NOV. 10, 2002
 Cover Story
 From The Editor
 Ranbaxy Inc.
 BT 500
 ONGC Uncapped
 BT Billboard

Q&A: Anshu Jain
The London-based Anshu Jain, Head of Deutsche Bank's Global Markets division and member of the bank's Group Executive Committee, was in Mumbai for a day recently. He spoke to BT about trends in global debt markets, banks' appetite for coprorate risk, derivatives and the implications for India.

Travel Agent Blues
India's big travel agents are feeling the heat. Commissions are getting squeezed, even as big-ticket travel-overseas particularly-is suffering. So, how are the travel biggies coping? Innovations. Ever paid a consultancy fee for your holiday advice? Better get used to it.

More Net Specials
Business Today,  October 27, 2002
Mos Who?
MosChip, that's who. But just what is a story on a company ranked 429 in the BT 500 doing here?
C. Dayakar Reddy, MD, MosChip: Betting on a contrarian strategy

Nestled in Hyderabad's Tony Banjara Hills borough is one of India's hottest semi-conductor companies. Another reading of that sentence isn't warranted; you read it right the first time and I can produce a doctor's certificate to prove that I wasn't under the influence of any mind-altering substance when I wrote that.

If you'd still like a raison d' etre for this story, try three for size: the company in question, MosChip, is, arguably, the hottest listed little start-up in the country; it is promoted by three Valley vets who, between them, have started up and sold four semiconductor companies, one to National Semiconductor; and it has got enough going for it to have had two electronics manufacturing service biggies (you know the kind-they make products for other companies), ESS Technologies and Flextronics, to have invested in it.

Chip design companies are as common as the darshinis vending idlis in the capital of Nerd Nadu, Bangalore. Karnataka's redoubtable it Secretary Vivek Kulkarni can give you, if your interest runs to listings, a roster of 48 that have made a home in Bangalore. Many of the 48, though, are into services; MosChip is on holier, and more profitable ground, products-branded products. In Indian technology companies' quest for that Holy Grail, MosChip has made a start of sorts. Surely, that's enough to merit #429 four pages of print, the same as #1 Bharti Tele-Ventures in this special.

» The three promoters are old Silicon Valley hands with industry experience
» Investors include prominent electronics companies, ESS Technology and Flextronics
» Has a 16-product pipeline that's waiting to hit the market
» The products are designed on existing standards and hence carry lower risks
» If the products work out, MosChip could be a potential takeover candidate
» Is a relatively late entrant in the business, and does not have a strong parent to back it up
» The business is capital intensive and needs superlative technological skills to launch products
» Despite the impressive product portfolio, ICs are mass-market products with low margins
» Also, the economic lifespan of a chip is short, averaging at 24 months. Sales volumes will be important
» Stock price of Rs 21 underlines the market's concern over the lack of positive cash flow

Modest Beginnings

It's hard to miss MosChip's offices on the Banjara Hills, Road 12, a three-storeyed light-green building with the name MosChip emblazoned in red on one side. This is the Gen HQ from which the company will set out to conquer the world early in 2003 when it launches the first three of the 16 products in its pipeline now; every passing quarter will see the launch of two more, an arithmetic progression that Moschip hopes will wipe away all traces of red from its balance sheet. That, there's aplenty.

MosChip was founded in July 1999, by three men who returned from the Valley, Ramachandra Reddy, C. Dayakar Reddy, and Vinay Kumar. In January 2001, the company raised Rs 10.50 crore through an initial public offering. Soon after, in July 2001, it acquired, for Rs 39 crore, a US-based company that had been founded by its founding trio, NetMos, and renamed it MosChip US. The acquisition gave the company six ready products, but it is the sixteen in the offing that could propel it to technology greatness.

Anticipation of that, it is, which makes MosChip a company to watch. There's little else: its revenues dipped from close to Rs 2 crore in 2000-01 to a mere Rs 34 lakh in 2001-02; net profits, from Rs 32 lakh to a negative Rs 4.38 crore. The numbers don't look pretty but that could well be, as Managing Director Dayakar Reddy reasons, because they do not incorporate those of NetMos. On a consolidated basis, MosChip boasted sales of Rs 7.7 crore and a net loss of Rs 3.8 crore in 2001-02.

This isn't one of those instances of unscrupulous promoters launching a company, taking it public, finding some investors, and then, acquiring a company they had founded earlier at a sizeable premium. What it is, instead, in MosChip's case, is a high-risk product play. Before it acquired NetMos, a significant portion of MosChip's revenues came from design services it offered to the company. Post acquisition, the company exited the segment-although it remains lucrative-and moved all its engineering resources into product development. "We have taken a temporary hit to focus on products," says Reddy. Just wait till next year, "when our products come out." Only, the road to creation is long and expensive; for the three months between April and June 2002, MosChip returned a net loss of Rs 2.78 crore on sales of Rs 1.23 crore.

