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Foxconn interested in setting up another semiconductor plant in India

Foxconn (formally, Hon Hai Precision Industries, with unaudited 2022 revenues of $213.84 billion) seems is interested in setting up, even without any government incentives, a semiconductor plant in India, in addition to the one it already is setting up in collaboration with Vedanta in Gujarat. The story is attributed to an unnamed government official, and should be taken along with more than a smidgeon of salt. (The company has not responded to the report so far.) However, there is no denying the robust interest the company is showing in setting up new lines of production in multiple locations across India.

There are two reasons why Foxconn is unlikely to give up on official incentives to set up a new chip-making facility. There is an abundance of incentives on offer for chip manufacturing across the globe, including one in India. The Biden administration has offered $52 billion in subsidies to set up chip manufacturing plants – or fabs – in the US under the Creating Subsidiary Incentives for the Production of Semiconductors (CHIPS) and Science Act. It has formed the Chip 4 Alliance with Taiwan, South Korea and Japan to try to deny China access to high-end chips that would give it dominance in critical dual-use technologies such as artificial intelligence.

Japan, South Korea, Taiwan and the European Union all offer major incentives, from tax credits to upfront subsidies, for manufacturing the chips. China develops its semiconductor industry as a strategic imperative and cash is no constraint.

Chip manufacturing is highly automated, unlike chip design, and requires few workers. Chips are light and can be moved around quickly and cheaply. When generous incentives are offered at a certain location, it does not make sense to set up a plant elsewhere. The chips can be produced where it is cheapest to do so, after factoring in government support, and shipped where they are in demand.

Another reason for skepticism is that one company will inevitably suffer a competitive disadvantage if it skips government incentives while others happily toil from the trough.

Foxconn Chairman Young Liu recently visited India and met the Prime Minister and various Chief Ministers. He showed interest in setting up plants in Karnataka and Telangana. The company’s existing plant in Hosur, Tamil Nadu, where it manufactures iPhones, is likely to be expanded. Foxconn has also recently invested in expanding its plant in Vietnam.

All this should be seen as part of an ongoing partial diversification of supply chains away from China. The shutdown of Wuhan at the start of the pandemic and subsequent disruption of production and shipments across China showed the dangers of concentrating production in a single country. China accounts for about one-third of total electronic manufacturing — worth more than $3.4 trillion — for three reasons: a vast, local ecosystem of components that allows seamless input access, a large supply of trained manpower, and a logistics network that can handle the huge export volumes.

It is not possible to transplant all of them somewhere else in such a short time even if people want to. However, it is possible to move parts of these supply chains out of China. While Japan and South Korea have been relocating mixed production lines elsewhere for some time, Chinese companies have joined the trend to lower their costs.

Chinese wages have risen sharply. Citing Havre Analytics, The Economist says while Chinese wages are set to double between 2013 and 2021 to more than $8 an hour, while it is still less than $3 an hour in some parts of the region, the The Economist dubs it Altasia (Alternative Asia). This ultra-low-wage sector extends to India, Malaysia, the Philippines, Thailand, Bangladesh and Vietnam.

Local production demands local supply of components in addition to skilled, cheap labour, reliable power supply, industry-friendly administration and functional logistics. India has the largest supply of skilled and skill-upgradable labor outside China. While the supply of young labor in China is not increasing as before, India has no such problem.

It makes sense for a company like Foxconn to shop around for the best support on offer from individual state governments, and build itself the missing bits of the supply chain that it needs for large manufacturing enterprises such as iPhone production.

That’s what’s going on in Foxconn’s growing business in India. This is good for the company and the Indian economy, and makes for a less concentrated, less vulnerable global production structure.

While it is realistic to expect some supply chain diversification away from China, it is useful to factor in the huge market that China represents for any high-value product when reading reports laden with wild optimism about the scale of this diversification. . It makes prestigious economic and political sense to keep a fair proportion of production within China, even while moving other bits to Altasia, including India. Live Mint

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