The Upcoming IPO of Tata Electronics and Why It Could Be a Gamechanger

The pandemic brought in many good things, keeping aside all the havoc it created across the globe. One of those good things was the repeat telecast of the famous Ramayana and Mahabharata.

Watching those two epic shows was definitely a treat.

I am sure a lot of you guys would have followed the ritual of watching these shows again.

Speaking of Mahabharata, do you remember the Mayasabha that Mayasura built for the Pandavas at Indraprastha?

Let me remind you...

Mayasabha as the name suggests was a palace of illusions. The palace was built using precious metals like gold and rubies. However, the most remarkable feature of the palace was illusions.

It is believed that inside the Mayasabha, the clever architect and his team built many illusions. For example, one would think that there is a bridge on the small pool in the palace but if you tried to step in the pool, you'd be drenched in the pool because the bridge was just an illusion.

This Mayasabha reminds me of the gigantic Tata group. The salt-to-steel conglomerate has new IPOs coming up in the market, in the form of Tata Play IPO and Tata Technologies IPO.

However, these two IPOs might just be an illusion while the group may be preparing for another big IPO silently.

We're talking about the electronics arm of the group: Tata Electronics. The company has been in focus since the Tata group chairman announced Tata group's big leap into the semiconductor industry.

About Tata Electronics

Tata Electronics is a green field venture of the Tata Group. The company has expertise in manufacturing precision components.

To know what exactly the company does, we will have to first understand two terms:

1. Greenfield venture
2. precision manufacturing

# Greenfield venture

The term greenfield project is derived from the real estate sector. A greenfield project is not constrained by prior work. It is constructed on unused land where there is no need to remodel or demolish an existing work structure. Basically it is building from scratch.

Hence, a greenfield venture means a company in which a parent company creates a subsidiary company building its operation from scratch. Tata Electronics will not be acquiring existing manufacturing facilities, it will build its own facilities.

# Precision components

Precision components are highly precise machinery parts manufactured based on the custom specifications of customers and used for industrial and machine-based companies in different applications.

Tata Electronics will only manufacture specially customised products.

Tata Electronics is a wholly owned subsidiary of Tata sons that will set up new manufacturing facilities to manufacture customised products for its customers. In fact, the company has already taken the first step towards the same.

Tata Electronics' manufacturing facility

In October 2020, the Tata group invested Rs 50 billion (bn) to set up a mobile component manufacturing unit in Krishnagiri district, Tamil Nadu.

Tata Electronics was allotted 500 acres of land by Tamil Nadu Industrial Development Corporation (TIDCO). Titan's precision engineering division, Titan Engineering and Automation, provided the expertise for this project.

Tata group's intention behind moving into this field was to make the most of the opportunity presented by a paradigm shift in US companies of shifting their manufacturing base from China to other countries. Their intention was further boosted by incentives announced by the government.

Government Schemes for Electronics Manufacturers

The government announced product-linked incentive (PLI) schemes in April 2020. The scheme offers to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components, including assembly, testing, marking and packaging (ATMP) units.

According to the scheme, under the first round, an incentive of 4% to 6% would be offered on incremental sales (over a base year) of goods manufactured in India and covered under target segments, to eligible companies, for a period of five years after the base year as defined.

After the success of the first round, the second round was announced by the government. Under the second round, incentives of 3% to 5% shall be extended on incremental sales (over the base year i.e. 2019-20) of goods manufactured in India and covered under the target segment, to eligible companies, for a period of four years.

The business giant's move to enter the electronics field was supported by dual factors. Their entry into the field couldn't be timed better. That's not all...Tata group played another smart move by being very selective of what they manufacture.

Currently, the Krishnagiri facility produces iPhone housings or cases that hold the device together. Tata group smartly moved into manufacturing apple components because it saw a possibility of gradually becoming the first Indian company to manufacture iPhones in India.

Tata Electronics and the Apple iPhone manufacturing opportunity

It takes time to circulate a piece of news but what about rumours? Rumours spread around like wildfire. It was rumoured that the Tata group will soon manufacture iPhones in India.

