A Step Closer to India's Own Silicon Valley: Vedanta to Set Up a Semiconductor Plant in Gujarat

When it comes to the semiconductor sector, countries across the globe were excessively dependent on China. But the situation is slowly changing.

Many countries are looking for an alternative. Countries are implementing a China plus one strategy.

Last month, the CHIPS and Science Act was implemented in the USA. The act provides incentives to companies for setting up semiconductor and advanced technology factories in the USA.

Owing to the tensions between China and Taiwan, Taiwan, the world's largest electronics manufacturer, is now worried about its dependence on China for manufacturing semiconductors.

The matter is so serious that the national security of Taiwan had to interrupt a deal between Foxconn and China's Tsinghua Unigroup. Taiwan wants to persuade Foxconn to divest its stake worth US$ 800 m from the Chinese chip maker.

In December 2021, the Indian government also announced incentives worth Rs 760 bn for semiconductor companies in the product linked incentive (PLI) scheme. The government had received 23 applications concerning this scheme.

Conglomerates like the Tata group and the Vedanta group expressed their interest in setting up chip facilities in India.

Apart from Indian companies, international firms have also shown interest in setting up chip manufacturing plants in India and making India a semiconductor hub.

A notable partnership in this space was of Vedanta and Foxconn.

In February 2022, Taiwanese electronics seller Foxconn and Indian oil-to-metal conglomerate Vedanta joined their hands for a semiconductor foray. Vedanta and Foxconn formed a joint venture (JV) to manufacture semiconductors.

Recent developments suggest that these companies have announced future plans and also fixed a location for the plant after months of discussion.

Details of the Vedanta-Foxconn JV

Vedanta has a joint venture (JV) with Taiwan's Foxconn to manufacture semiconductor chips in the 28 nm category.

The JV was planning to set up a semiconductor manufacturing plant in the next two years.

To become India's first chip maker, Vedanta was seeking 1,000 acres of free land on a 99-year lease, water, and power at concessionary and fixed prices, among other incentives.

The government had asked the companies to provide more details on how they plan to acquire the required expertise or get a third partner with demonstrated technical capability. The companies hadn't disclosed the location of the manufacturing plant.

This was the first joint venture in electronics manufacturing after the government announced the PLI scheme.

Vedanta group was planning to invest US$ 15 bn in a phased manner over the next 5-10 years to make displays and semiconductor chips in India.

Earlier this week, Vedanta's chairman Anil Agarwal tweeted:

'India's own Silicon Valley is a step closer now. #India will fulfil the digital needs of not just her people, but also those from across the seas. The journey from being a Chip Taker to a Chip Maker has officially begun...Jai Hind!.'

Hence, Vedanta Foxconn JV has made its decision about setting up a semiconductor manufacturing plant in India.

From chip taker to chip maker

In its first major step, the Vedanta-Foxconn JV has selected the state of Gujarat for its semiconductor project. The project will include display and semiconductor facilities near the largest city of Ahmedabad in the western state.

It will invest Rs 1.5 tn in Gujarat. It will set up a fabrication plant with Rs 945 bn and a semiconductor fabrication and outsourced semiconductor assembly and test plant with Rs 600 bn.

The company was also in talks about setting up a plant in Pune, Maharashtra, but the state did not agree to some of the incentives and tax brackets sought by the company. Hence, the plant was bagged by Gujarat.

According to Anil Agarwal, they need two such plants to meet the global demand of semiconductors. Hence after setting up a plant in Gujarat, Vedanta was also looking into setting up another plant. For this, it has received interesting plans from Andhra Pradesh and Maharashtra.

It is expected that the Gujarat plant will start operating from 2024.

Notably, Vedanta Foxconn was not the only Indian-international collaboration to take place under the PLI scheme. In fact, it was the third applicant to apply for setting up a semiconductor fabrication unit.

Let us take a look at which other companies had applied for setting up a plant.

India to have more semiconductor manufacturing plants

The Ministry of Electronics and Information Technology, in February, said it had received proposals worth Rs 1.5 tn for setting up semiconductors display and fabrication units.

ISMC has also sent proposals for setting up a fab plant. ISMC is an international semiconductor consortium.

It is led by India-based investment firm Next Orbit. It had entered into a tie-up with Tower Corporation Israel.

In early May this year, the state government of Karnataka said that the above venture would invest US$3 bn in Karnataka to set up a chip-making plant.

In July 2022, the Tamil Nadu state government announced that Singapore-based IGSS Ventures in collaboration with University Microelectronics Centre (IMEC) will set up a plant in Tamil Nadu. It plans to invest US$ 3.3 bn in Tamil Nadu.

These plans were announced months back, however, no concrete actions were taken.

As can be seen, global companies are also eyeing a piece of the pie in India's semiconductor sector.

Is bureaucracy killing the dream of Indian Silicon Valley?

Raj Kumar, the founder and group CEO of IGSS Ventures, recently said that global investors and technology partners have become "wary and impatient".

An article by the Economic Times states the ISMC group wrote a letter to the centre seeking fast decisions regarding the plans presented by them.

Hence, India needs to decide by October this year if it does not want to lose out on two good collaborations.

This is not the first time India is having problems in setting up a semiconductor manufacturing plant. Back in 2005, bureaucratic complexities muddled up the plans of multinationals to set up plans in India.

If you think that bureaucracy doesn't exist in Modi's government, you might want to hold back your horses. 2017 and 2020, attempts to set up chip-making plants in India failed.

Hence, if the centre does not act fast history will repeat itself.

Investment Takeaway

The CEO of India Electronics and Semi-Conductor Association (ISEA), Krishna Moorthy, said,

'Before the end of this decade, there will be nothing that will not be touched by electronics and the ubiquitous chip.

Be it fighting carbon emissions, renewable energy, food safety, or healthcare, the semiconductor chip will be all-pervasive.'

In the coming years, the Indian semiconductor industry is set to scale rapidly.

The 'Indian Semiconductor Market Report, 2019-2026', observes India is poised to be the second largest market in the world in terms of scale and growing demand for semiconductor components across several industries and applications.

However, this is all from the consumption viewpoint. Most of the semiconductor requirement is being fulfilled by imports at present. This is draining economic resources. Only 9% of the total requirement is met domestically.

Hence, setting up a fab plant by Vedanta Foxconn JV may be the first step toward tapping the opportunity presented by the semiconductor sector.

However, running a full-fledged semiconductor industry is no joke. There are so many questions. Will Indian semiconductors be at par with global quality standards? If yes, will India be able to supply at cheap prices like China? Or will the cost for the end consumer shoot up?

There are other significant challenges like the environmental effect of the chip-making industry, that need to be considered as well, when dreaming about an Indian Silicon Valley.

Investors should carefully analyse risks and rewards before investing in semiconductor stocks.

Before signing off, we recommend you to check out the below video where lead smallcap analyst at Equitymaster Richa Agarwal talks about the semiconductor stocks to track if you are interested in semiconductor theme.

Happy Investing!

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