An ISA – FEEDBACK Document

1. An ISA – FEEDBACK Document ISA Confidential 2009

2. Objective and methodology of the document Objective • The ISA (Indian Semiconductor Association) has proposed a study to understand the smart card industry scenario in India from a semiconductor industry perspective • The key objectives of the study include • Understanding the overall dynamics of the smart card industry • Current status of the Indian smart card industry • Key usage trends and application areas of smart cards • Global smart card industry practices • Smart card industry practices in India • Drivers for growth, new segments, emerging application areas, changes in technology • Impact of smart cards on the semiconductor industry Methodology • Around 25+ expert interviews across key stakeholders, including chip suppliers, card manufacturers, RFID suppliers, system integrators, issuing authority, planning commission, smart card association • Desk research focusing on global and Indian market trends, existing and emerging applications, technology focus, new initiatives, e-governance projects • Analysis based on primary interviews and desk research ISA Confidential 2009

3. Smart cards and RFID tags – A brief ideology Smart cards are plastic cards embedded with a microprocessor or memory chip • In the Indian context, • Contact based smart cards and RFID tags currently have moderate penetration, while contactless cards are yet to see a significant application base • However in select cases, the smarts cards are built only with memory devices and the reader re-programs the card when connected Contact based smart cards Contactless based smart cards RFID Tags Identification and process based application Identification based application ISA Confidential 2009

4. Smart card applications in India are currently nascent but have immense potential in the years to come • A smart card is a combination of electronic modules embedded in a plastic card to perform simple access applications to more complex applications, like monetary computation and identity status. The core function of a smart card is to store and process data based on the application it is programmed for • The Indian smart card industry is characterized by popular applications like SIM cards, access cards, vehicle registration, tolling, ticketing, loyalty cards, pay TV cards, financial and health cards • These cards are contact based or contactless, which can be either upgraded or can function as use and throw cards • RFID, a relatively new technology, is gaining popularity in some areas • RFID tags are used for product tracking and identification application. Some of the popular applications include vehicle tracking, retail goods tracking, LGP cylinder tracking, library management, auto component tracking ISA Confidential 2009

5. Indian Telecom is the most successful application market for contact based smart cards Success rate of smart card implementation – Global vs India scenario India Global best scenario Source: ISA – Feedback Study, 2009 ISA Confidential 2009

6. Status of applications for smart cards and RFID tags in the Indian market Segment NFC – Near Feed Communication Access Control SIM cards Telecom Vehicle tracking & parking solutions Ticketing and toll Access control & Attendance Transport Pay TV cards Entertainment Access control & Attendance Asset tracking Credit cards Banking Health & Pharma Access Control Asset Tracking Raw material & goods tracking Retail Toll receipts Government Identity cards Driving license MNIC cards Electronic passports Vehicle Registration Library management Education Attendance Access control, Loyalty cards Hotel Personnel & Ammunitions tracking, LGP cylinder, laptop tracking Defense plane tracking Others Usage Discontinued Under evaluation Nascent Pilot Already prevalent • Majority of the pilot projects have been tested for RFID tagging • Ticketing, Toll collection and e–passports are the only applications tested for contactless smart cards Source: ISA – Feedback Study, 2009 ISA Confidential 2009

7. Bulk of the applications are supported by contact based cards Source: ISA – Feedback Study, 2009 Predominantly contact based Predominantly contactless RFID tagging Segment arrangement is based on popularity of usage ISA Confidential 2009

8. India is now moving towards contactless cards; however RFID yet to gain popularity Indian Smart Card Industry Evolution • Majority 8 bit, but 16 bit finding acceptance • Around 80% contact based, 20% contactless • Select cards are memory based, while others are microcontroller based • Access control, identification, driving, tolling, license • 16 bit & 32 bit to find maximum applications • Majority of cards being contactless • Only microcontroller based cards • Integrated application cards, likely to be the key Processing type 8 bit card System (excludes SIM cards) Contact based Type Memory card Application Access control Historic Future Current Source: ISA – Feedback Study, 2009 • Shift from the simple application of identification, to more complex applications, like data processing from smart cards • Technology orientation and scope to integrate futuristic applications, have led to the usage of 16 bit processors • Need for an all in one card - national acceptance for multiple applications ISA Confidential 2009

