seventh Wave”, that will help us break from paddling the white shallows and truly take us to the deep blue (or Green) ocean of opportunities!
Now back to the shore! We currently export no more than a measly $20 billion (official and not so official included) and the last major hype that was trumpeted to be the messiah for Pakistan’s economy, yes that much used and abused term - IT and along with it Software stands at a paltry 400 or so million per annum even after 5 odd years of national ‘irrational exuberance’. So what is it that I am proposing? The answer my friends lie in something that goes by the name of “Semiconductors”, the stuff that actually drives everything from cell phones, to computers, to modern medical diagnostics and of course not to mention -IT. The substantial impact of the semiconductor industry on the growth and resilience of the global economy represents crucial developments now recognized at the highest level of national policy making in most countries. Today semiconductors are all-pervasive and an important source of productivity in any modern economy. Their rapid technological evolution—characterized by continuously increasing productivity and contemporaneously decreasing cost—is a source of growth throughout the economy, both in emerging industries and in the more traditional industrial sectors as well. Sales in 2006 will grow by 6.3 percent to $228 billion and in 2007 by 15.2 percent to $260 billion. The Semiconductor Industry Association forecasts an 11.8 percent compound annual growth rate through the forecast period of 2004 through 2007.” Yes that is $260 billion, if we can manage to grab just 1% of that market it will net us 2.6 billion dollars which is close to 15% of our entire combined exports. You begin to see the picture!
Alright the numbers are great and all and as stated before, a similar hype was created about software that it’s the silver bullet for all of Pakistan’s economic ills. So what is to say that the same fate will not befall this industry also? Let me try to explain why if the semiconductor business does come to Pakistan, its chances of success are brighter than that that faced by its Software & IT cousins. To begin with Software requires proficiency in core programming languages and a skill set that constantly needs to be updated as new software packages and programming languages pop up(ask any Java Programmer). The hype was short lived since we did not have the required number of ‘Real’ professionals (Arts graduates with six months diploma courses don’t count) to actually fuel the growth; we were burning Cow Dung when instead we required Jet Fuel. Institutes of all sorts opened up, offering everything from typing tutor to computer programming. Garbage in = Garbage out. Semiconductors on the other hand require real electrical/electronic engineers (No offence to software people) and the established Pakistani Institutions producing them have had a pretty good track record of producing above caliber engineers and so the workforce is already there, they don’t need to be retrained only re-tuned. The second and the major problem with the IT or software exports was that currently established players (A.K.A Local Seths) were not willing to truly own and invest in something they didn’t understand or more precisely something they could not touch or feel, for them it had to be something tangible which could be felt, checked (and not to mention manipulated), this I believe is one of the key reasons for software/IT consultancy not taking off in a big way on this side of the border, unlike the Indians who had the vision or Good Fortune of recognizing the potential early on. In case you doubt it, think again, Wipro, one of the largest names in Global outsourcing and a major Indian software power house was originally started as – ‘Western India Vegetable Products Limited’, Yes Azeem Premji was a local seth selling vanaspati ghee and not some Hot shot Harvard Business Exec whose first words were ‘BPO’ when he came out of his mothers womb, Q.E.D.
The Semiconductor Industry:
So how do we get in on the action and grab a piece of this lucrative Industry?
Instead of rushing in we first need to comprehend the complete cycle of this industry and then try to see and analyze the areas that can be easily accommodated into our current Industrial stream and business psyche. It all begins with the design of the chip, where customers tell a design house/company that they need such and such functionality from the chip, an example would be a medical instrument company asking for a chip that measures the blood glucose level of a patient. The design company would then gather all the parameters, design the chip and then send it for manufacturing, Design houses don’t require too much of an investment in terms of capital expenditure but does require a lot of rich human expertise and Intellectual capital and since both these quantities are in extremely short supply, the chances of a large scale proliferation of Semiconductor design houses or Fabless companies as they are more commonly known is unlikely, since top level knowledge and human capital is not our forte, nonetheless there are a few top notch design houses functioning in the ever green and serene environs of Islamabad, mostly operated by a handful bunch of sincere US based Pakistanis for whom giving something back in return means more than just handing out charity.
Then comes the manufacturing part, once the chip is designed it has to be manufactured and that is done in a Silicon Foundry or in tech lingo a – FAB and to set up a state of the art FAB where these chips can be manufactured requires a cool $3 billion dollars. Now if we were to do this from our own pocket, there are only two entities that come to mind who can even afford to put a down payment on one of these babies. Its either of the Zardari Inc type or the Government of Pakistan, not much of a choice!, so we can safely cross off putting up a FAB from our own resources off the list, and while we are doing that, for the sake of curiosity, lets take a peek again next door, and we find: “Union Minister for IT and Communications Dayanidhi Maran on Wednesday said the Centre would shortly come out with a comprehensive policy for encouraging semiconductor industry, including provision of incentives and special packages. ‘It is only a matter of weeks before the policy is announced,’ Mr. Maran said at a function where Chief Minister Y. S. Rajasekhara Reddy laid the foundation stone for the $ 3 billion dollar Sem India`s Fab City project”. --- Déjàvu! India is at it, again, before us, but this time the lag period is so small that even if we start by the end of next fiscal year we can be at par with them, so how do we do it, like we always do things of this magnitude – Call our Chinese friends and ask (persuade, plead, beg) them to help us build our first FAB as a gift to the people of Pakistan or as a testimony to the time tested friendship of our countries, whatever the reason – just get them help us build the Fab, and in case the government wants to figure out where, Gawadar Port would be a good idea but if you want to be practical Port Qasim in Karachi would be the ideal location, The benefits of having a Fab are enormous, it immediately puts you on the global semiconductor map and where there is a Fab, downstream test and packaging Industries(which have one of the highest skilled job creation ratios) are sure to follow. Need I say more!
