The traditional computing markets for the semiconductor industry are slowing down significantly. The PCs and tablets segment is expected to recover from a 9.9 percent drop in units shipped in 2016. But growth through 2018 and 2019 is estimated at a meager 1.4 percent. It’s a similar story in the smartphones market, which posted its lowest ever year-on-year growth of 2.5 percent last year. Though shipment volumes are expected to recover, single digit growth will probably be the norm. Volumes will increase by just over 4 percent over the next two years for a CAGR growth of 3.8 percent going into 2021.

The global semiconductor industry had a slow start to 2016 but ended the year with the industry’s highest-ever annual sales of $340 billion. Modest growth in traditional markets, encouraging macroeconomic factors and increasing memory prices were all factors in this performance. But most important of all is probably what the Semiconductor Industry Association has described as “the ever-increasing amount of semiconductor technology in devices the world depends on for working, communicating, manufacturing, treating illness, and countless other applications”.

These are the applications that can be broadly classified under IoT (Internet of Things). Many of the the application segments for IoT are still in the early stages of development and the volumes have yet to be delivered or even confirmed. But many sectors like manufacturing, transportation, healthcare, utilities, consumer electronics and automobiles have already made significant investments in IoT. And some of these sectors can have a significant impact on semiconductor industry performance. For instance, the automotive segment, represents juts 12 percent of the overall semiconductor market but is expected to grow at a CAGR of just over 10 percent between 2015 and 2020. The increasing proportion of smart components in modern automobiles, possible regulatory mandates for smart solutions, like vehicle-to-vehicle communications and the momentum in the development of autonomous vehicles will influence the trajectory of the semiconductor industry.

According to one estimate, semiconductor sales for IoT systems functions will grow at a CAGR of 14.9 percent to reach $31.1 billion in 2020. Even if the market is currently still developing, most of the big semiconductor companies are already making a big play for the IoT market. Leading semiconductor firms like Qualcomm and Samsung already seem to be stepping up the pace of development in the lead up to IoT. A recent report found that Samsung had the world’s largest portfolio of patents relevant to IoT while Qualcomm topped the list in terms of quality.

Qualcomm, the leader in the smartphone applications processor market, has already seem to have built some traction in the nascent IoT market. Earlier this year the company announced that it was currently shipping more than 1 million chips per day for IoT applications. Qualcomm’s IoT solutions are said to have been shipped with over 1.5 billion products including wearables, connected smart home products like TVs and home entertainment systems, and for commercial and industrial applications.

Even as the semiconductor industry moves in on the IoT opportunity, Southeast Asia is emerging as the chip manufacturing hub of the world. Taiwan is currently the global leader in installed wafer capacity with a 21.3 percent share of global capacity. In fact, Taiwan, South Korea, Japan and China together account for over 70 percent of installed capacity in the world.

In China, the development of the domestic semiconductor industry has become a strategic priority. The country has launched a slew of policies and investments designed specifically to reduce the huge gap between the consumption and the production of semiconductors.

India has a similar imbalance between supply and demand that could be corrected with a focused and strategic initiative to develop its semiconductor industry. The country already has a strong base in chip design but lacks the design-to-testing capacity to compete with the integrated manufacturing capabilities of its neighbors in Southeast Asia.

There are several compelling reasons for India to invest in an end-to-end semiconductor ecosystem. Over the next three years, the country’s semiconductor demand is expected to translate into economic opportunity that’s worth $50 billion. Also, as electronics as a category gets smarter, a robust component level ecosystem, including wafer fabs, will provide a competitive manufacturing edge to the domestic electronics industry. Finally, a robust integrated IoT-focused chip development ecosystem could help deliver localized and cost-effective solutions required to realize the government’s ambitious Smart Cities mission.

For its part, the government has been trying since 2011 to get its semiconductor ambitions on the road. A project approved in 2013 to establish two semiconductor fabs, by a consortium including IBM, Israel’s Tower Semiconductor and a local infrastructure company, came to naught after the local partner withdrew citing concerns of commercial viability. A second project, led by Hindustan Semiconductor Manufacturing Corporation (HSMC), in partnership with ST Microelectronics (France) and Silterra (Malaysia), recently received its first seed investment of Rs.700 crore (~$100 million) against a total estimated project cost of Rs.30,000 crore (~$4.5 billion). But the project has added some major equity in the form of a tie-up with global chip maker AMD.

The country’s semiconductor strategy is now back on the drawing board as policy makers attempt to address the commercial viability concerns of the private sector. Concurrently, the government also needs to come up with a practical roadmap to  improve the overall manufacturing infrastructure in the country. For India, the challenge is to not only get its semiconductor ambitions off the ground but to also develop an ecosystem that delivers comprehensive solutions rather than components. With the semiconductor industry poised on the verge of a huge IoT market, India also has the opportunity to focus its semiconductor strategy on the unique requirements of IoT products and solutions.

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