As it turned out later, this was not completely a rumour. On 10 January 2023, Bloomberg reported that the Tata group is close to taking over a major plant in southern India in a deal that would give the country its first homegrown iPhone maker.

After months of discussion, Tatas are finally going to purchase a stake in the iPhone manufacturing facility of the Wistron corporation.

Wistron currently has four assembly lines for iPhone 14 production at its plant in the Kolar industrial area and employs 14,000-15,000 people. A facility in Peenya, Bengaluru, is out of commission, while a third one is used for the repair of Apple products.

Reportedly, the company was about to open another manufacturing facility in Kolar by the end of November 2022, with production beginning in January 2023.

Tata group was eyeing to buy the main facility of the Wistron Corp located in the Kolar district. According to reports, the Tata Group has initiated discussions with Taipei's Wistron Corp, one of the three top vendors for Apple in India, to buy its sole manufacturing facility in Karnataka. The purchase is expected to be completed by March 2023.

After exploring a lot of options the companies have come down to establishing a joint venture, with a major stake being owned by Tata. In the joint venture, Tatas will run the show, but Wistron may keep a small share to leverage the global vendor ecosystem of Apple. The structure of the deal is yet to be worked out.

The Indian conglomerate aims to complete a due diligence process by 31 March 2023 so that its Tata Electronics arm can formally take over Wistron's position in a program that gives it government incentives.

If the acquisition is completed, Tatas will take over all its eight iPhone lines of Wistron, as well as the plant's 10,000 workers, including a couple of thousand engineers. Wistron would continue as a service partner for iPhones in India.

The acquisition could value Wistron's only iPhone manufacturing operation in India at more than US$600 m (about Rs 48,981 m) if the Taiwanese company meets the requirements to receive the expected incentives for the current financial year.

Tata Electronics' plant is spread over a vast area where it could add another iPhone production line in future. According to government officials, an industrial corridor with high-end infrastructure and connectivity is being planned to facilitate electronics manufacturing in Tamil Nadu and Karnataka. This would include highways and high-speed Vande Bharat trains to cut the 3.5 to 4 hours of travel time between Chennai and Bengaluru.

This means that the travel time for Tata Electronics for supply between its Krishnagiri facility and Wistron's Kolar facility will also be reduced to a greater extent.

If the deal goes through, it would be a big step towards establishing India as a cutting-edge electronic manufacturing base.

However, the race is not going to be easy for Tata, because while Wistron may be exiting iPhone manufacturing from India, its other Taiwanese peers like Foxconn and Pegatron are expanding their iPhone production lines.

Tata Electronics and Semiconductors

Tata Electronics' was recently in focus because on 8 December 2022, the chairman of Tata group N Chandrasekaran announced the company's foray into the semiconductor business.

N Chandrasekaran stated that Tata Group, under Tata Electronics (TEPL) will set up an Outsourced Semiconductor Assembly and Test (OSAT).

OSAT, also referred to as assembly, testing, marking, and packaging (ATMP) units, plays a crucial role in semiconductor manufacturing as they package and test the silicon chips made at the foundries before they are shipped to the market.

N Chandrasekaran also mentioned the possibility of partnering with existing chip manufacturers and eventually launching an upstream chip fabrication platform.

Also, this isn't the first move by the group in this industry. Earlier in June 2022, Tata group companies - Tata Motors and Tejas Networks entered a strategic partnership with Japanese semiconductor manufacturer Renesas Electronics Corporation.

The tie-up will help Tata Motors tide over the global auto chips crunch that has affected its earnings and resulted in production cuts and even temporary plant shutdowns.

According to the India Electronics and Semiconductor Association, India's semiconductor market is expected to more than double between 2021 to 2026 and reach US$ 64 billion (bn) (about Rs 5,211.7 bn).

Tata group was very clear about establishing an OSAT unit. In 2021 Raja Manickam was appointed as the CEO of the OSAT unit of Tata Electronics. Raja Manickam has an experience of 40 years in electronics manufacturing.

He founded Tessolve in 2004. At Tessolve he was closely associated with delivering high-volume manufactured products from physical silicon. This makes him a good bet for Tata's semiconductor plans.

