India’s latest chip venture is little more than a piece of paper

This week's announcement that India's Vedanta Group has tied up with Taiwan's Foxconn Technology Group to make chips is being lauded as proof that New Delhi is gaining traction with its plans to build a semiconductor industry. That's hardly the case.

Those hopeful that India can establish a foothold in the sector should temper their expectations, and instead keep an eye on the government of Prime Minister Narendra Modi for evidence that he will truly follow through on his big, expensive plan to build a local chip industry.

What Vedanta and Foxconn released on 14 February was little more than a piece of paper. Memoranda of understanding don't commit either party 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 choice of partner because its background is in mining and commodities, with limited experience in technology manufacturing.

What the two parties have in common is that they both smell opportunity.

India's government is offering almost $7 billion of enticements to boost the electronics manufacturing sector, which includes a production-linked incentives scheme, and a strong desire to move up the value chain from simple assembly to more technologically advanced semiconductor production.

And nothing attracts business executives like free money. Vedanta may be looking for a boost, too. Chairman Anil Agarwal is reported to have considered merging Vedanta Resources Ltd., the indebted holding company of his commodities empire, with its cash-rich listed unit, Vedanta Ltd. Last year, India's Supreme Court upheld a 2018 decision ordering Vedanta Ltd. to halt iron ore mining in the coastal state of Goa due to a violation of environmental and regulatory norms. The same court is scheduled to hear petitions on the case this week.

In the end, such a restructuring may not be on the cards. Last week, Vedanta Ltd. said it'll stick with its current corporate composition but is looking to venture into new areas. Among them, an investment of up to $500 million over two to three years to make liquid-crystal display glass substrates used in screens for electronics. That's a curious choice, because such operations need to be set up close to the factories where panels are made, and India is not even on the radar in this sector.

Foxconn, on the other hand, does know flat panels. Its Innolux Corp. is one of the world's biggest names, while founder Terry Gou engineered the 2016 takeover of Sharp Corp., turning around the embattled Japanese company's fortunes in just a few years.

Computer and smartphone screens are not semiconductors, however. One shouldn't be fooled into thinking that an investment in one portends a move into the other.

Among the tell-tale signs that this chip venture may not be what it seems is the paltry amount of money going in. Foxconn's announced $118.7 million 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 sufficient to kick-start semiconductor manufacturing from scratch.

Then there's the actual chips this new company would produce. It has two real choices — manufacture-to-order for external clients, or make products that it's designed itself. The former is a tough gig. The rise of Taiwan Semiconductor Manufacturing Co., now one of the world's largest companies, might make people believe this is a hot and lucrative business. But the fact that the world's third-largest 1 , GlobalFoundries Inc., can barely string together a few quarters of profit highlights the pitfalls even for those with years of experience.

If, on the other hand, this future business is to make its own chips, then it'll need to create two divisions — those that know how to design globally competitive components, and the team that can manufacture them efficiently and at scale. For that, Foxconn is a good choice and helps explain why the Taiwanese partner is getting a 40% stake, possibly disproportionate to the funds it's putting in. 

But the lack of detail is a clue to the real strength of this announced business. What we're really seeing is two companies agreeing to jointly petition the government for corporate welfare, funds that New Delhi says it's willing to put up to achieve bold policy goals. When they do put in an application, the ball will be in Modi's court to pony up the money.

For sure, Vedanta's local connections combined with Foxconn's technical chops make for an enticing enterprise. But for now, that venture is merely on paper and little more.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.