India dreams of semiconductors – so why do its plans keep running aground?

Posted on : 2023-07-29 08:10 KST Modified on : 2023-07-29 08:10 KST
Technology levels and geopolitics are complicating India’s attempts to get its foot into the chipmaking market
A Foxconn shareholder poses for a photo following a shareholders meeting in Taiwan in May. (Reuters/Yonhap)
A Foxconn shareholder poses for a photo following a shareholders meeting in Taiwan in May. (Reuters/Yonhap)

Foxconn has really stirred things up in India.

On July 10, the Taiwanese electronics manufacturer backed out of a planned joint venture with India’s Vedanta Group.

Foxconn, perhaps best-known as the company that makes Apple’s iPhone, had made plans last year to build a semiconductor plant in India as a joint venture with Vedanta. The project would have been worth US$19.5 billion.

According to Foxconn, the plan fell through because of rocky negotiations with Vedanta. The two sides apparently ran into a disagreement while trying to nail down STMicroelectronics, a European chipmaker, as the joint venture’s technical partner, Reuters reported.

Vedanta is a natural resources company with no connection to electronics, and it has recently been running up debt, which some say caused Foxconn to lose confidence in the group. The day after the plan’s collapse was reported, Foxconn said that once it finds an optimal partner for the project, it will reapply for the Indian government’s production-linked incentive scheme.

While Foxconn insisted that it remains positive about investing in India, the botched deal brings India’s growth potential under fresh scrutiny.

The “global call center” full of top-class professionals

The Indian cities of Bengaluru and Hyderabad are well-known hubs for the IT industry, and top-class Indian professionals are well-represented in Silicon Valley. But India is still treated as a “global call center” because it hasn’t laid the foundation for manufacturing.

The Indian government, led by Prime Minister Narendra Modi, is determined to turn that potential into reality; last year, it released a plan last year to build an ecosystem for semiconductor and display production facilities. The government pledged to spend US$10 billion in incentives to grow the Indian semiconductor sector to US$63 billion by 2026.

But Foxconn, whose investment was the meatiest part of that plan, has now parted ways with Vedanta. That’s sure to be a serious blow for Modi, not least because the factory was supposed to be built in the state of Gujarat, Modi’s political stronghold.

The fact is that India’s ambitious semiconductor vision is viewed with considerable doubt from the outside. As it turns out, Vedanta-Foxconn was just one of three factory construction plans that were submitted to the Indian government last year, and now they have all run aground.

An international consortium led by UAE-based Next Orbit Ventures had pledged to build a US$3 billion semiconductor factory with Israeli chipmaker Tower Semiconductor as its technical partner, but Intel’s planned acquisition of Tower Semiconductor threw a wrench in the works. Singapore-based IGSS Ventures had also been planning to submit a design for a US$3 billion factory, but later halted those plans for unspecified reasons.

Even so, the Indian government remains hopeful because it has concluded a memorandum of understanding with Micron Technology, a US-based producer of memory chips, about building a semiconductor factory. Modi touted that as the No. 1 achievement of his visit to the US last month.

Micron was reportedly going to invest as much as US$825 million, but most of the costs were to be paid by the Indian side. The Indian government and Gujarat government would be investing US$2.75 billion in a semiconductor assembly plant to be built in the state. Moreover, what Micron agreed to build was not a production factory but a facility for assembly, packaging and testing.

On July 12, the day the Foxconn factory plan was pulled, the Indian Express and other news outlets reported that the South Korean company SK Hynix was considering plans to build semiconductor assembly and testing facilities in India.

But SK Hynix dismissed the reports as being without a factual basis. An official with the company explained, “With our priorities on investing in establishing a US factory and pursuing a domestic semiconductor factory in Yongin, we don’t have room for considering building a factory in India.”

Other reports stated that the major Indian conglomerate Tata Group was considering its own semiconductor manufacturing and that the Japanese semiconductor company Renesas Electronics Corp. had shown interest. But those too lacked any concrete details.

In one of its reports, the Hindustan Times noted that around 20% of the world’s semiconductor design engineers hail from India. But most of the intellectual property rights are in the hands of foreign companies. The US’ top 10 semiconductor companies in sales terms have design centers in India but not production.

India hopes to move beyond being a mere semiconductor production base and establish its own intellectual property. One reason that vision is running into roadblocks now may be that the grand design was not so much reflecting economic feasibility as it was targeting a geopolitical niche.

Major lag in technology

India has signaled plans for developing into a global semiconductor hub in the next five years, taking advantage of the situation with the semiconductor war between US and China and the unprecedented tensions in China-Taiwan relations.

In May 2022, Modi joined US President Joe Biden in announcing the India-US initiative on Critical and Emerging Technology (iCET). During Modi’s US visit last month, the two had discussions focusing on technology cooperation.

But one hurdle would have to be overcome: the nuclear issue.

During the Cold War era, India embarked on a nuclear development program, and its relations with the US soured as a result. India has also refused to sign the Treaty on the Non-Proliferation of Nuclear Weapons (NPT).

Even today, the US applies certain provisions that restrict defense- and aerospace-related exports to India. India hopes the regulations will be loosened as technology interchange with the US grows — but given the poor terms between New Delhi and Beijing, Washington is unlikely to be accommodating on the matter.

Geopolitical calculations alone are not enough to make the factories work. Making chips requires there to be factories, stable electricity supplies, and an abundance of skilled workers. It also requires a domestic market to consume the chips that are produced — an area where India still falls well short.

Back when Bengaluru was emerging as India’s answer to Silicon Valley in the 1980s, there was already a movement afoot to build a semiconductor factory in the state of Punjab. The facilities in question ended up burning down in a mysterious fire in 1989.

According to analysts, India’s level of technology is about two decades behind the other three members of the US’ Chip 4 alliance: South Korea, Japan and Taiwan.

Now India is once again eying a geopolitical opportunity. Ironically, geopolitics is also what is hampering it now.

The US has been pressuring its “semiconductor allies” to reduce their transactions with China. But it is from China that India would have to buy a lot of the raw materials and components it needs to build its semiconductor industry.

Feeling the pressure, India has been working to improve relations with Taiwan. But it also has a history of ambiguous behavior toward Taiwan — reflecting its consciousness of China’s perceptions.

Taiwan had sought to allow TSMC, its biggest semiconductor company, to establish a base in India, while proposing a free trade agreement and bilateral investment treaty. India balked, citing political and industrial factors.

What is China’s take on the dilemma India finds itself in?

The state-run Global Times newspaper observed, “China's labor force was not raised to the level in one day to be able to produce chips and electronics.”

“India's ambitious plan in terms of producing its own chips has much to do with the US [. . .] but a growing number of cases show that geopolitics-oriented industrial development path is a dead end,” it declared.

“Instead of blindly following the US strategy, India might as well improve its manufacturing foundation step by step along a path that suits its own conditions. And it can start with developing low-end manufacturing, cultivating labor force, improving business environment, and strengthening cooperation with major partners including China,” it advised, with an accompanying illustration showing an elephant straining to row a boat laden with microchips.

By Koo Jeong-eun, international affairs journalist

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