Now after these Silicon chips are manufactured (in India, if we fail to take the initiative) they go through a process called testing and packaging, and this is where I really believe we can grab the biggest piece of the pie and hop on the bandwagon in time before the next boom cycle, for this segment not only blends well with the existing psyche of our local Industrialists, its also within the financial means of most local business groups. For the Industrialist reading this, think of the “Test House” in which these silicon chips are tested on Automatic testers as the “Production” department of a textile unit and the testers as ‘looms’ running silicon chips instead of fabric, you would need an operator just as you would need a loom operator, tested silicon units come out which need to be packaged, retested and then shipped. It’s as simple as that; the same Quality Inspections are required, same time constraints and delivery schedules have to be met, In short nothing that is not the norm. The only difference being instead of hiring labor at minimum wage you would need to hire skilled technicians and Engineers for maintaining a strict quality control regime and a trouble free operation, and in return reap at least double the margins and quadruple the turnover for the same amount of investment in say a hosiery or a towel unit.
Take the Philippines for example; they have managed to carve out a good niche market for themselves in the Testing and Packaging sector. All major semiconductor firms of the world have a low cost facility in the Philippines that churn out their high volume parts. This year alone US based semiconductor companies are expected to inject $600 million into the Philippines and have poured more than $5 billion into this country over the past three years. The investment has transformed their economy and acted as a buffer against the economic crisis that has plagued the rest of East Asia. Once reliant on coconuts and palm oil for foreign cash, it’s now outperforming many of its neighbors and becoming one of the fastest-growing outposts of the high-tech economy. Exports of chips and electronics grew 33% last year, to $20 billion, and now account for 70% of their exports.
Another country that has also benefited from this sector in a big way is the tiny city state of Singapore. Singapore`s eminence in the Electronics industry is evident in the quantity and scope of facilities currently residing on its shores. Home to over 14 Semiconductor wafer fabrication plants, approx 20 assembly and test operations, and 40 IC design centers, Singapore includes in this number the world`s top three wafer foundries, the world`s top three assembly and test foundries, and four of the world`s top 10 fabless design companies.
So how do we tap into this lucrative test and packaging market? and what does it take to set up one of these test centers? The simplest and easiest entry vehicle would be to partner up with major regional companies that are based in either Philippines or Singapore and have them invest in Pakistan, we already have a dozen or so Singapore based companies that are actively involved in other sectors of our economy and it would be relatively easy to persuade at least a few of them to come to Pakistan. An example would be the folks at Ecommerce Gateway Pakistan (Pvt) Ltd (A Singapore based consortium), who were the pioneers of hosting International Exhibitions and Conferences in Pakistan and help put it on the radar map as a major trade show and exhibitions venue. Now interestingly the foreign stake holders on the board of this company who are Singaporean nationals also happen to be the semiconductor veterans of their country and more precisely in test and contract manufacturing, Mr. Inderjit Singh who is the chairman of the consortium is also the CEO of Infiniti Solutions Limited, a Singapore based company in the Semiconductor Manufacturing business and was also the past President of United Test and Assembly; one of the largest contract manufacturers of semiconductor test(7th largest to be exact).
The other more tedious option would be to establish a test center independently; that would require a large warehouse, a dozen or so testers, an equal number of specialized handlers and about 25-30 million dollars worth of investment, the return approx 30% in real world terms and priceless otherwise, for the tertiary industry that is spawned to support these centers contributes to massive job creation in which again skilled and semi skilled engineers and technician are hired. There are already a few test support companies in Pakistan that are providing these services mostly to the US based chip manufacturers such as the Karachi based Altanova-Pakistan and others, and they are doing extremely well.
However hoping to bring in a bigger piece of the pie requires efforts not only from the locals but also from Overseas Pakistanis and most notably US based ones. Organizations such as the Silicon Valley based OPEN (Organization of Pakistani Entrepreneurs) are ideal platforms to act as transit mediums for the transfer of not just technology but the actual business as well. Currently whatever is coming thru the overseas channel is sadly on an individual to individual basis and not on an organizational level. This needs to change if we are to even have a decent shot in attracting business from the big players.
Another option could be that the GOP markets Pakistan as a virgin market where the first comers can successfully leverage the initiative and reap long term benefits. Incase they need a hint where to start their marketing blitz from, the answer is Europe. Modern European semiconductor manufacturers have shown the same enterprising spirit that their ancestor`s trading companies showed and are extremely keen on exploring Virgin Islands of opportunity, and who else is better aware of this European trait than the people of the subcontinent. In my opinion, European powerhouses such as ST Microelectronics, Philips Semiconductors, Infineon Technologies and the likes thereof could be successfully persuaded with a sustained effort.
Finally once all is said and done, the chips are incorporated into end-use devices such as cell phones, computers, digital cameras, etc and sold off in supermarkets /electronics bazaars and that marks the end of the product lifecycle.
The choice before us is crystal clear; either grab the opportunity that is surely headed towards our part of the world or maintain the status quo, unwilling to leap and think outside the box. The former demands that we stand up and be counted whereas the latter asks that we be content with knitting fabric and sipping “Lassi” for the rest of our lives. Whatever the outcome, I for one will rejoice knowing that we will always figure somewhere in this chain, albeit at the bottom as mere third rate consumers in the back alleys of Karachi’s Electronics Market.
