April 24, 2024

Foxconn’s failed India chip effort shows how difficult it is for new players

This month, Foxconn pulled out of its joint venture with Vedanta. The two sides “agreed to mutually agree,” Foxconn said in a statement at the time.

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Foxconn he is best known as the chief assembler of Apple’s iPhones. But in the past few years, a Taiwanese firm has pushed into semiconductors, betting that the rise of technologies like artificial intelligence will boost demand for these chips.

But Foxconn’s semiconductor division has had a tough start, highlighting the difficulty for new players to enter a market dominated by established firms with vast experience and a highly complex supply chain.

“The industry poses high barriers to entry for newcomers, primarily high levels of capital intensity and access to specific intellectual property,” Gabriel Perez, ICT analyst at BMI, a unit of Fitch Group, told CNBC via email.

“Players are built on habit TSMCSamsung or Micron counting decades of R&D (research and development), process engineering and trillions of dollars in investment to reach their current capabilities.”

Why is Foxconn going into semiconductors?

Foxconn, officially known as the Honorable Hai Technology Group, is a contract electronics manufacturer that assembles consumer products like iPhones. But in the last two years, it has stepped up its presence in semiconductors.

In May 2021, he established a joint venture with Yageo Corporation, which manufactures various types of electronic components. That same year, Foxconn bought a chip plant from a Taiwanese chip maker Macronix.

The biggest expansion of the effort came last year when Foxconn agreed with Indian metals-to-oil conglomerate Vedanta to set up a semiconductor production and display plant in India as part of a $19.5 billion joint venture.

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Neil Shah, vice president of research at Counterpoint Research, said Foxconn’s push into semiconductors is to diversify its business, and the company’s decision to launch an electric car unit is part of that plan. It aims to be a “one-stop shop” for electronics and automotive companies, Shah said.

If Foxconn could assemble electronics and manufacture chips, it would be a uniquely competitive business.

Why India?

What went wrong for Foxconn?

It’s hard to break into chip manufacturing

Foxconn’s setbacks point to a broader issue — it’s difficult for newcomers to break into semiconductor manufacturing.

Chip manufacturing is dominated by one player — Taiwan Semiconductor Manufacturing Company, better known as TSMC — which has a market share of 59% in the foundry segment, according to Counterpoint Research.

TSMC does not design its own chips. Instead, it makes these components for other companies like Apple. TSMC has more than two decades of experience and billions of dollars of investment to get to where it is.

TSMC also relies on a complex supply chain of companies that make critical tools to allow it to manufacture the world’s most advanced chips.

Foxconn and Vedanta’s effort seemed to depend heavily on it STMicrobut when the European company came to the rescue, the joint venture had little expertise in semiconductors.

“Both companies lacked the core competency of manufacturing chips,” Shah told Counterpoint Research, adding that they relied on third-party technology and intellectual property.

Foxconn’s efforts to crack the semiconductor space show how difficult it is for a new entrant to do so—even for a $47.9 billion giant.

“The semiconductor market is highly concentrated and few players have taken more than two decades to evolve to this point,” said Shah, adding that there are high barriers to entry, such as large amounts of investment and specialized labor.

“On average, it takes more than twenty years to reach the level of skill and scale to become a successful semiconductor manufacturing (fab) company.”

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