Tata is already in talks with three state governments to invest US$ 300 bn (Rs xx bn) to set up a semiconductor OSAT plant. The three states are Tamil Nadu, Telangana and Karnataka.

Tata has forayed into the semiconductor testing (assembly) business and not into the semiconductor manufacturing (fabrication) business. Allow us to explain how one differentiates from the other.

It is pertinent to note that semiconductor FABs provide only 50% of the services that are necessary to turn a product design into reality. The rest of the 50% is dependent on the OSATs

India is finally taking a step closer to its own Silicon Valley. In September 2022, the Vedanta Foxconn JV announced their plans about setting up a semiconductor fab manufacturing plant in Gujarat. And Tata announced its OSAT unit plan in December 2022.

Hypothetically speaking, the Indian semiconductor industry has reached a stage where a semiconductor fab manufactured by Vedanta may be assembled by Tata Electronics to supply to any foreign or domestic electronics manufacturing company.

However, Indian semiconductor is at a very nascent stage. Indian semiconductor industry stands where Taiwanese semiconductors stood four decades ago.

Coming back to Tata Group, the decision of Tata to foray into OSAT and not fab manufacturing can be supported by many logical reasons. OSATs can be an excellent vehicle for the emerging semiconductor arena as they require less investment compared to semiconductor fabs and on other hand, the revenue is attractive too.

Developing an in-house semiconductor unit will not only benefit Tata Electronics but also other companies of the Tata group.

How other Tata companies will benefit from Tata Electronics

Just like any other electronics, electric vehicles (EVs) make use of semiconductors. There are hundreds of electronic control units (ECUs) in electric vehicles controlling everything from the brakes and headlights to the latest gadgets such as parking cameras and radar. These ECUs make use of semiconductor chips.

Even EV charging stations need semiconductor chips to function.

Increasing demand for EVs and other electronics translated into increasing demand for semiconductors. However, the entire EV industry was impacted by the serious global shortage of semiconductors that started in 2020.

Long lockdowns in China and supply chain disruption led to an acute shortage of semiconductors globally. EV manufacturers suffered significantly because of the said shortage.

When we talk about EVs in India it would be impossible to not talk about two companies leading the EV revolution in India: Tata Power and Tata Motors. It is no secret that Tata group is riding the EV opportunity with full gusto.

EVs can only work successfully if a country has sufficient EV charging stations. Tata Power knew this and it dived head-first into building EV charging stations around the country. It rode the EV opportunity without making any cars.

Through its widespread presence in the EV charging space, the company now provides over 3,600 public/semi-public chargers and 23,500+ residential chargers.

Currently, all the semiconductor chips required in developing automobiles manufactured by Tata Motors and EV charging stations built by Tata Power are imported. So one can only imagine the amount of cost savings to both companies once Tata Electronics' OSAT is fully functional.

Doing what Tata does best: Social Welfare

Tata Electronics' Krishnagiri manufacturing facility is working towards creating a conscientious socio-economic footprint with a target of employing 85% of women in its workforce.

The organization also aims to make a difference in the social and cultural landscape in the surrounding areas through necessary intervention and assistance in health, hygiene, and education.

The company has also committed to giving preference to workers from the Tamil Nadu state. Tata Electronics continues to conduct recruitment drives in collaboration with the Tamil Nadu government in almost all districts as it taps potential talent. Its current workforce, Tata Electronics has around 80% of the workforce from Tamil Nadu itself.

Investment Takeaway

Tata Electronics has geared itself to meet the big opportunity present in the electronics and semiconductor industry.

However, the company faces a lot of challenges currently. Beginning from maintaining high-quality standards required by the iPhone to successful assembly, packaging and testing of semiconductors, Tata Electronics will have to answer a lot of questions.

It has announced foray in the semiconductor business, but what if the cost of assembly and testing a semiconductor wafer altogether make up for more than importing the semiconductor chip?

It is difficult to predict how the new Tata Group companies will overtake older ones and bring a new revolution altogether.

To know more about how Tata Electronics could be the next TCS from Tata group watch the video below:

Watch this space for more as we dig deeper on this topic in our next editorial.

Happy Investing!

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