A few months ago, when SemIndia decided to locate its semiconductor fabrication plant in Hyderabad, India at a cost of $3 billion, the media went ‘ga ga’ about it saying that it signals India’s entry into the manufacturing league, a stronghold of select few countries such as China, Taiwan and Singapore till recently. Yes. One cannot refute the fact this is the first time India has been considered as manufacturing location for chips. However, this is not the first time a chip company is setting up its operations in India. Companies such as Texas Instruments and Cadence Systems set up their development centers in India as early as 1980s to make the most of talent pool available here. Besides, if the argument truly holds water, Intel, the worlds largest integrated chip manufacturer, would have located its fab (28) at an estimated cost $3.5 billion in India, instead of Israel.
The cost arbitrage
So, what is new this time, one may ask. The apparent reason to locate a fab is India must be the cost arbitrage. This holds good particularly in the wake of appreciation of the Chinese currency, Yuan, by 3.3% since it got pegged to the basket of currencies last year. Hence, importing wafers from fabs is China may not be a viable option for fabless manufacturers such as Freescale, Broadcom, Altera and nVidia, on the long run. This is because, the appreciation in the currency will offset the cost advantage. Consequently, the wafer manufacturers will be forced to keep a mark-up on the product prices. This in turn will have a bearing on the operating margins of the fabless manufacturers.
Secondly, a huge fabrication facility also lowers the time-to-market for pure design firms that operate out of India and enable them to stay ahead in the competition. Thirdly, the technical expertise that India has gained over a period, bridging the perceived gap in technology adoption, also appears to have aided the decision. The other possible reason could be the decision to strike a geo-political balance and diversifying the risk by setting up a base in a market-driven economy instead of purely relying on select China-based large manufacturers such as United Microelectronics (UMC) and Taiwan Semiconductor Manufacturing (TSM).
Driven by volumes
Semiconductors (particularly digital chips) generally have a short product life cycle, rapid technological obsolescence and a steady markdown in selling prices. This calls for large capital expenditures by wafer manufacturers on a regular basis to roll out products in line with market requirements. Hence, economies of scale become the single most critical success factor to cover up all the fixed costs a wafer manufacturer incurs. The question at this point of time is do we have a large domestic market to achieve the economies of scale. The answer is a big no. Nonetheless, according to a leading market research firm, the market for electronic equipments is expected to grow by 35% annually for the next five years driven by a surge in sales of set-top boxes, DVDs, cell phones and other electronic appliances. This in turn is expected to drive the demand for chips.
However, it is pertinent to note that the market for PCs, which account for over 50% of the chip demand globally, is growing at a single digit rate. Adding to the risks, the chip industry has been historically cyclical in nature. For instance, during the downturn in 2001 the top and the bottom line of most of the semiconductors witnessed a nose-dive. Consequently, wafer manufacturers such as UMC and Chartered Semiconductor Manufacturing (CHRT) also reported operating losses during the period. These Industry manage to witness a recovery only in 2004, and post revenues of over $200 billion in 2005, the first time since 2000.
What is in store for SemIndia?
According to SIA, the trade association that represents the U.S. semiconductor industry, the global sales of chips are expected to grow at about 10% annually. This augurs well for all the chips and wafer manufacturers. However, the success of SemIndia will depend on its ability to ward of all these challenges and risks. Further, its strategy should be flexible enough to focus not only on the domestic market, but also on the international markets, if the anticipated growth in the domestic market does not emerge. In such case, SemIndia should also be ready on its toes to take on the biggies such as TSM, UMC and CHRT.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
Monday, June 26, 2006
Saturday, May 27, 2006
Lessons from China - 2
In my previous post (Lessons from China - 1), i had promised that i will try to answer a few questions that i had raised. In this i have made an attempt to do the same.
How successful is China in running its show? Can India emulate what it did? Where is India scoring ahead?
One should look at multiple parameters to evaluate this. Looking at GDP alone will not suffice the requirements. This is because though China is growing at a rapid 10% every year, almost all of its growth has been funded by the Government. On the other hand, India is growing at 8% and is doing a very creditable job on this count, as very little Government money is driving this growth. Secondly, the growth in India is propelled by a slew of entrepreneurs such as Infosys, Wipro and Tata. In China, entrepreneurism is almost a non-existant word.
In Manufacturing
Yes! agreed China is far ahead of India in manufacturing. For instance, two chinese semiconductor manufacturers, Taiwan Semiconductor Manufacturing and United Microelectronics, account for over 50% of all the wafers manufactured throughout the world. The number is only set to go up further. However, India is quickly catching up. For instance, the investment ($3.5 billion) made by SemIndia in to set up a wafer manufacturing plant in Hyderabad is a case in point. We also have several success stories in the name of Indian auto ancillary companies.