9. Government initiatives – potential applications specific to India for smart cards ISA Confidential 2009

10. Chip suppliers and card manufacturers are technology drivers, while market is driven by governing bodies • Third party evaluators to verify the sanity of the system • Manufacturers of smart cards • Integrate SOC with the plastic cards • Policy makers • Regulatory authority – set out guidelines for all needs of card users from design, integration to supply • Key entity to roll out national level projects • Design the system based on the key objectives of usage • Integrate technology with infrastructure for optimum usage and maximized operations • Technology standardization • NIC, CRIS • End users have limited influence in driving the need for smart cards • Majority of the smart cards and components are imported; Chip sets, SIM cards, readers, etc. ISA Confidential 2009

11. Market dynamics of smart cards have time and again posed operational challenges for stakeholders in the Indian market Chip suppliers • Hitachi • Infineon • MosChip • NXP • ST Micro Active consortiums • CEPS • NIC (National Informatics Centre) • SCAFI (Smart Card Forum of India) • SMARS (Smart Rupee System) • Zero Mass System integrators • AFTEK • CMS • EFFKON • Explore Infotech • iSmart International • M -Tech • Score Infotech • SISL • Smart Chip • Wipro • Xident Card suppliers • Bartronics • ERG • Gemalto • IRIS • Kedia • M -Tech • Orga • Siepmanns • VCT • Promote smart card based transactions in payment and identification areas • Refer standards and specifications User segments: • Government Sector • Telecom • Non – Telecom Reader suppliers • CMS • Data Net Systems Ltd. • Gemalto • M -Tech • Industry evolution started with chip suppliers followed by consortiums, system integrators, card and reader suppliers Note: This is only an indicative list, established through market interaction. The listing is done on alphabetical order ISA Confidential 2009

12. Regulations and policy framework need to be strengthened to advocate higher issuance of smart cards across segments Focus areas • Need to ensure conformance to standards and guidelines • Policy framework should warrant that all the applications and software is developed/ tested by the department of IT (NIC), specially for government projects • Promote collaborative working across departments various systems • Build a wider network of semiconductor companies for authorising and certifying smart cards for the varied applications Issues to be addressed • Ensure faster implementation of projects • Build capabilities for implementation of large scale projects – addressing mass market volumes for smart card application • Synchronizing cards usage across multiple applications – integrating geographic usage to common user pool ISA Confidential 2009

13. Indian smart card industry estimated at USD 130 mn for FY’ 09 where cards account for 64% Overall size of the smart card industry Market estimates for smart cards and RFID tags 2008 - 09 Volume: 158 mn Value: USD 84 mn Value: INR 6,500 mn (USD 130 mn) Source: ISA – Feedback Study, 2009 Conversion norm: USD 1 = INR 50 • Of the 140 mn contact based cards, SIM cards account for125 mn • Chip sets account for 40 – 50% of the total project cost, while the balance is made up by card, OS and integration costs • Smart cards chips are primarily imported from China, Taiwan, United States and European Union • Penetration of smart cards has been driven by the acceptance of Governing bodies or nodal agencies, despite higher cost of cards ISA Confidential 2009

14. Contact based cards form bulk of the smart cards business in India Smart cards –18 mn cards (excludes SIM cards) RFID Tags – 15 mn tags • Contactless is a superior technology, but is yet to find strong foothold, due to cost economics; is likely to gain prominence in the coming years • New technology phones like Nokia 6212C with NFC driver, capable of acting as smart cards and also as reader terminal (NFC project implemented in Bangalore on a pilot basis) Source: ISA – Feedback Study, 2009 ISA Confidential 2009

15. Contactless cards are likely to become more popular in future due to competitive costing and longer life of cards INR per card • Smart cards are typically of the following sizes • 2.5 cm x 1.5 cm (SIM cards) • 8.5 cm x 5.5 cm (Others) • Contactless cards gaining popularity over contact based cards – The ratio likely to change to 50% share for contactless, from the present 20% for non-SIM card applications • Life of contactless is higher (8 – 10 years) than contact based (3 – 4 years) • RFID tags with a reading range of 5 – 10 cm are the most common; strong challenge against barcode labels valued at 20 paise per label • Minimal changes in infrastructure for contact based solution and contactless solution; variation in cost of solution is primarily driven by cost of card Source: ISA – Feedback Study, 2009 ISA Confidential 2009

