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Israeli chipmaker Tower Semiconductor is negotiating an alliance with the Indian semiconductor company SemIndia. Sources close to the company, which operates out of New Delhi and Hyderabad, say the two firms are looking at collaboration in development and production as well, and claim that Tower is thinking of moving its production to India in about two years.

If so, Tower most likely would be prepared to move its Fab 1 operations, which make chips using relatively outdated technology. Sources close to the Migdal Haemek-based company confirmed discussions over collaboration on development, but firmly denied any intention of moving production overseas. Tower declined to comment.

Tower began talking with SemIndia about six months ago, when a Tower delegation visited India. At the time, the talks went nowhere, and the Tower team also started discussions with the Indian technology company HCL. In parallel, the Tower executives met with a delegation to Israel of the India Semiconductor Association. After the discussions with HCL fell through, the Israeli company resumed its contact with SemIndia.

Fab City

India's semiconductor industry is based mainly on companies developing, not actually manufacturing, chips, but it does have fabs (chipmaking facilities) too. In 2007, the Indian government announced the establishment of a large semiconductor-manufacturing park by the technology capital of Hyderabad, which received the monicker Fab City. India also promised incentives to investors in the fabs.

During his visit to Israel two months ago, the head of the India Semiconductor Association and CEO of SemIndia, B.V. Naidu, said the team believes Israeli companies have considerable intellectual property that could be commercialized in India. The Israeli companies would provide the intellectual property and the Indian companies the experience in production; the products could be sold in the vast Indian market. India has about 120 companies engaged in chip design, according to the association.

Asked at the time about working with Tower, Naidu said it provides a stable semiconductor production basis that could be useful to Indian chip designers. He confirmed that Tower was seeking to establish a joint venture in India, and said that in principle an alliance was possible, but still bore examination.

Industry sources estimate that India's market for semiconductors will reach $16 billion by 2015, based on an electronics market worth about $40 billion. At present, India's chipmakers mostly use outdated technology, Naidu said, but he sees a wave of rejuvenation in about three years.

Tower Semiconductor, managed by Russell Ellwanger, is controlled by the Ofer brothers company The Israel Corporation. About eight years ago the company inaugurated its second plant, Fab 2, which uses more advanced technology than Fab 1 does to manufacture chips. Investment in Fab 2 ran at about $1.5 billion, and the facility has yet to attain profitability.

Investment in Fab 2 included an Israeli government grant, but Tower claims never to have received the full pledged amount. The Industry and Trade Ministry says that Tower lost its eligibility for the full amount after failing to meet the schedule, which meant that the permit covering part of the grant expired.

However, TheMarker has learned that the Industry and Trade Ministry will soon raise with the Finance Ministry the issue of another $80 million grant that Tower has requested.