However, not all manufacturing setups in China are benchmark standards. For instance, China's oil refining capacity is limited, as most of them cannot refine oil with high sulfur air-polluting content. Hence, the oil that it imports (China is net oil importer. It imports 35% of its oil requirements) from the middle east (or far east as the case may be) is sent to Singapore or South Korea for refining before being consumed in China. Further the entire oil industry is dominated by three large players, CNOOC, CNPC and Sinopec. Lack of synergy between these companies has resulted in lot of inefficiencies and duplication of technology and processes.
According to the China Association of International Engineering, the average light crude production yield in China's refineries is at 58%, as compared to 80% for all of Asia. It is pertinent to note that Chinese cars consume 20%-30% more fuel than its foreign counterparts. According to China's Energy Research Institute, by pegging up the industry energy efficiency levels to international standards, China can reduce its energy requirements by 40%-50%. An interesting point to be noted here is The Chinese manufacturing sector is growing at a faster clip only because it is supported primarily by multinational companies. For instance, the Chinese auto sector is dominated by foreign players such as Volkswagen, General Motors, Toyota and Hyundai. Together, Volkswagen and General Motors, accounted for over 40% of the market.
Keep watching this space for Lessons from China - 3.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
How successful is China in running its show? Can India emulate what it did? Where is India scoring ahead?
One should look at multiple parameters to evaluate this. Looking at GDP alone will not suffice the requirements. This is because though China is growing at a rapid 10% every year, almost all of its growth has been funded by the Government. On the other hand, India is growing at 8% and is doing a very creditable job on this count, as very little Government money is driving this growth. Secondly, the growth in India is propelled by a slew of entrepreneurs such as Infosys, Wipro and Tata. In China, entrepreneurism is almost a non-existant word.
In Manufacturing
Yes! agreed China is far ahead of India in manufacturing. For instance, two chinese semiconductor manufacturers, Taiwan Semiconductor Manufacturing and United Microelectronics, account for over 50% of all the wafers manufactured throughout the world. The number is only set to go up further. However, India is quickly catching up. For instance, the investment ($3.5 billion) made by SemIndia in to set up a wafer manufacturing plant in Hyderabad is a case in point. We also have several success stories in the name of Indian auto ancillary companies.
However, not all manufacturing setups in China are benchmark standards. For instance, China's oil refining capacity is limited, as most of them cannot refine oil with high sulfur air-polluting content. Hence, the oil that it imports (China is net oil importer. It imports 35% of its oil requirements) from the middle east (or far east as the case may be) is sent to Singapore or South Korea for refining before being consumed in China. Further the entire oil industry is dominated by three large players, CNOOC, CNPC and Sinopec. Lack of synergy between these companies has resulted in lot of inefficiencies and duplication of technology and processes.
According to the China Association of International Engineering, the average light crude production yield in China's refineries is at 58%, as compared to 80% for all of Asia. It is pertinent to note that Chinese cars consume 20%-30% more fuel than its foreign counterparts. According to China's Energy Research Institute, by pegging up the industry energy efficiency levels to international standards, China can reduce its energy requirements by 40%-50%. An interesting point to be noted here is The Chinese manufacturing sector is growing at a faster clip only because it is supported primarily by multinational companies. For instance, the Chinese auto sector is dominated by foreign players such as Volkswagen, General Motors, Toyota and Hyundai. Together, Volkswagen and General Motors, accounted for over 40% of the market.
Keep watching this space for Lessons from China - 3.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
Wednesday, May 17, 2006
A Free Pass for toxic ships
Too often in recent times we have heard the news of ships with Toxic materials heading India's way for ship breaking, and the government doing nothing until the Supreme court intervening. Inspite of being aware of the pollution that a Toxic ship might introduce to the eco system, the government has been sitting tight lipped on the issue. It has been left to organisations like Green peace to protect the Indian waters from the poisoning that a toxic ship like Blue lady could do when being broken down.
There is no denying that ship breaking industry is big in Alang, Gujrat where it has helped improve social status of quite a few workers. India alone has 60% of the worlds ship breaking business and all of that is done in Alang, which is also the worlds largest scrapping site.
Officially, India does not allow toxic ships to be broken in its sites. This is in accordance to the Basel convention, an UN environmental program treaty that places onus on exporting nations rather than importers. However we have seen in the past few months atleast a couple of incidents (as with Le Clemenceau and Blue lady) that proved otherwise. The French ship 'Le Clemenceau', an aircraft carrier was turned back only after Green Peace created awareness of the Toxic nature of the ship and organised demonstrations against letting the ship and finally when the supreme court intervened.Even though the onus was on France to make sure the ship was toxic free, Indian Government should have acted given that we were to be the ones being affected.