16. Large scale project implementation and technology upgradation amongst key challenges K E Y C H A L L E N G E S Technology • Build allied infrastructure (like reader terminals) and improve its penetration across cities • Work towards educating customers on the extent of application of smart cards across user segments and governing bodies Awareness • Streamline procedures in Government funded projects (approvals, standardization) Regulation • Database generation, integration into one system and authentication - major challenge for UID project • Integration of existing non smart card users to smart card user pool for existing applications (e.g: e-passports: existing book form passport holders to convert to e-passport) Integration • Increasing cost pressures from substitute products like magnetic cards (for smart cards) and bar code readers (for RFID tags) Cost ISA Confidential 2009

17. Government projects likely to be the key growth driver for smart cards in India • Government – • Employee's Provident Fund to issue smart cards for its 26 mn subscribers • Smart Cards for Government employees & laborers in Goa • The Kerala government to issue smart card based ration cards • 6 mn cards under RSBY scheme; 10 mn ESIC cards • Banking and Financial Sector – • ICICI Bank: Smart cards for facilitating transactions, payments to utilities and services etc. • Reserve Bank of India (RBI): SMARS (Smart Rupee) project Mumbai Campus Scheme for 150 merchants • Transport – • Driving license : Gujarat State & Delhi Traffic Police. • Ticketing: Metro railway, Kolkata & (BEST) Mumbai • Loyalty card – • Promoted by BPCL, HPCL, Snowhite, Homesaaz • Library Management – • Used for stock taking, to determine the location of the books at DFRL Mysore, Kerala State Central Library • Government schemes like NRGEA, RSBY, ESIC and e–Governance projects • Government participation and strong policy framework • Growth in telecom subscriber base – key driver for contact based smart cards (SIM cards) • Increasing awareness on applications of smart cards and reduced prices, likely to see greater acceptance of smart cards in private organizations • Technology integration and multiple applications of smart cards, expected to drive growth ISA Confidential 2009

18. Unique Identification number to every resident of India UID program will be issuing an unique identification number alone and will not necessarily influence the usage of smart cards UID can be used for applications which demand background checks • Need for UID number is primarily governed by security requirements of the Indian economy and access to opportunity for the poor, which is identity governed • Around USD 20 mn planned under UID project for FY’ 10. The authorities will work in close coordination with Home Ministry’s National Population register through the Registrar General of the census, in accordance with the Indian Citizen Act • National Rural Employment Guarantee Act, SarvaShikshaAbhiyan, National Rural Health Mission, Bharat Nirma are government schemes covered under UID • Karnataka has been chosen as the pilot state to implement the project; potential of around 50 mn • Phase 1, which is database collection, is estimated to complete in around 2 years • Authenticity and safeguard of information through government nominated data collection centers • First set of UID numbers expected to be rolled out by 2010-11 PE, ESI, Pension Bank account Identity Driving license Police complaints Telemedicine Property transaction Passport Employment schemes Institutional admissions Tax Voting • Biometric information like fingerprint and photograph to be used for identification and authentication of a particular UID number ISA Confidential 2009

19. UID can be a backbone to drive high potential for smart cards • Scope to feed the UID number onto a smart card • Ease of carrying the card and use in applications which require UID number • Individuals do not have to remember 16 digit UID number • Large number of issuing authorities like Banks, Insurance companies, Mobile phone operators, Schools, Government bodies, Corporate firms can incorporate the UID number in the smart cards for their respective users • Easier and faster background checks • Since UID will be accepted nationwide, the migrating population will be hooked onto the existing services • Eliminates the possibility of re-allotment based on location • Scope to converge multiple applications onto the UID based smart cards to make the system future proof • Passports • Vehicle registration and Driving license • Ration cards • Banking and insurance, etc • Likelihood of an all in one card in the years to come ISA Confidential 2009

