Can BRIC Pave the Road to a Rebound? India's drivers of growth and dreams of a design future

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Short term promise for semiconductor growth is hard to find in any the world’s developed economies. The BRIC (Brazil, Russia, India and China) countries have enjoyed the spotlight in recent years due to their rapid growth as manufacturers and consumer markets. In the ongoing economic downturn these countries continue to grow, albeit at a slower pace due to global macro economic effects.

A look at India reveals an economy in which continued growth means current concrete opportunities for semiconductor suppliers and electronics manufacturers. Even today, as India faces new challenges from the horrific attacks in Mumbai, the business community, spearheaded by Mr. Ratan Tata, chairman of Tata Sons, is defiant and positive about India’s continued bright future in the global economic fore (http://online.wsj.com/article/SB122806478088367089.html). Capital markets on the Friday after the attacks showed resilience and added support to India’s strength in the global business world by only fluctuating within a percentile for the various electronically traded funds (ETFs) (http://seekingalpha.com/article/108702-capital-markets-defy-terrorists?source=email).

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BRIC economic trajectories
Following the BRIC countries’ path through the economic turmoil this year has provided some needed shelter from the unending deluge of bad news, as well as providing insight to questions of decoupling from advanced economies and inherent strength under severe pressure. Advanced economies are certainly the hardest hit by the current financial crisis and waning consumer confidence levels. To wit, these economies are experiencing dramatically depressed growth and Gross Domestic Product (GDP) estimates for 2008 and 2009E, zero to 0.5 percent GDP, respectively. It is the emerging economies that are propping up the International Monetary Fund’s (IMF) estimates for the ‘increase’ to roughly 3 percent global GDP in 2009E. It is the emerging economies which are continuing to grow under these worst of conditions at a combined rate of just under 5 percent for 2008 and up to 6.1 percent by 2009E (www.economist.com/displayStory.cfm?story_id=12382253). Recently updated numbers for November continue to show contraction for advanced economies, down by an additional 0.75 percent from October projections, but with a recovery still “projected to begin late in 2009.” (www.imf.org/external/pubs/ft/weo/2008/update/03/pdf/1108.pdf)

The good news is that the emerging economies are continuing to grow, but the lowered growth levels are roughly parallel to that of the sluggish advanced economies, see Figure 1.

 

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Figure 1. Comparison of GDP, Constant Prices, from 1990-2010E (as percent) Source: Compiled from IMF World Economic Outlook (WEO) data (www.imf.org/external/pubs/ft/weo/2008/02/weodata/index.aspx)

Certainly, were decoupling to have existed, the parallel trajectories across indicators, such as GDP, ought not exist. Additionally, given the past year’s true economic tests, it may be safe to say that the notion of decoupling with today’s highly integrated, multinational supply chains is unrealistic for any participating economy, be it on the supply or demand side of the chain. As such, the reasons for the parallels become more obvious: as demand wanes due to deflating consumer confidence and willingness to spend, those on the supply side of goods suffer as well.

India’s economic landscape
But what of India, with it’s highly domestic-driven GDP, as opposed to export-reliant economies? Shouldn’t India be further buffered from the global economic crisis? On the face of broad assumptions, yes. However, India also carries the “largest current-account deficit, which widened to 3.6% of GDP in the second quarter [of 2008]. It bridged most of this gap with foreign-direct investment.” (www.economist.com/displayStory.cfm?story_id=12481004) And, of course, such investment has become both more expensive and more scarce.

The reductions in the ability to bridge deficit gaps comes at a steep price for India; it has had to put numerous infrastructure plans on hold, something it can little afford to do. The resulting constraints impede progress for increasing production to satisfy local and export markets. The terrorist attacks on Mumbai may, however, actually be an odd positive push to the Indian government to revisit and increase spending plans for social services and infrastructure in a show of ‘confidence boosting,’ according to a recent report in the Wall Street Journal (http://online.wsj.com/article/SB122813035163768709.html). It will be a tricky balance to maintain investment-grade ratings and fulfill strategic goals such as that unscored by “previous Finance Minister P. Chidambaram […] after the attacks that India's growth wouldn't be allowed to fall under 7%.” (ibid.)

