First came the plaudits. The Union government had maneuvered deftly to ensure Gujarat got the $19.4 billion Foxconn- Vedanta’s semiconductor chip manufacturing facility. Then came the recrimination as Maharashtra’s opposition parties cried foul alleging the state had been unfairly done out of the deal. And finally the cul-de-sac!
All the brouhaha was a waste. Foxconn has now pulled the plug on the joint venture. The project was moving slowly, but the snapping of relations came as a surprise blow. The reasons are grainy, but it appears the Taiwanese electronics contractor was not happy with Vedanta’s heavy debt and doubted its ability to pay for the project’s technology.
In the follow-up, both the JV partners have vowed to independently pursue chip-making in India. Vedanta’s chief Anil Aggarwal said his company would work with other partners to transform India into a semiconductor and display glass manufacturing hub. Foxconn too in a separate statement has reaffirmed it will continue to invest in India and will apply afresh under the government’s subsidy programme. The government has said the break-up would not impact the country’s plans.
Despite all the brave talk, there is no doubt it is a setback. The project was expected to be a huge magnet for attracting talent and was slated to generate 1 lakh jobs. Assessing the worldwide shortage of semiconductor chips and the decline of China as a hub, the Indian government had, towards the end of 2021, announced Rs 76,000 crore in investments to drive the India Semiconductor Mission (IS M). The Foxconn- Vedanta venture would have given a good start. Now, things are back to the drawing board.
The ‘shortage’ economics
Ironically, there can’t be a more opportune time for India to build a semiconductor hub. There is a US-China war on for the world chip-making market. The Joe Biden administration has come down heavily on US companies doing business with China. In October 2022, Washington announced licensing for US companies exporting chips or technology to China and black-listed a slew of Chinese companies on security grounds. China countered with complaints to the WTO against US’ ‘technology terrorism’. Though China currently has just 9% of the semiconductor market, it has been on the growth path and is expected to touch 23-25% by 2030.
Conversely, the US, which is the world leader accounting for 46% of semiconductor production,is expected to lose ground to Vietnam, China and others coming down to 36%. It is in this context, that one has to see US giant Micron, stonewalled in China, now set to erect a $2.7 billion semiconductor testing and packaging unit in Gujarat. Remember how there was an inordinate delay in the delivery of your new car? It was because of a shortage of the microchip that controls many of its functions.
The revolution in the Internet of Things (IoT), automation and Artificial Intelligence (AI) has a common thread – the nano semiconductor that stores and processes data on a wafer-thin electrical circuit. These technology building blocks suffered a production crisis with the onset of the pandemic in 2020, disrupting supply chains across the globe. Workers in this highly labour-intensive process were locked in at home, freezing production; and there too little inventory to feed the millions of electronic gadgets dependent on these chips. One survey contended as many as 169 industries faced disruption.
The UN’s Industrial Development Organization’s survey assessed the dramatic impact it had on passenger car industry: Around 11.3 million cars could not be produced in 2021 as a result of the semiconductor shortage, and a further 7 million cars are assumed to not have been produced in 2022. When Covid restrictions began to be lifted in 2021, demand skyrocketed as work-fromhome users bought laptops, cars and other electronic gadgets; but the supply lines were jammed. Moreover, the semiconductor industry is concentrated in a handful of countries, including Taiwan, South Korea, Japan, the United States and some players in Europe.
Good domestic demand
The industry has therefore limited capacity and is facing surging demand. Further complexities are being added by the geopolitical crisis that is disrupting supply chains. To add to the potent mix is the fact that the industry is highly capital-intensive requiring as much as $10 billion for setting up a single unit. The thinking therefore is veering around to the view that rather than global supply chains, the semiconductor industry must move to a new format: of regional supply chains.
A $160 billion industry is too big to put all its eggs in a few baskets. India has a huge domestic market too. We import 94% of our electronics and 100% of our semiconductors. This was endorsed by Vedanta’s Anil Aggarwal, who at a recent shareholder meeting said the opportunity was in-house: India imports $100 billion worth of electronics every year.
This includes $30 billion worth of semiconductor and display glass. The Foxconn-Vedanta JV may have dissolved and the Micron Technology investment is only for packaging chips. But if India stays the course, and provides infrastructure investment to international chipmakers, it is only a matter of time before she emerges as a regional hub.