20. India offers a huge potential for smart cards with e–governance applications leading from the front • Increase in immigrant population mix of students and working professionals seeking overseas opportunity; around 8 - 10 mn passports issued every year e-passport • Initiative to provide free health check up and treatment for the rural population has given rise to the need for health cards; an estimated 800,000 is the rural population of India • ESIC – provides health services card to 40 mn people at government subsidized rates Health Pointers defining potential for smart cards Transport and Ticketing • Government focus on metro rail projects across major cities like Delhi, Mumbai, Bangalore, Chennai, Hyderabad; scope for integration by using common card across public transport • Huge potential, replacing existing magnetic cards with smart cards; smart cards offer scope for multiple applications using a single card Banking • Growth in the retail sector and need for tracking the goods helps in efficient stocking • Growth in segments like transport (vehicle tracking), logistics (container tracking); fuelling demand for RFID Tags RFID Tags ISA Confidential 2009

21. Strong regulations and technology convergence likely to help achieve realistic market numbers by 2014 Segments Action points which would help achieve realistic volumes • Regulations • Need for a strong regulation which would govern and monitor smart card implementation on a pan India basis • A consortium could ideally drive smart card implementation • Technology convergence • Learnings from the global market and showcase integration with existing technology • Inflection points for smart cards • Faster implementation of pilot projects and converge to established applications Source: ISA – Feedback Study, 2009 • Other applications like hotel cards, club cards, access cards are likely promising ones, along with the above listed key application segments • The Indian market exhibits a huge limiting potential owing to the large population base • Need for technology future proofing likely to be driven by the usage of 32 bit processors ISA Confidential 2009

22. In summary… Learning from the global smart card market Capabilities of Indian companies to address smart card demand Emerging trends – application and segments • While India offers a huge potential for smart cards, the biggest challenge is timely implementation and existence of strong regulatory policies • Different Government departments need to work as a consolidated unit for successful implementation of smart card based projects • Suitability of new applications, which can be directly implemented in India • Technology barriers overcome and converted into proven success, which could be replicated in India • Strong base of system integrators with exposure to complex system applications • Import of select components like chip sets, high integrated application smart cards, readers, etc. • NFC devices likely to be the next level technology products; doubly used as a smart card and reader terminal • 16/32–bit cards expected to become more popular, governing the applications built on smart cards Conclusion ISA Confidential 2009

23. Need for an active consortium comprising stakeholders in the smart card ecosystem to increase penetration of smart cards and redefine the market in India Key challenges associated with smart card implementation • Targeting mass population for smart card implementation likely to be a challenge as rural population is widespread • Integration of services like authenticity of cards and processing specific applications from a remote location, likely to be a challenge • Reaching out to the rural population and setting up a strongly networked infrastructure for smart cards Way forward for the Indian semiconductor industry • Import of semiconductor chips to address the potential; foundry set-up requires huge investments and rapid change in technology • SC supplier needs to be a “solution provider” to reap higher benefits in the smart cards and identification business • Associate strategically with key IT vendors who “ exercise” significant control over potential customers • Proactive investments in pilots projects; unconditional supply of chipsets and RFID tags for developmental and pilot projects • Leverage the experience of global markets to develop standardized solutions ISA Confidential 2009

24. Themes for Recommendations – Inputs from the Team (based on the things to be done to benefit the semicon industry) • Government programs – Enlist various government programs which could potentially make use of smart cards. Showcase the benefits to individuals and Government by usage of smart cards for these programs • Implementation and impact on economy - How will the use of smart cards impact the economy as a whole – learnings from the global market • Government policy and regulations – Flexibility in operations, interoperability, use of local foundry • UID to create opportunity for smart cards – Convince Government to include UID number onto smart cards, along with biometric and photo image of individuals • Benefits to the ecosystem – Enlist the benefits for the stakeholders/ companies involved in the smart cards ecosystem from a semiconductor perspective • Boost local manufacturing – Activities that could be locally managed (design, manufacturing of cards, readers, etc.) relate to employment generation with local interest ISA Confidential 2009

25. Glossary of terms used in the document ISA Confidential 2009

26. Glossary of terms used in the document ISA Confidential 2009

27. Thank you ISA Confidential 2009