Foxconn’s change of heart on semiconductor factory a warning to India

Posted by Mihir Sharma

India has big plans to become an electronics manufacturing hub. Given this level of ambition, we need to be prepared for setbacks — such as the news this week that Taiwan-based Foxconn won’t eventually build a semiconductor plant in the western Indian state of Gujarat.

This was a huge disappointment. Getting some semiconductor manufacturing onshore was an important part of India’s plans to create a homegrown supply chain for electronics manufacturing. It turns out that these plans may have been too ambitious and not ambitious enough.

It’s not big enough because, even if the government’s targets for export growth are met, we’ll still lag some way behind smaller countries like Vietnam. A recent study by mobile phone makers in India indicated that Vietnam’s mobile-related exports were more than nine times that of India’s in 2021; Even Thailand exported nearly four times as much.

It is highly ambitious because meeting even the current targets requires electronics exports to grow between 65% and 75% annually. This is, of course, much faster than I expanded before. Even if India’s mobile-related exports grow consistently as fast as they did in the previous record year of 2015, manufacturers point out, it will need the better part of this decade to reach the level where Vietnam is now.

How can India raise and fulfill its ambitions? For manufacturers, the answer is clear: by opening up to trade and offering a more stable political environment.

The report says that every country in the emerging world, including India, has “focused on attracting investment through subsidies, facilitating trade, and improving operating conditions for domestic investors and producers.” Only India has imposed higher tariffs at the same time, driving up costs for almost every input in the electronic supply chain.

More expensive inputs mean Indian phones cost more, even if producers replace domestic suppliers with foreign ones. Had India been satisfied with tariffs on the level of Vietnam, phone manufacturers calculate that “Indian mobile phones would be on average about 4% more competitive.”

The rare sight of Indian manufacturers asking for less, not more, protection should jolt policymakers from their focus on tariffs. Foxconn’s fiasco should make them question the focus on subsidies.

The Taiwanese company’s withdrawal from its deal with Indian conglomerate Vedanta this week comes nearly a year after it signed an agreement with the Gujarat state government. The facility in Gujarat, home to Prime Minister Narendra Modi and stronghold of India’s ruling Bharatiya Janata Party, was India’s first semiconductor plant, and is eligible for billions of dollars in federal funds.

Foxconn’s reasons for not going ahead with this particular project were murky, and the company insists it remains committed to manufacturing in India and finding a partner that possesses the advanced know-how required for such a complex undertaking.

However, what is clear is that manufacturers and investors want not only financial incentives that are in the same ballpark as those offered elsewhere, but also policy stability and confidence. Semiconductor manufacturing plants, for example, require an exceptionally reliable water supply. The phone assembly must be near working outlets. All electronics manufacturers want to see low and stable tariffs on main inputs.

Subsidies alone will not be powerful or rewarding enough to overcome India’s trade and competitive disadvantages. Government dictates will not lead to the emergence of inclusive supply chains overnight. Indeed, given the pervasive nature of modern industrialization, moving the entire supply chain inward may prove impossible for any developing country.

India can start to right its wrongs by moving quickly on several free trade deals, such as with the European Union. It would also have to adhere to a trade policy much like that of Vietnam or Thailand – open to investment and imports.

In other words, India will have to reverse course if it is to have any hope of realizing its own ambitions, let alone raising them. If you do not shift the focus from industrial policy to openness and efficiency, India will probably never replace Vietnam, let alone China.

To contact the author of this story:

Mihir Sharma at [email protected]

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