What Vedanta and Foxconn released on February 14 was little more than a piece of paper. The memorandums of understanding do not commit any of the parties to anything. The $118.7 million that Foxconn – the world’s largest contract electronics maker – is putting up for a 40% stake in the joint venture is just a number. And Vedanta is an unexpected partner choice as its background is in mining and commodities, with limited experience in tech manufacturing.
What both parties have in common is that they both sense the opportunity.
The Indian government is offering nearly $7 billion in incentives to boost the electronics manufacturing sector, which includes a production-linked incentive program and a strong desire to move up the value chain from simple assembly to production of technologically advanced semiconductors.
And nothing appeals to business leaders like free money. Vedanta may also be looking for a boost. Chairman Anil Agarwal has reportedly considered merging Vedanta Resources Ltd., the debt-ridden holding company of his commodities empire, with his cash-rich listed unit, Vedanta Ltd. Last year, India’s Supreme Court upheld a 2018 ruling ordering Vedanta Ltd. iron ore mining in the coastal state of Goa due to violation of environmental and regulatory standards. The same court is due to hear motions in the case this week.
In the end, such a restructuring may not be possible. Last week, Vedanta Ltd. said she would stick to her current line-up, but was looking to venture into new areas. Among them, an investment of up to $500 million over two to three years to manufacture liquid crystal display glass substrates used in displays for electronics. It’s a curious choice, because such operations must be located near the panel manufacturing plants, and India is not even on the radar in this sector.
Foxconn, on the other hand, knows flat screens. His Innolux Corp. is one of the biggest names in the world, while founder Terry Gou engineered the takeover of Sharp Corp. in 2016, reversing the fortunes of the beleaguered Japanese company in just a few years.
Computer and smartphone screens are not semiconductors, however. Don’t be fooled into thinking that an investment in one portends a move to the other.
Among the telltale signs that this chip company may not be what it seems is the paltry sum paid into it. The $118.7 million announced by Foxconn is barely enough to set up a design team, let alone a production facility. Vedanta is likely to offer up to 10 times that amount, but even $1 billion won’t be enough to kick-start semiconductor manufacturing from scratch.
Then there are the actual chips that this new company would produce. She has two real choices: to manufacture to order for external customers or to manufacture products that she has designed herself. The first is a difficult concert. The rise of Taiwan Semiconductor Manufacturing Co., now one of the largest companies in the world, might make people think it’s a hot and lucrative business. But the fact that the world’s third (1), GlobalFoundries Inc., can barely string together a few quarters of earnings highlights the pitfalls even for those with years of experience.
If, on the other hand, this future company is to manufacture its own chips, it will have to create two divisions – those who know how to design globally competitive components and the team who can manufacture them efficiently and at scale. For this, Foxconn is a good choice and helps explain why the Taiwanese partner gets a 40% stake, perhaps disproportionate to the funds it invests.
But the lack of details is a clue to the real strength of this announced business. What we are really seeing are two companies agreeing to jointly apply to the government for corporate welfare, funds that New Delhi says it is ready to set up to achieve bold policy goals. When they submit an application, the ball will be in Modi’s court to unlock the money. Of course, Vedanta’s local connections combined with the technical chops of Foxconn make it an attractive company. But for now, this company is only on paper and a little more.
More from Bloomberg Opinion:
• India’s Chip Dreams aren’t crazy, just misguided: Tim Culpan
• Take it easy with the IPO of India’s most valuable company: Andy Mukherjee
• Elon Musk has it all wrong about state subsidies: Anjani Trivedi
(1) We are talking about pure-play foundries like TSMC and UMC. Samsung is a key supplier, but also manufactures its own designs.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.