This month, Foxconn pulled out of its joint venture with Vedanta. Foxconn said in a statement at the time that the two sides “agreed to part ways”.
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Foxconn best known as the main assembler of Apple’s iPhone. But in the last few years, the Taiwanese company has pushed hard into the semiconductor sector, betting that the development of technologies such as artificial intelligence will drive demand for these chips.
But Foxconn’s foray into semiconductors got off to a rough start, showing how difficult it is for new players to enter a market dominated by established companies with seasoned experience and complex supply chains.
“The industry presents new entrants with high barriers to entry, primarily high capital intensity and access to coveted intellectual property,” Gabriel Perez, IT analyst at BMI, a unit of the Fitch Group, told CNBC via email.
“The players established as TSMCSamsung or Micron several decades of R&D (research and development), engineering processes and trillions of dollars of investment to achieve their current capabilities.”
Why did Foxconn enter the semiconductor field?
Foxconn, officially known as Hon Hai Technology Group, is a contract electronics manufacturer specializing in the assembly of consumer products such as the iPhone. But over the past two years, it has strengthened its presence in the semiconductor sector.
In May 2021, it formed a joint venture with Yageo Corporation, which manufactures a wide range of electronic components. That same year, Foxconn purchased a chip factory from the Taiwanese chip maker Macronix.
The biggest push came last year when Foxconn agreed with India’s metal-to-oil converter Vedanta to set up a semiconductor and display manufacturing plant in India as part of a $19.5 billion joint venture.
Neil Shah, vice president of research at Counterpoint Research, said Foxconn’s push into semiconductor production was to diversify its business and the company’s decision to launch an electric vehicle unit part of that plan. Its goal is to be a “one-stop shop” for electronics and auto companies, Shah said.
If Foxconn could assemble electronics and make chips, it would be a very unique and competitive business.
Why India?
Foxconn looks to India for a joint venture with Vedanta because the government is looking for it promote the domestic semiconductor industry and bring production to shore.
“Foxconn’s decision to establish a joint venture in India responds to two main trends – one of which is the growing role of the market as a hub for consumer electronics manufacturing, the second is India’s ambition – which mirrors other major markets such as the US, EU and mainland China – to develop the domestic semiconductor industry through public subsidies and regulatory incentives,” said BMI’s Perez.
What happened to Foxconn?
This month, Foxconn pulled out of its joint venture with Vedanta. Foxconn said in a statement at the time that the two sides “agreed to part ways”.
“Both sides acknowledged that the project was not progressing fast enough, that there were challenging gaps that we were unable to cross smoothly, as well as external issues unrelated to the project,” Foxconn said.
The deadlocked negotiations with European chipmaker STMicroelectronics, the project’s technology partner, were one of the main reasons the joint venture failed. Reuters reports this month.
Foxconn and Vedanta want to license technology from STMicro and India wants the company to have a stake in the joint venture, but the European chipmaker does not, Reuters reported.
It’s hard to break into chip manufacturing
Foxconn’s hurdles point to a broader problem – it’s hard to get new entrants into semiconductor manufacturing.
According to Counterpoint Research, chip production is dominated by one player – Taiwan Semiconductor Manufacturing Company, aka TSMC – which holds a 59% market share in the chip segment.
TSMC does not design its own chips. Instead, it manufactures these components for other companies like Apple. TSMC has over two decades of experience and billions of dollars in investments to get to where it is.
TSMC also relies on a complex supply chains of companies creating the key tools that enable it to manufacture the most advanced chips in the world.
Foxconn and Vedanta’s efforts seem to rely heavily on STMicrobut once the European company bails, the joint venture doesn’t have much semiconductor expertise.
“Both companies … lack core competencies in chip manufacturing,” said Counterpoint Research’s Shah, adding that they depend on third-party technology and intellectual property.
Foxconn’s efforts to disrupt the semiconductor space highlight how difficult it is for a newcomer to do so—even for a $47.9 billion giant.
“The semiconductor market is highly concentrated with some players taking over two decades to develop 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 two decades to reach the skill level and scale to become a successful semiconductor (fab) company.”
