India may not have got the timing right about nurturing two or three semiconductor plants even as the government finally has a policy that it hopes could put the country on the world map of semiconductor (wafer fab) manufacturing.

The process of joining the ranks of countries such as Taiwan, China, Korea, Japan, Singapore and the US has already begun with the government expecting a $6-10 billion investment.

The $3 billion SemIndia project is already underway and Hindustan Semiconductor Manufacturing has submitted its $4 billion proposal that awaits the Centre's nod. But most analysts and some industry players are wondering whether government incentives alone will suffice.

"India needs around two to three fabs to meet the local demand. The problem is there could be a supply overcapacity by the time these fabs start production," says Ganesh Ramamoorthy, principal analyst, Gartner.

"The move (of notifying the policy) is definitely going to help high-end manufacturing. However, technology becomes obsolete at a very fast pace and the gestation period to set up a fab is long," says Y S Sashidhar, vice president, Frost & Sullivan (India).

By the time the fabs come up (2009-10), technology would have moved on. For instance, most of the projects announced about 130 nm (nanometer) technologies to begin with.

This technology will help in developing chips for set-top boxes, micro controllers, logic devices, discrete devices, and so on but not for mobile phone or memory chips (which account for 40 to 50 per cent of the total semiconductor market) that require better technologies.

"The problem is that by the time the fab plants in India start production, these high-tech devices will require more sophisticated technology (say 60 nm or 45 nm technologies)," says an expert. Only SemIndia is currently talking about 90 and 60 nm technologies for its second phase of production. Besides, the lower the chip size, the higher the investment.

However, there's still a logic in having a fab plant in India. Chip designing, which India excels in, accounts for around 30 per cent of the total high-tech manufacturing revenues.

Assembling, testing, marking, packing and chip manufacturing account for the remaining 70 per cent, which India loses out on.

While there's a negligible duty on import of semiconductor chips, India "can still reduce its input bill by setting up fabs". Setting up a semiconductor plant is expected to create a semiconductor "eco-system", which in turn will help Indian companies move up the global value chain and meet the local demand.

The Indian Semiconductor Association projects India's consumption of electronic equipments to touch $363 billion by 2015, up from $28.2 billion in 2005, at a compound annual growth rate of 30 per cent (Frost & Sullivan figures).

Of this, the market for the semiconductor industry is expected to be around $36.3 billion. ISA maintains that the semiconductor industry would address not only the home market, but also the global one, creating an electronics manufacturing industry in India of $100 billion in 10 years.

SemIndia, the company setting up a $3-billion chip fab in Hyderabad, has said there will be enough local demand since India's GDP is growing at over 8 per cent.

A company spokesperson declined to comment on the order book position. However, sources say companies have plans to source chips from SemIndia and "the current figure is around $500 million".

Industry experts also note that much depends on contracts too. Major fab players like Taiwan Semiconductor Manufacturing Company have contracts for a minimum period of two years. TSMC recently opened an office in Bangalore to bolster its efforts. Indian semiconductor plants will have to compete with the global majors for a decent market share.

Meanwhile, even as the government plans to "reopen negotiations with Intel and other companies to explore possibilities of them setting up units in the country", Texas Instruments has stated it will not set up a semiconductor manufacturing plant in India.

So has NXP Semiconductors, which says it has no "immediate plans", according to Ashok Chandak, sales and marketing director, NXP Semiconductors India. "In terms of the local demand, we are still not there. The numbers (with regard to demand) projected appear steep," says Chandak.

Intel, the world's largest chip manufacturer, had been waiting for the semiconductor policy to take decisions on its India plans and had in the meantime selected Vietnam for a facility. Recently, it even set up its first Asian plant in China. The government is hopeful that Intel will return.