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India Aims to Boost Semiconductor Manufacturing Investment

Published: 28 February 2007 Analyst(s): Ganesh Ramamoorthy

India will provide tax incentives for new semiconductor manufacturing investments. Before taking advantage of the incentives, companies should assess the Indian market for their products.

News Analysis
Event
On 22 February 2007, the Indian government announced the Special Incentive Package Scheme, aimed at attracting semiconductor manufacturing investments in India by providing subsidies, tax breaks and interest-free loans. The scheme will run through 2010, and the key incentives include:

Subsidies of 20% of capital expenditure in the first 10 years for facilities set up in special economic zones (SEZs), and 25% for other facilities. The countervailing duty on capital goods will be exempted for facilities set up outside SEZs.

To qualify for the incentives, the minimum investment must be $550 million for a wafer fab, and $220 million for facilities that manufacture, assemble or test products such as storage devices, displays (including liquid crystal, organic light-emitting diode and plasma) and other micro- and nanotechnology products.

Analysis
The Indian government has finally responded to the high-tech industry's desire for incentives for major global semiconductor companies to establish manufacturing facilities in the country. Although the industry had wanted 25% subsidies for facilities in SEZs, the new incentives are attractive when considered alongside existing SEZ incentives. Incentives include:

100% foreign equity allowed Duty-free imports allowed of capital goods, raw materials, components and other inputs Domestic Tariff Area (DTA) sales allowed on payment of the applicable duty

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100% income tax exemption on export profits for five years, 50% for next five years, and 50% on reinvested profits for another five years Exemption from central sales tax Physical export allowed of supplies from within the DTA

Facilities in SEZs have to be net foreign exchange earners. Information technology products classified as ITA-1 items manufactured within an SEZ in the DTA count as exports. Gartner's view is that the new scheme will generate considerable interest among wafer fab companies, manufacturers of displays and other advanced microelectronics devices, and companies looking to set up semiconductor assembly, test and packaging units. The announcement will have a direct and immediate impact on SemIndia, Nano-Tech Silicon India, Network Systems and Technologies, SPEL Semiconductor and Tessolve Services. All these companies have already announced projects or have existing operational units in India.

Recommendations
To gain benefits from the new incentives, semiconductor companies considering investing in India should:

Consider possible investments in India in the context of the global industry. Globally, semiconductor manufacturing is heading toward overcapacity by 2009. Moreover, even though semiconductor consumption in India is increasing, the market is still not big enough to consume all the country's semiconductor output. Study the emerging market demand in India before committing to an investment. Even though the country is positioned to become a large consumer of a wide range of electronic equipment, semiconductor companies need to investigate whether there will be sufficient demand for their products.

Recommended Reading

"Forecast: Semiconductor Capacity, Worldwide, 1Q07 Update" Expect the trend of slowing fab wafer starts, equipment push-outs and declining utilization rates, which started in late 2006, to continue through 1H07, followed by a slow recovery in the second half of the year. By David Christensen and Bob Johnson "Dataquest Alert: Semiconductor Market Forecast (4Q06 Update)" We have adjusted our forecasts for revenue and capital spending slightly downward, though overall market conditions have changed little since 3Q06. By Richard Gordon

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