India’s latest chip venture little more than a piece of paper?

This week’s announcement that India’s Vedanta Group has contacted Taiwan’s Foxconn technology group to produce chips is hailed as proof that New Delhi is gaining momentum with its plans to build a semiconductor industry. Hardly so.

Those hoping that India will be able to gain a foothold in the sector should soften their expectations and instead follow the government of Prime Minister Narendra Modi to get evidence that it is indeed fulfilling its big and costly plan to build a local chip industry. .

What Vedanta and Foxconn released on February 14 was little more than a piece of paper. Memoranda of understanding do not bind any of the parties. The $ 118.7 million that Foxconn, the world’s largest contract electronics maker, puts up for a 40% stake in the joint venture is just a figure. And Vedanta is an unexpected partner choice because of its experience in mining and raw materials, with limited experience in manufacturing technology.

What the two sides have in common is that they both smell opportunities.

The Indian government is offering nearly $ 7 billion in incentives to develop the electronics manufacturing sector, which includes a production-related incentive scheme, and a strong desire to move up the value chain from simple assembly to more technologically advanced semiconductor manufacturing.

And nothing attracts business leaders like free money. Vedanta may also be looking for an incentive. Chairman Anil Agarwal reportedly considered merging Vedanta Resources Ltd., the debt holding company of his commodity empire, with its money-rich division of Vedanta Ltd. Last year, the Supreme Court of India upheld a 2018 decision to close Vedanta Ltd. iron ore mining in the coastal state of Goa due to violations of environmental and regulatory norms. The same court is scheduled to consider motions in this case this week.

After all, such restructuring may not be on the cards. Last week Vedanta Ltd. said it would stick to its current corporate structure but is keen to enter new areas. Among them, an investment of up to $ 500 million over two to three years in the production of liquid crystal glass substrates used in electronics screens. This is a curious choice because such plants have to be set up next to the factories where the panels are produced, and India is not even listed in the sector.

Foxconn, on the other hand, knows flat panels. Her Innolux Corp. is one of the biggest names in the world, while founder Terry Gow developed the acquisition of Sharp Corp. in 2016, turning the tide of a Japanese company in dire straits in just a few years.

However, computer and smartphone screens are not semiconductors. Don’t be fooled into thinking that investing in one portends a transition to another.

Among the striking signs that this chip company may not be what it seems – it’s a meager amount of money. The announced Foxconn $ 118.7 million is barely enough to create a group of designers, not to mention production. Vedanta will probably offer up to 10 times more, but even $ 1 billion will not be enough to start semiconductor production from scratch.

Then there are the actual chips that this new company will produce. He has two real choices: to make to order for external customers or to produce products that he has developed himself. The first is a difficult concert. The growth of Taiwan Semiconductor Manufacturing Co., now one of the largest companies in the world, may lead people to believe that this is a hot and profitable business. But the fact that the world’s third-largest, GlobalFoundries Inc., can barely raise a few quarters of its profits, highlights the pitfalls even for those with years of experience.

On the other hand, if this future business has to produce its own chips, it will need to create two divisions – those that know how to develop the world’s most competitive components, and a team that can produce them efficiently and on a large scale. For this, Foxconn is a good choice and helps explain why the Taiwanese partner gets 40% of the shares, which is perhaps disproportionate to the money it invests.

But the lack of details is the key to the real strength of this announced business. In fact, we see two companies agreeing to jointly petition the government for corporate welfare, funds that New Delhi says it is ready to set aside to achieve bold political goals. If they apply, the ball will end up on Modi’s field to get the money.

Undoubtedly, Vedanta’s local connections combined with Foxconn’s technical reflections create an attractive venture. But so far this venture is only on paper and a bit.


Leave a Comment