The Profit Zones

Just what are these products MosChip is betting so heavily on? For the technically inclined, the company designs products that facilitate high-frequency data communication, interconnectivity and wireless applications. And oh yes, it also does high-end systems on chip. For people like us, MosChip's products target companies that manufacture peripherals, PCs, and consumer durables. There's no denying the existence of a market for these products. "Based on consumer feedback, we see the addressable market for a company like MosChip at $200 million (Rs 980 crore)," says Dayakar Reddy. Only, the company will need to keep its product pipeline flowing-the 16 in the offing should take care of it for some time-and build inventories. High-end as its products are, there's more money to be made in the volumes game than the value one.

"We are not getting into radically new markets but are instead focusing on established standards," says Reddy. Keeping up with relevant standards will pose a challenge: product lifecycles in the semi conductor industry rarely exceed 30 months; the norm is 24. And each new product could cost anything between $200,000 to half-a-million dollars (Rs 1-1.25 crore).


No, we aren't caste-conscious, but MosChip's business model does make it a Brahmin among India's chip designing multitude.

There are chip companies, and then there are chip companies. MosChip is a fabless chip company. That means it manufactures its own products but outsources the silicon wafer processing to large foundries like Taiwan Semiconductor Manufacturing Co. (TSMC). That gives it an edge over chipless chip companies and chip design services firms. The former, also termed chip IP companies, do not build complete chips but design and licence out parts of them (or modules) to other firms. Intel, TI, and other integrated device manufacturers increasingly outsource designs and IP from chipless firms. The emergence of fabless and chipless firms has pushed plain vanilla chip design companies-they dealt not in IP but in chip design services-to the background. Still, most analysts reckon fabless is the way to go (See Fabless Rules).

Foundries can make huge capital investments and leverage economies of scale. Ergo, fabless firms can source chips at volume prices.
» It costs upwards of $3 billion to build a fabrication facility, and there's no telling whether this can be run to capacity.
» Fabless companies won't suffer from excess capacity or inventories when the next downturn in the semi-conductor industry comes along.

The upside? MosChip will operate in the profit zone of designing and marketing chips to customers such as Sunrich, Hong Kong-based company engaged in the business of cards, cables and other devices and Megarich, a Taiwan-based company that deals in peripherals, cards, and connectors, and if all goes well, a clutch of consumer electronics majors some of whose products adorn your homes. The commodity business of manufacturing the chips (or the foundry work, as it is called), the company will outsource to Flextronics-that's one reason for its investment in MosChip.

Its peers believe MosChip has what it takes to make it to the big league. "What is admirable about MosChip is that it has entered the system-level design (market), right from the beginning," says Bishwadip Mitra, the Managing Director of TI India. His reference is to the traditional route adopted by Indian chip-design wannabes: a little outsourcing work for larger chip design companies, then a little more, until, gradually, the company becomes a full-fledged chip design one itself. Even then, few are willing to risk branding and marketing their chips like MosChip will do. "It is not a cost play any more; it is a very strong IP (Intellectual Property) play," adds Mitra. Purely on the kind of competition it faces, MosChip is on to something big. These include, in the peripherals space (let's just call it chips for printers), Taiwan's ITE and UK's Oxford Semiconductors; and in data communication, TI, Cypress, and Philips. A combination of price-play and value add, such as free system design (buy our chips and we'll help build you a device around it, is the promise), explains a Mumbai-based analyst who has been tracking the company, should help MosChip hold its own against the competition.

Marketing can make or break the company. Unlike chip-design hotshops that merely have to go out there and seek business from a chipmaker that wants to outsource part of the design process, MosChip will have to find takers for its chips. Founder Ramachandra Reddy has considerable experience in international marketing in the semiconductor industry, and that should help.

India's National Association of Software and Service Companies (NASSCOM) believes the Indian chip design industry today is placed exactly where the it services one was a decade ago. The transnational heavyweights are all here (TI, Motorola, ST Micro, Cadence, Synopsys), as is a host of Indian and MNC startups. The first reports about the scarcity of microelectronics pros are just starting to make the rounds but hey, things are just about getting warmed up.

The Next Infosys?

If MosChip is really as hot as we think it is, what can explain its stock price (Rs 21 on October 19)? "We are doing well even from the stock market point of view," argues cfo Vivek Bhargava. "We have some reputed investors, but the company has yet to deliver."

He can say that again. Still, MosChip hopes to clock revenues between $35 million (Rs 171.5 crore) and $50 million (Rs 245 crore) by 2005. That's not bad for a $2 million (Rs 9.8 crore) firm. And the first profits, claims Bhargava, should come by the first quarter of 2003-04. Premature as that may seem, it is a possibility: investments in the semi conductor business are invariably front-ended; and a smart volumes player can recoup them, and turn a tidy profit before the 30-month deadline.

The market doesn't have much to go by. When it looks at MosChip it sees a company making huge losses; one that burned some money acquiring a company founded by its promoters; and one that operates in the esoteric world of fabless chip-making. When we look at it, we see the possibility-just that, nothing more-of it being the next Infosys.