The Silence of the government is puzzling. What measures is the government going to take to make sure that this saga is not repeated. Inspite of having a 'Ministry of Environment and Forest', and a Pollution control board in Gujrat and every other state, which is supposed to be the watch dog for such activites, how was the ship given a clearance? If it wasnt for the sustained efforts of Green peace, and the intervention of the supreme court, these ships would be in the scrapping yards already. What is the need to pollute our environment and risk lives by accepting to let these toxic ships. On whose greater intrests is the Ministry of Environment acting? This story is only getting intresting with many unanswered questions.
There is no denying that ship breaking industry is big in Alang, Gujrat where it has helped improve social status of quite a few workers. India alone has 60% of the worlds ship breaking business and all of that is done in Alang, which is also the worlds largest scrapping site.
Officially, India does not allow toxic ships to be broken in its sites. This is in accordance to the Basel convention, an UN environmental program treaty that places onus on exporting nations rather than importers. However we have seen in the past few months atleast a couple of incidents (as with Le Clemenceau and Blue lady) that proved otherwise. The French ship 'Le Clemenceau', an aircraft carrier was turned back only after Green Peace created awareness of the Toxic nature of the ship and organised demonstrations against letting the ship and finally when the supreme court intervened.Even though the onus was on France to make sure the ship was toxic free, Indian Government should have acted given that we were to be the ones being affected.The Silence of the government is puzzling. What measures is the government going to take to make sure that this saga is not repeated. Inspite of having a 'Ministry of Environment and Forest', and a Pollution control board in Gujrat and every other state, which is supposed to be the watch dog for such activites, how was the ship given a clearance? If it wasnt for the sustained efforts of Green peace, and the intervention of the supreme court, these ships would be in the scrapping yards already. What is the need to pollute our environment and risk lives by accepting to let these toxic ships. On whose greater intrests is the Ministry of Environment acting? This story is only getting intresting with many unanswered questions.
Sunday, May 14, 2006
Is it the ‘beginning of an end’ for Dell?
When Michael Dell founded Dell Computer Corporation, his philosophy was quite simple – small margins but large volumes. In short, he tried and succeeded in commoditizing the computer. He sold the PCs directly to the customers and pared the overhead costs. However, when Dell Inc., currently the world’s largest PC maker, announced a few days ago that it might miss its first quarter earnings target, it read something straight out of a marketing text book – a company cannot get a sustainable competitive advantage over the long-run if it merely competes on price. The logic is quite simple. Competitors with superior processes, leaner operations, and lesser overhead costs will soon emulate what the price leader has done. And this is exactly what happened in this case as well.
Competitors – Hewlett Packard, Lenovo, Acer – are giving a run for the money for Dell.
For instance, HP has been steadily eating into Dell’s share of PC market, though Dell continues to remain a market leader in the PC segment. HP, which once used to have huge operating costs, has made itself a leaner machine now. Its trailing twelve months operating margins now currently is at 6%, while Dell’s margins hover slightly higher at about 8%. HP also has opted a slew of measures to strengthened its presence in the PC market and enhance its market share. For instance, to attract corporate customers the company not only offers PCs with Intel chips, but also with AMD chips. Recently, it also emerged on a marketing campaign to promote that computers is personal and not a commodity.
Triggered by these events, Dell’s stock has lost about 40% over the past one-year. To counter this, Dell reacted in a much more predictable way. It lowered its prices again on its offerings including Inspirion and Dimension, very similar to that of what it did in 2000. However, this time around analysts opine that this move may not necessarily work, as their cost overheads where not the same, unlike five years ago. As the battle for the PC market unfolds, it will be interesting to see who will be the last man standing.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
Competitors – Hewlett Packard, Lenovo, Acer – are giving a run for the money for Dell.
For instance, HP has been steadily eating into Dell’s share of PC market, though Dell continues to remain a market leader in the PC segment. HP, which once used to have huge operating costs, has made itself a leaner machine now. Its trailing twelve months operating margins now currently is at 6%, while Dell’s margins hover slightly higher at about 8%. HP also has opted a slew of measures to strengthened its presence in the PC market and enhance its market share. For instance, to attract corporate customers the company not only offers PCs with Intel chips, but also with AMD chips. Recently, it also emerged on a marketing campaign to promote that computers is personal and not a commodity.
