Why the Tata-Tesla Partnership is a Game-Changer for the Semiconductor Sector

In less than a year, the Tata group has unveiled its ambition to corner a significant chunk of India's future high-tech manufacturing.

In November last year, it bought the India manufacturing facility of Taiwan's Wistron, becoming the first Indian company to join the Apple supply chain as an iPhone assembler.

Four months later in March, ground was broken for two Tata semiconductor plants: a US$ 11 billion (bn) semiconductor fab facility, the country's first, to be built by the Tata Group at Dholera in Gujarat and another unit proposed by the conglomerate, a Rs 270 bn chip assembly, testing, marking, and packaging facility at Morigaon in Assam.

Just one month to this, a Tata Group company has inked a deal with US EV automaker Tesla for a semiconductor chip.

The Tata Company is none other than Tata Electronics.

# The Semiconductor Deal

Tesla has recently finalised a strategic partnership with Tata Electronics to procure semiconductor chips for its global operations.

This decision follows the approval of a new policy by the government, incentivising electric vehicle (EV) companies to establish manufacturing facilities in India by offering reduced import duties on EVs.

According to the new policy, EV manufacturers committing to invest a minimum of Rs 41.5 bn (approximately US$ 500 m) in India for setting up manufacturing plants will benefit from a reduced import duty of 15% on vehicles with a CIF value of US$ 350 or higher, for five years.

Tesla is expected to initially focus on introducing premium electric models to the Indian market, while also exploring options for local production of entry-level electric vehicles.

This development coincides with Tesla's ongoing discussions with Reliance Industries for a potential joint venture aimed at establishing a manufacturing facility in India. Industry analysts predict that Tesla could potentially invest between US$ 2 to US$ 3 bn in India for manufacturing electric cars.

# Tesla's India Entry

Tesla's India entry comes as the company faces slowing EV demand from its two largest markets, the US and China.

In China, the company is facing intense competition from Chinese OEMs, while some quality and manufacturing issues have damaged its reputation and market share in the US.

India primarily relies on two-wheelers and three-wheelers for electric vehicles (EVs). However, by 2030, there's anticipated to be a substantial increase in electric cars on Indian roads, driven largely by competitive pricing strategies from manufacturers.

While the current market for electric four-wheelers in India is limited, the momentum favours EVs. Sales of electric vehicles surpassed 1.5 m in 2023, dominated by two-wheelers and three-wheelers.

Despite Tata Motors leading the EV four-wheeler segment, electric cars accounted for only 2% of total car sales in 2023.

Why is it Important?

This agreement carries significant weight by positioning Tata Electronics as a key supplier for leading global clients seeking to establish a crucial segment of their semiconductor value chain within India.

The entry into India is of paramount importance for the EV giant, considering India's status as the world's fastest-growing automotive market.

Elon Musk, the driving force behind Tesla, is scheduled to visit India this month for a meeting with Prime Minister Narendra Modi. During this visit, Musk is anticipated to unveil potential investments in India, including commitments towards establishing EV manufacturing facilities.

Simultaneously, Tesla is gearing up for its inaugural major shipment to India and is strategizing to scale up its manufacturing capabilities.

Reports indicate that Tesla has commenced production of right-hand drive vehicles at its factory in Germany, marking a significant step towards a potential entry into the Indian market later this year.

# Tata Electronics Expansion Plan

Tata Electronics has recently expanded its workforce by recruiting 50-60 top-level expatriates to leverage their expertise in semiconductor technology and strategic planning.

Randhir Thakur, CEO and MD of Tata Electronics, has been instrumental in bringing in top talent, with his extensive experience in the semiconductor sector.

Tata Electronics has made significant investments in semiconductor manufacturing facilities across various locations in India, with ambitious plans for further expansion.

The company has invested US$ 14 bn to date and has focused on indigenous technology development, backed by a team with over 1,000 years of global domain experience.

Further, recently on 13 April 2024, the company conducted a roadshow in the Taiwanese country of Hsinchu as it houses several chip fabrication plants, including Taiwan Semiconductor Manufacturing Company, Powerchip Semiconductor Manufacturing Corporation (PSMC), United Microelectronics Corporation, and Epista.

This initiative will further propel the company's semiconductor expansion strategy.

Conclusion

The Tata Group has ambitious plans to expand further in tech sectors. Its anticipated capital infusion into new business areas and group priorities - semiconductors, defence, electric vehicles, and Air India, for instance, is set to exceed US$ 120 bn in the coming years.

The lion's share of investments is earmarked for capital-intensive pursuits like semiconductors and Air India, marking the largest domestic investment commitment in the conglomerate's history.

As geopolitical tensions shape the global narrative, the Indian government has identified electronics manufacturing as a key economic growth driver, with chip manufacturing at the heart of these plans.

In tumultuous times, when global value chains are more prone to collapse, the government wants to ensure a steady supply of the components needed for future technologies - from artificial intelligence to electric vehicles and defence capabilities to space exploration, further making space for the company's growth.

Although the Tata Group companies have always remained at the forefront of innovation and the India growth story, it does not mean Tata stocks aren't vulnerable to macroeconomic conditions.

You should treat them like any other company when considering them from an investment perspective.

Remember, a fundamentally strong company has the potential to give good returns in the long run. Hence, it is better to carry out proper due diligence before investing in any stocks, including Tata Group companies.

As you're interested in Tata group stocks, check out the new section in our Stock Screener, where you can view the fundamentals of companies within a business group in one screen, including the Top Tata group stocks.

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