Another concern to economic health, particularly in emerging economies, is inflation. As the barrel cost of oil rose steeply during this year, consumers worldwide quickly began curtailing their spending. As the price of oil rose, prices for other goods also climbed due to the link in goods’ delivery. Inflation reached a peak in late summer. In India, inflation doubled from roughly 5 percent to just over 10 percent “due to soaring commodity and fuel prices, peaking at 12.63% on August 9, 2008. Inflation declined to 11.44% on October 3, 2008; however, there appears to be no further reprieve of extreme significance and economic growth is likely to decelerate considerably,” according to Reggie Middleton, contributor to Seeking Alpha 11/06/2008 (“Economic Contractions and Rising Prices: Enter Global Inflation”).

While the Reserve Bank of India (RBI) took measures quickly and appropriately to ease the rise of inflation, the Asian Development Bank still forecasts India’s growth at 7.8 percent for 2008 and further down to “6.3-6.5%, down from about 8% annually from 2002-2007.”
(http://blogs.wsj.com/economics/2008/11/17/adb-official-china-india-can-keep-asia-afloat/) This rate of growth, according to the ADB, is seen as strong and proof that inflation is being held in check. The forecasts for growth in 2009-2010 are now estimated by the ADB to be around 9 percent (www.economist.com/displayStory.cfm?story_id=12411151). At these rates, India quickly moves up in rank to be “among the world’s fastest-growing economies. Many of India’s fundamentals remain sound.” (ibid.)

India’s drivers for the semiconductor industry
Gartner’s 2008 forecast for revenue growth in the semiconductor market has not seen many double digits this year, but India and the “Other Asia/Pacific category [i.e., excluding China and Hong Kong] are forecast to achieve higher CAGR [Compound Annual Growth Rate] of 19.1% and 18.7%, respectively.” (www.electronicsweekly.com/Articles/2008/10/07/44648/china-dominates
-asiapac-semi-industry-growth-gartner.htm) According to the report, as cited in Electronics Weekly (ibid.):

India is expected to continue to attract investment from global electronic manufacturers, which will drive significant revenue growth in semiconductor consumption. As electronic equipment manufacturing continues to shift out to lower-cost destinations to stay competitive, major markets like South Korea, Taiwan, and Singapore are forecast to see continued falls in their semiconductor consumption revenue.

100% y-o-y growth forecast for LCD TV market
Presently, the Indian television (TV) market is roughly 13 million units, with the vast majority, 92.9 percent, being CRT TV units, “followed by LCD TV with 6.6 percent and PDP TV with 0.5 percent.” (www.eetasia.com/ART_8800544955_480200_NT_01f9e53d.HTM) According to the same EETimesAsia article,a recent DisplaySearch report on the Indian TV market is forecasted to steadily drop in the number CRT TVs per year for the next five years, while the LCD TV market is anticipated to grow by more than 100 percent year-on-year through 2012.

100 percent growth is phenomenal, especially in light of the ongoing economic climate. The supporting variables to these bold estimates are rooted in India having the second largest population in the world, the present popularity and penetration rate of TV, growing purchasing power of consumers and their desire to acquire new TV technologies, falling prices of flat panel TVs, and the penetration of digital TV (DTV) broadcast (ibid.).

Mobile phones and gateways to the internet
India is in the limelight of the ultralow-cost (ULC) handset market due to the relatively low ‘teledensity’ rate of 25 percent. New chip technologies combined with decreasing prices are enabling the ULC market to provide handsets that offer internet connectivity. This multimedia dimension of the ULC handset not only increases the interest in the consumption of these devices but also provides alternative access routes to the internet for a population that has been even slower to adopt PCs.

The sheer volume of Indian subscribers, based on current subscribers and those forecasted to join, brings the forecast for the WiMAX market (subscriptions and devices combined) to roughly US$13 billion by 2012, or roughly 20 percent of the global WiMAX user base (www.eetasia.com/ART_8800
549918_499488_NT_24b97aec.HTM). The proliferation of WiMAX will also add support to the penetration of handsets beyond the ULC devices, thereby also increasing the spectrum of mobile chips in the Indian market. With the present low notebook and PC penetration rates, the opportunity for new consumer markets to go directly to smart phones, mobile internet devices, and ultramobile PCs is significant (ibid.).

