BANGALORE, INDIA: ARM was one among the very few global semiconductor companies that beat the recession! In fact, its Q408 revenues were up 15pc YoY! Naturally, it was time to find out the reasons for its success.

Interestingly, it was way back in 2007, in a discussion, Anil Gupta, managing director, India operations, ARM India, had also raised the question regarding the timing of having silicon wafer fabs in India.

Post the announcement of ARM's results, I met up with Anil Gupta, and asked him what were reasons behind ARM's success, and whether the Indian silicon wafer fab story was really dead and buried. Excerpts:

CIOL: What has ARM done right? What are lessons or takeaways from ARM for others in the industry?

Anil Gupta: ARM has tried to do a few things to weather the storm.

a) Controlled costs over most of 2008. We saw signs of a slowdown back in late 2007 and early 2008. And we responded to that by being very careful with our spending and headcount growth in 2008.

b) Product diversification. While ARM has a very strong presence in the mobile phone market, we have been working hard at diversifying into other areas like microcontrollers. Last year, of the 4 billion chips containing ARM processor that shipped, 2.4 billion was in the mobile market and the remaining 1.6 billion was in non-mobile market! This careful diversification, where we leverage our v7 architecture to create multiple real-time and embedded microcontroller offerings, opens up newer markets for us and spreads the risks.

It should be noted though that whatever we have done is actually based on our long term plans. While we foresaw the general slowdown, we did not foresee the deep financial crisis hitting us the way it did. That said, if you look at our 2008 results, the management has said that we are comfortable with the street's estimate of ~$460M in revenue for 2009. Note that this figure is much lower than the $546M revenue we achieved in 2008.

What we are reiterating is that the current slowdown is so widespread that even we expect to be impacted by it to some extent, not so far, but quite likely over the next quarters.

CIOL: Naturally, what's the contribution of Indian arm of ARM in this success?

AG: The challenge for the Indian arm has been to improve our knowledge and build deeper expertise in the areas we are working. We continue to focus on that. To create a richer portfolio of IP offerings, we need engineering resources. ARM India thus becomes critical from an engineering centre perspective.

CIOL: An old question: does India have the capability to sustain or even build a product development ecosystem? What needs to be done?

AG: We need the following for this:
* Entrepreneurs committed to product development and willing to take that risk.
* Investors willing to take risk on product development companies.
* Consumption (this will happen as the economy improves any way).
* Deep enough technical/technological knowledge/know-how to put reasonably competent end products together (it exists. Examples like Sukam, Tejas and other are there).

CIOL: What's your take on the Indian silicon wafer fab story? Is it completely dead and buried now?

AG: When TSMC says they are running at only 38 percent capacity, one can imagine what the rest of the fabs must be going through. In any case, the Indian fab story was a longer term story and the current economic climate actually makes it further and further remote. So yes, it is dead and buried now!

In fact, what worries me now is the glut of the solar/PV fabs. By industry estimates, solar/PV is a viable option only when the price of oil is >$100 per barrel (oil is at $40 per barrel now). This means, there would be challenges for the solar cell industry too! One can only hope that the economy picks up growth soon enough and sends the price of oil higher so that solar becomes a viable option.

CIOL: Do you feel that the Indian semiconductor industry is somewhere losing its way?

AG: Not really. What has been working until now, still continues to work. Our strength is design and verification. We will continue to be in demand for that. The other pastures we explore, there are a lot of uncertainties.

The challenge is to pick the right pasture where the grass remains green even in summer. This is not easy to find and does require that we bet on some of them and learn through the experience.

CIOL: What needs to be done to get the industry in India really buzzing?

AG: Local consumption is key. Local consumption would hopefully foster electronic product innovation just like products by two-wheeler manufacturers and the Tata Nano. The current initiatives in the industry for rural applications are also quite interesting. I am optimistic that some good offerings will come out of this.

While these may not be specifically from a "semiconductor" perspective, at least at the "system" level these would make sense.

CIOL: What does India NOW offer to the semiconductor world, in these times of a global recession?

AG: The Indian economy is still mostly internal consumption oriented, as opposed to exports oriented. This is very different from the economies of island nations like Taiwan, Korea, and Japan, which are very heavily export oriented.

In a recession like the current one, these predominantly export-oriented economies experience a far greater crunch than the others. Thus, as long as products are being sold in Indian markets at the right price points, there would be consumption.

This time around, the world would come out of recession mainly driven by Asian countries, India being one.

People in the industry that I talk to tell me that as the worst is over in this crisis, and as things begin to pick up, India will once again be the beneficiary of a lot of work moving here. My personal view is somewhat different!

I believe that the last round did witness this phenomenon mainly because it was the honeymoon period. But by now, the honeymoon period is over and the India centres of these companies are working hard to reach a level where they become "mission critical" to the businesses of their companies.

The journey hasn't been very easy for multiple reasons. And by now the cost differentials also do not look as attractive as they did before. Hence, what work comes here would come only after a careful assessment and very selectively (not by leap of faith).