Foxconn-Vedanta deal hits the brakes; Is India’s semiconductor mission at crossroads

Just as the Indian Government was banking big on its own semiconductor fab, Foxconn has withdrawn from its joint venture with Vedanta. The Taiwanese giant, Hon Hai, has walked away from a deal that they had signed last year to set up an ambitious semiconductor and display plant in Gujarat entailing an investment of about Rs 1.5 lakh crores.

Though Foxconn and Vedanta have both stated their intentions to continue with their chip manufacturing ambitions, the announcement has sparked speculation about the future of homemade semiconductors. So, what does the Foxconn-Vedanta split mean for India inc. and is India’s aim of becoming a semiconductor empire in jeopardy now? Let’s find out from the experts.

What has happened so far…

On July 10th, 2023, Foxconn announced the breakup of its joint venture with the Vedanta Group. In a statement Foxconn said, “In order to explore more diverse development opportunities, according to mutual agreement, Foxconn has determined it will not move forward on the joint venture with Vedanta.”

While India is consistently focusing on becoming a global player in semiconductor manufacturing, Foxconn’s change of heart comes at a time when the company had just revealed its plans to establish a fabrication unit in Dholera, near Ahmedabad, which would have been India’s first semiconductor manufacturing fab.

The plan entailed the Vedanta-Foxconn chip JV to be in a 60:40 partnership and an investment of Rs 1,54,000 crores, which would have created at least over one lakh jobs. The setup would have included a semiconductor fab unit, a display fab unit, and a semiconductor assembling and testing unit on 1000 acres of land.

Why did Foxconn pull the plug

When it comes to semiconductor manufacturing, neither Foxconn nor Vedanta have much experience. Vedanta is into mining and Foxconn is best known for iPhone manufacturing but wanted to expand and foray into semiconductor manufacturing.

Foxconn’s reasons for abandoning this deal are rather vague. To begin with, Foxconn declared that the project was not moving fast enough and there were challenging gaps and external issues unrelated to the project. Therefore, to explore more diverse development opportunities, both companies had mutually decided to part ways.

Though both companies have established that they remain committed to making a semiconductor fab in India, we can’t ignore the fact that there could be several reasons behind the breakup.

This comes only months after Deputy IT Minister, Rajeev Chandrasekhar told Reuters that the JV was ‘struggling’ to find a technical partner. Foxconn and Vedanta had brought on European business STMicro to licence the technology, but the Indian government insisted on the company having more ‘skin in the game.’

“What we understand from various public domain reports and the news, the key issue for this JV was getting the right ‘technology partner’ for this semiconductor project. Apart from this, if there are any other challenges then it’s not in the public domain and it’s better for them to elaborate on the same,” opines Sanjeev Keskar, Executive Director at EPIC Foundation and Ex President, IESA.

Then there were the incentive delays which contributed to Foxconn’s decision. The government’s incentive plan is to provide $10 billion to encourage chip making. Upon reviewing their application for the incentive scheme, the Indian Government raised some questions on their cost estimates, as per a Reuter’s source.

In June, SEBI fined Vedanta for violating disclosure regulations by issuing a news statement implying that it had collaborated with Foxconn to manufacture semiconductors in India, even though the contract was with Vedanta’s holding company.

Taiwan’s Foxconn pulled out of the semiconductor joint venture with Vedanta after India’s government raised questions over its application for an incentive scheme for chip production, a source familiar with the matter said.

Furthermore, according to various media reports, Foxconn along with the government was worried about the financial situation of Vedanta.

According to media reports, Vedanta’s UK parent firm, Vedanta Resources, is drowning in debt and has to repay $2.2 billion in debt this fiscal year. According to an ET report, the corporation has dues of $4.2 billion, of which $2 billion was paid in the first quarter. The remaining $2.2 billion includes $1.3 billion in total principal obligations as well as interest or inter-company loans. A $1 billion bond due in January 2024 accounts for a sizable portion of this $1.3 billion.

It’s not a setback!

Post the announcement, there has been a mixed response to the decision. Many opine that it is a big blow to India’s semiconductor dream. A debt research firm, CreditSights touted this split as ‘credit negative’ for Vedanta Resources.

CreditSights had previously expected a “minimal credit impact” on Vedanta Resources based on the old arrangement, as Volcan, Vedanta’s holding entity was undertaking the semiconductor investments.

“Since the semiconductor venture will be now parked directly under Vedanta, we see a higher probability that a good portion of the project funding will come from Vedanta,” CreditSights, part of the Fitch Group, wrote in a note.

CreditSights also expects further strain on credit metrics and free cash flows for both Vedanta Resources and India’s Vedanta with Foxconn’s exit also resulting in a loss of a partner to split manufacturing costs with.

Meanwhile, in response to the negative feedback, Union Minister Rajeev Chandrasekhar tweeted explaining why the split doesn’t impact India’s ambition.

Following the newer developments, Keskar is also positive that there will be no impact on India’s Semiconductor Mission. “It’s definitely not a setback!” he says.

“They submitted their proposal to ISM (India Semiconductor Mission) in early 2022 but MeitY (Ministry of Electronics and IT) and the ISM committee did not approve it as they were looking for a good ‘technology partner’ for this JV. Both these companies are very large corporations, and they will continue to work independently on their semiconductor plans in India. I feel there will be no impact as recently the government has approved a $2.8Bn proposal from the US based Micron Corp. to set up a packaging unit for their memory products, which is a great start to the India Semiconductor mission,” he adds.

How the ecosystem should interpret this

For now, Vedanta and Foxconn have parted ways, but are focused on their semiconductor plans.

Shortly after Foxconn’s exit from this $19.5 billion chipmaking venture, Vedanta’s Chairman, Anil Agarwal, announced the firm’s entry into semiconductor and display manufacturing this year. The company claims that it has already lined up more than 100 global suppliers and ancillary industries to establish India’s first semiconductor foundry, which will produce chips used in mobile phones, refrigerators, and automobiles.

“Vedanta Group remains fully committed to building India’s first semiconductor and display fabs in Dholera Special Investment Region in Ahmedabad district, Gujarat. Substantial progress has happened to tie up technology and equity partners in semiconductors and we will make an announcement soon,” says Akarsh K Hebbar, Global MD, Vedanta Semiconductors and Display.

The Government of Gujarat has allotted Vedanta Group the land in Dholera and work is already underway to prepare it for construction of the fabs.

“We continue to achieve key milestones in our progress. Now we will the Government of India’s nod to our applications under the modified scheme for semiconductor and display fabs. Thereafter, we will immediately begin construction and set out on the path to make India atmanirbhar in electronics in line with the vision of our Honourable Prime Minister.” he says.

While Foxconn intends to independently pursue incentives under India’s semiconductor production plan.

Due to this, Keskar feels that there is nothing to worry about as the Micron proposal has already been panning out.

“With the Micron proposal getting approval, it is very clear that the government and ISM are supportive towards the proposal which is perfect in all aspects. When global semiconductor companies will see the support extended by India to Micron with 50 per cent incentive coming from the Semiconductor policy and 20 per cent support coming from the Gujarat State Government, many more companies will show interest to come to India for Wafer FAB, Display FAB, ATMP/ OSAT and Compound Semiconductors,” he elaborates.

Moving forward, India is already a lucrative arena for semiconductor manufacturing, as its semiconductor market will touch $64 billion by 2026, almost three times its 2019 size of $22.7 billion. With ever improving policies in place, India offers one of the best places to develop a chip component ecosystem for the electronics Industry. In the near future, India will see many more good proposals coming to it.