Gautam Srinivasan is a reporter/producer for Reuters
With its vast work force, thriving chip design sector and burgeoning demand of electronics, India should be an attractive base for semiconductor makers, but its efforts to establish an international manufacturing hub have so far been a flop.
"Fab City", an industrial park on the outskirts of Hyderabad, was launched amid much hype in 2007, with the government offering tax breaks and capital subsidies to chip makers to set up operations there.
Since then, the proposed investment has dwindled from $9.5-billion for planned semiconductor and solar cell plants to less than $3-billion, with no semiconductor makers left on board. Only one factory, making solar cells, is fully up and running.
In hindsight, Fab City was launched at just the wrong time.
Global semiconductor revenues fell between 2007 and 2009 as the financial crisis hammered trade and companies cut back on capital spending to preserve cash.
Major investors SemIndia and Nano Tech Silicon India, for example, both shelved planned investments in Fab City of $3-billion and $2-billion respectively in 2008, leaving the site of India's digital dreams barren save for some paved roads, powerlines and dusty building sites.
"In 2007...globally the chip market was going down and this is a cyclical market," said Ajay Kumar, joint secretary at the Department of Information Technology.
The year 2007 "happened to be a bad time to have come out shopping for a fab. Right now we are in the period when things are looking up, the demand for chips is going up, foundries and other semiconductor companies are looking to expand capacity."
The logic behind Fab City -- a fab is industry jargon for a fabrication plant making silicon chips for computers, cell phones and other electronics -- remains sound. It explains why the Indian government remains keen to promote itself as a semiconductor manufacturing base to rival established hubs such as Singapore, Taiwan and China.
Many foreign chip makers, including Intel, AMD and Freescale, already have design operations in India. The Indian Semiconductor Association (ISA) predicts that the country's chip design industry will be worth $10.2-billion by 2012.
"We feel that we have put so much in there," said B.R. Meena, vice chairman of Andhra Pradesh Industrial Infrastructure Corporation (APIIC), the state agency that runs Fab City.
"We have put our own organization's money in that and we are not able to get investors there, so we feel slightly disappointed at what is happening."
A report from consultants Frost & Sullivan and the ISA said India's electronic chip market -- an indicator of overall electronics consumption -- grew 28 per cent in 2010, thanks to booming mobile phone sales. Almost none of the $6.55-billion of semiconductors used last year were produced in India.
That fact does not deter Mr. Kumar, who said India enjoys a demographic advantage over its Asian rivals.
"There is an abundance of labour in India and that situation is likely to further become accentuated in the next 10 years or so as age in China increases and in India the younger generation grows up," he said.
"I think there is a huge value proposition for any company to come and set up a fab in India, take advantage of this, cater to the domestic demand."
But if Fab City has not succeeded by now, despite cheap land, good roads, a dedicated power and water supply and a site 10 minutes from Hyderabad's airport, why should investors have faith in future attempts to lure semiconductor manufacturers?
This time around, Indian officials plan to customise incentives, rather than relying on a one-size-fits-all policy, to come up with tailor-made packages that may include the Indian government becoming an equity partner in some schemes.
Pradeep Udhas, an executive director at KPMG, said India also needed to make it easier to import equipment for the capital intensive industry and tweak visa rules to help companies bring in key staff from overseas.
"Throwing money at a problem and saying that we will do $5 billion and expect people to come in, that is not going to give you good results," he said.
But some investors remain sceptical about India's ambitions, noting the high initial capital costs of setting up a new semiconductor plant at a time when around 15 per cent of global capacity remains unutilised. A fab plant can cost around $3-billion for a low-end facility or about $10-billion for a high-end fab.
"Globally, it's not profitable," said Sameer Sain, co-founder and managing partner at Everstone Capital. "It's a waste of time to go down this route. India should focus on design."