The automobile industry
This October with numbers down 6.6 percent year-on-year, Indian car sales have experienced “their biggest percentage decline in more than three years as higher rates on loans and increased fuel costs crimped demand […].” (http://online.wsj.com/article/SB122634363547814491.html) India’s ranking as the number three top automobile sales market does not bode well for the auto industry as it looks to emerging markets to find some stability from the faltering advanced economies.

The reason that the BRIC economies continue to hold hope for the auto industry is the sheer volume of first time car sales, estimated at 14 million units in 2008 is bolstering what is set to be a record year in global car sales, roughly 58 million units – despite the global recession (www.economist.com/specialreports/displaystory.cfm?story_id=12544933). The BRIC markets have quickly become the lifeblood of the auto industry, 65 percent of General Motors (GM) first quarter 2008 (1Q08) sales were outside of the US (ibid.).

The greatest barrier to the market presently is the lack of infrastructure. The lower percentage of roads in good condition for driving compared to the increasing percentage of cars on those few roads is leading to fantastic traffic situations. Hand in hand with solving infrastructure needs for these countries is the necessity to consider the environmental impact of so many new automobiles on the roads while also considering the impact of fuel increases on these new consumers. There are, therefore, multiple drivers for designing and producing low- or zero-emission battery-powered autos. Not the least of which is the increased number of chips required for such cars over existing low-cost, fuel-based ones that contain significantly fewer ICs and sensors.

India’s chip design future
As India considers how to move its position to beyond that of an emerging economy, a directed strategy away from services to embedded systems design and intellectual property designs are at the fore. While not a new strategy, India’s fortunate position during the present global economic recession is strengthening its opportunity to grow its design capabilities (www.ednasia.com/print.asp?articleId=22195). The laundry list of over 100 leading global corporations that have a presence in India and are supporting design engineering activities, include Nokia, Intel, Texas Instruments, NXP Semiconductors, Cisco, Hitachi, Mentor Graphics, among others. (cf., www.eetindia.co.in/ART_8800492505_1800000_NT_c0f789af.HTM, www.eetindia.co.in/ART_8800492937_1800000_NT_do24eb73.HTM).

While there is concern that decreasing supply of top-level engineers and increasing labor costs may reduce India’s ability to lure R&D centers, the tipping point may be the localization trend due to freight costs, local product and market awareness, local presence to increase market penetration success, and the dominant status that BRIC nations are likely to play moving into the next decade (cf. www.industryweek.com/ReadArticle.aspx?ArticleID=17761, www.industryweek.com/ReadArticle.aspx?
ArticleID=15831, www.zdnetasia.com/news/business/0,39044229,62044560,00.htm,
www.iht.com/articles/2008/06/03/business/glob04.php). With the Indian government supporting the goal of becoming an engineering design hub, particularly for the semiconductor industry, and the existing investments by corporations along with the collaborations set up with local universities, the path to success looks more promising than troublesome.

As a leader in the Asia/Pacific region, India’s population, economic strength, labor market, consumer market, and central position for logistics all work in its favor. On the other hand, the significant infrastructure development that is currently being slowed by weakening of external investors due to the global financial crisis, is truly problematic (cf. www.mckinseyquarterly.com/Strategy/Globalization/
Nurturing_entrepreneurship_in_Indias_villages_2237, http://online.wsj.com/article/SB122644543959318895.html; cf. also issues related to basic materials http://seekingalpha.com/article/96947-india-s-approaching-age-of-basic-materials).

India as a safe harbor for the electronics industry in the ongoing global economic storm is not unfounded optimism, even in light of the recent tragedy in Mumbai. Concrete data point out the current advances and future potential for the Indian market in the semiconductor industry. Despite increasing inflation and slowing growth, Indian consumers continue to spend on electronic products – most notably TVs and mobile phones. This strong domestic market is shoring up local manufacturing and offering a target market for continued development by international semiconductor manufacturers. Similarly, the Indian automobile market presents growth opportunities, despite the dip in consumption. Of course, India’s growing prominence in chip design will continue to secure its place in the semiconductor supply chain. India’s domestic consumer promise certainly makes it an important focus of semiconductor suppliers and electronics manufacturers today. And clearly, such consumer strength signals a very meaningful future.

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