Triggered by these events, Dell’s stock has lost about 40% over the past one-year. To counter this, Dell reacted in a much more predictable way. It lowered its prices again on its offerings including Inspirion and Dimension, very similar to that of what it did in 2000. However, this time around analysts opine that this move may not necessarily work, as their cost overheads where not the same, unlike five years ago. As the battle for the PC market unfolds, it will be interesting to see who will be the last man standing.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
Sunday, April 30, 2006
Lessons from China - 1
Assume that you were born in a rural town and you want to migrate to a city to make a living. But the government restricts the rural-urban migration. Assume that you want to invest your money in safer options, but all you will get is 1.5-1.75% in returns for a 30 year long-term bond. Assume that the Government owns all the lands and is willing to lend it to you at a nominal rate. What would you do? A logical person would come to this simple conclusion - I will try to invest in myself and grow wherever I am. This is what happened in China, even as it grows at a rapid 10% a year over a decade.
Two pronged Advantage
The Chinese started operating and growing through a concept called 'TVE' - Township and Village Enterprises. The government lent the land and encouraged the people to produce goods and sell. As the cost of capital was very low, (Please note that i am talking about History. Two days ago, the Central Bank hiked its lending rate by 27 basis points to 5.85% inorder to garner a soft landing in a few over-heated sectors. However, the one-year deposit rates still remains the same at about 2.5%) companies managed to manufacture the products at a substantially lower cost. In addition, till July 2005, the Government kept the currency, Yuan, under tight control (RMB8.3-US$1) for almost a decade. (However, Yuan has appreciated 3.3% till date ever since it got pegged to the basket of currencies of last year). This created adequate trade surpluses for the country and enabled it to sustain its comeptitives on the export front.
The Government's stand
The Government realized that, for growth, it would require lot of investments. Hence, it opened its economcy in 1979, a decade earlier to Manmohan Singh's new industrial policy. This enabled it to attract sizeable FDI and FII investments (at present its forex reserves are about six times more than that of what India holds). Concurrently, the Government is doing a multitude of things. This include breathing life into its moribund stock market (some financial casinos really manage to pass on as bourses there), nursing sick banks (NPA levels in Chinese banks are worser than India's) by allowing foreign institutions to take stake in them, and enhance the quality of life in the fields (China accounts for 20% of increased global agricultural output over 25 years). The recent one was to address the energy crisis. China is planning to accumulate and keep a six month oil reserve, over a period of next ten years, to keep its power hungry industries going unabated. China currently uses 6.6 million barrels of oil a day (U.S. guzzles closer to 20 million barrel a day). Besides, they can't ask a third of a humanity to go back to the bicycles because there is an oil crisis.
I am sure you must be having several questions in your mind. For instance, how successful is China in running its show? Can India emulate what it did? Where is India scoring ahead? For answers, just keep watching this space.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
Two pronged Advantage
The Chinese started operating and growing through a concept called 'TVE' - Township and Village Enterprises. The government lent the land and encouraged the people to produce goods and sell. As the cost of capital was very low, (Please note that i am talking about History. Two days ago, the Central Bank hiked its lending rate by 27 basis points to 5.85% inorder to garner a soft landing in a few over-heated sectors. However, the one-year deposit rates still remains the same at about 2.5%) companies managed to manufacture the products at a substantially lower cost. In addition, till July 2005, the Government kept the currency, Yuan, under tight control (RMB8.3-US$1) for almost a decade. (However, Yuan has appreciated 3.3% till date ever since it got pegged to the basket of currencies of last year). This created adequate trade surpluses for the country and enabled it to sustain its comeptitives on the export front.
The Government's stand
The Government realized that, for growth, it would require lot of investments. Hence, it opened its economcy in 1979, a decade earlier to Manmohan Singh's new industrial policy. This enabled it to attract sizeable FDI and FII investments (at present its forex reserves are about six times more than that of what India holds). Concurrently, the Government is doing a multitude of things. This include breathing life into its moribund stock market (some financial casinos really manage to pass on as bourses there), nursing sick banks (NPA levels in Chinese banks are worser than India's) by allowing foreign institutions to take stake in them, and enhance the quality of life in the fields (China accounts for 20% of increased global agricultural output over 25 years). The recent one was to address the energy crisis. China is planning to accumulate and keep a six month oil reserve, over a period of next ten years, to keep its power hungry industries going unabated. China currently uses 6.6 million barrels of oil a day (U.S. guzzles closer to 20 million barrel a day). Besides, they can't ask a third of a humanity to go back to the bicycles because there is an oil crisis.
I am sure you must be having several questions in your mind. For instance, how successful is China in running its show? Can India emulate what it did? Where is India scoring ahead? For answers, just keep watching this space.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
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