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Why Foxconn is unlikely to forego government incentives for chip making

Reports that the Taiwanese manufacturing giant is interested in setting up a semiconductor plant in India even without government incentives should be taken with a large pinch of salt

Any chip maker that forgoes the abundant government incentives on offer will inevitably be at a competitive disadvantage (Photo: Reuters) Premium
Any chip maker that forgoes the abundant government incentives on offer will inevitably be at a competitive disadvantage (Photo: Reuters)

It has been reported that electronics contract manufacturing major Foxconn (formally, Hon Hai Precision Industries, with unaudited 2022 revenues of $213.84 billion) 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 forego official incentives for setting up a new chip-making facility. One is the abundance of incentives on offer for chip manufacture around the world, including in India. The Biden administration has offered $52 billion in subsidies for setting up chip fabrication plants – or fabs – in the US under the Creating Helpful Incentives for the Production of Semiconductors (CHIPS) and Science Act. It has formed a Chip 4 Alliance with Taiwan, South Korea and Japan to try and deny China’s access to high-end chips that would give it the dominance it seeks in critical dual-use technologies such as artificial intelligence.

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

Chip manufacture is highly automated, unlike chip design, and requires few workers. Chips are light and can be moved around quickly and cheaply. When liberal incentives are on offer in a certain place, it makes little sense to set up a plant elsewhere. Chips can be produced where it is the cheapest to do so, after factoring in government support, and shipped to where they are in demand.

The other reason for scepticism is the competitive disadvantage a company will inevitably face if it foregoes government incentives while others happily feed 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 makes iPhones, could be expanded. Foxconn recently invested in expanding its plant in Vietnam, too.

All this must be seen as part of the ongoing partial diversification of supply chains away from China. The shutdown of Wuhan at the onset of the pandemic and subsequent production and shipment disruptions across China showed the dangers of concentrating production in a single country. China accounts for nearly one-third of all electronics manufacture – worth over $3.4 trillion – for three reasons: a vast, local ecosystem of components that allow for seamless input access, a huge supply of trained manpower, and a logistics network that can handle its gigantic export volumes.

It is not possible, even if people desired it, to transplant all these elsewhere in a short span of time. However, it is possible to take parts of these supply chains out of China. While Japan and South Korea have been shifting assorted lines of production out elsewhere for some time, Chinese companies have joined this trend to lower their costs.

Chinese wages have risen sharply. Citing Haver Analytics, The Economist says Chinese wages doubled between 2013 and 2021 to over $8 an hour, while it is still below $3 an hour in parts of the region The Economist dubs Altasia (alternative Asia). This ultra-low-wage area spans India, Malaysia, the Philippines, Thailand, Bangladesh and Vietnam.

Local production calls for local supply of components, apart from skilled, inexpensive labour, reliable power supply, industry-friendly administration, and functional logistics. India has the most abundant supply of skilled and skill-upgradable workers outside China. While China’s supply of young workers is no longer increasing as in the past, India has no such problem.

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

This is what has been playing out in Foxconn’s expanding businesses in India. It 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 giant market that China represents for any high-value product when reading reports laden with wild optimism about the scale of this diversification. It makes eminent economic and political sense to retain a fair proportion of production within China, even while shifting other bits to places in Altasia, including India.

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Updated: 07 Mar 2023, 08:18 PM IST
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