L&T to foray into chip design, not manufacturing. Here’s why – Business Today
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Following in the footsteps of Vedanta, Tata, and the Hiranandani groups, another prominent Indian multinational conglomerate is venturing into the semiconductor industry. Larsen & Toubro (L&T) is entering the realm of fabless semiconductor chip design, as opposed to semiconductor manufacturing.
L&T plans to establish a subsidiary with an investment of Rs 830 crore. R. Shankar Raman, L&T’s Chief Financial Officer, announced during the second-quarter financial results call that the company’s board has approved the creation of a wholly-owned subsidiary that will be involved in fabless chip design.
What is fabless?
A fabless semiconductor company specialises in the design and creation of semiconductor chips, without owning or operating semiconductor manufacturing facilities, commonly referred to as “fabs” or fabrication units.
Unlike chip manufacturing, the fabless approach is a cost-efficient undertaking. These companies focus on designing and marketing hardware and semiconductor chips while subcontracting the manufacturing process to specialised foundries. Consequently, they require less working capital. Prominent global fabless names include NVIDIA, Qualcomm, and MediaTek.
Why fabless?
L&T has acknowledged that the company is focusing on the low-investment part of the chip supply chain as it does not intend to compete with the likes of Chinese, Taiwanese and South Korean companies to start with.
Given the investments that go into setting up a fab, L&T’s decision to start with semiconductor design is a well thought out decision. It’s been over a year and a half since the Indian oil-to-gas conglomerate Vedanta announced its chip plans, but it still hasn’t been able to lock in a technology partner. Also, if applying for a fab under the government of India’s Rs 76,000 crore semiconductor scheme, the applicant must have a production-grade technology partner onboard.
Secondly, the fab ecosystem is a heavy investment space. Depending upon the nanometre, setting up a silicon semiconductor fab can involve an investment worth $3 billion to upwards of $20 billion.
Thirdly, according to industry experts, while India lacks talent in chip manufacturing, it currently has around 125,000 engineers—with a bachelor’s, master’s or PhD degree—working in various aspects of chip design and development. Typically, a BTech in Electronics and Communication Engineering (ECE) or Electronics, MTech in VLSI Design, or PhD in Semiconductor Technology, Material Science or Chemical Engineering, is required to work in firms engaged in VLSI (very large-scale integration) design. More importantly, all the leading fab and fabless companies globally have their R&D centres in India. This list includes Intel, NXP, Global Foundries, Samsung Semiconductor, Micron, Qualcomm, and Mediatek to name a few, and a lot of innovation happens from India.
The fabless model allows companies to be more agile and responsive to market demands. Given the evolution of technology, it is easier for a fabless company to change without the long lead times and constraints associated with operating their fabs.
Also Read: Adani Wilmar Q2 loss at Rs 131 crore; stock down 2%
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