Tata Group and Vedanta offer lessons in India’s industrial policy

By Tim Culpan

A $125 million deal by Tata Group will one day become a case study for Indian industrial policy. The conglomerate has a high chance of success through buying its way into iPhone manufacturing, offering rival empires like mining group Vedanta Ltd. a lesson on the better path toward industrial expansion. 

 

Wistron Corp., a Taipei-based maker of computers, servers and smartphones, is slowly exiting its business of assembling Apple Inc.’s marquee product. Two years ago, it sold a Chinese unit that makes iPhones to Luxshare Precision Industry Co. for 3.35 billion yuan ($457 million). On Oct. 27, it announced the sale of Wistron InfoComm Manufacturing (India) Private Ltd., known as WMMI, to Tata Electronics Private Ltd. 

Both sides had been in discussion for over a year, so this transaction was widely expected. Wistron’s annual report shows improving revenue and operating income at WMMI, yet a post-tax loss for the division. Although the global smartphone market is currently in a slump, Tata ought to be able to drag the business to break even within a few years. That’s the easy part. 

Tata faces stiff competition from Taiwan’s Foxconn Technology Group and Pegatron Corp., both of which are expanding in India. There’s a reason  Wistron struggled to make much headway into Apple’s supply chain. Both larger rivals are more adept at a broader array of steps involved in manufacturing, including the parts that go inside as well as assembly of partially completed electronics subsystems. 

Tata, at least, has already made the right start. By its own account, Tata Electronics is a “venture of the Tata group with expertise in manufacturing precision components.” This is the most lucrative aspect of electronics production, and is the backbone from which Foxconn started 30 years ago, with the Taipei-based company now assembling more than 70 per cent of Apple’s iPhones. Buying a top-end factory from Wistron to move into assembly is an incremental step for Tata, not a completely fresh start, and augurs well for a successful future.

Contrast that to Vedanta, where billionaire chief Anil Agarwal is hoping to pivot into semiconductors. A year ago, the company had bold plans to set up a fresh chip factory in Gujarat, and had named Foxconn as a partner. The numbers didn’t make sense back then, and the project is even less coherent now.

Initial figures for around $20 billion of investment and 100,000 employees don’t accord with the semiconductor sector, which is capital intensive but uses very few staff. By contrast, Taiwan Semiconductor Manufacturing Co. is the world’s largest dedicated chipmaker but had just 73,000 employees at the end of last year. Vedanta’s plan included the less technology-intensive business of chip testing as well as flat-panel displays, but in reality, the figures it publicized seem intended for government officials tasked with handing out subsidies than any realistic plan.

Within a year, Foxconn withdrew its support — which wasn’t a great surprise since it offered a mere $119 million and only signed a memorandum of understanding days before Vedanta needed to submit its application for government grants. 

Vedanta’s decision to diversify away from resources and mining is not, in itself, a mistake. Taiwan’s Formosa Plastics Group made its way to becoming one of the world’s biggest memory-chip makers after founding Nanya Technology Corp. in 1995. But that was after it leveraged a commanding position in plastics to become a key supplier of printed-circuit boards — made from fiberglass — while another division division started in PC sales before moving into computer assembly. Other electronics giants have come from more traditional backgrounds, including Nokia Oyj (pulp, rubber) and Nintendo Co. (playing cards).

Instead, Vedanta’s big mistake is to chase exciting, headline-grabbing businesses like chip fabrication without first mastering the basics. There are numerous business models it could choose: design and make its own chips, manufacture for external clients, or even wade into the capital-intensive memory sector. Each path offers stiff competition, and there’s nothing to suggest Vedanta has an edge in any of them. Even if it could carve out a niche, there’s another bigger problem: nationalism.

Political pressure and national security concerns have spurred governments to fund new facilities from TSMC in Europe, the US and Japan. Tokyo is also spending money to found a local rival called Rapidus Corp. and subsidize a new factory from Taiwan’s Powerchip Semiconductor Manufacturing Co. and local investment group SBI Holdings Inc. Beijing, meanwhile, continues to put semiconductor independence at the forefront of government policy.

Instead of diving into the increasingly chaotic chipmaking sector, Vedanta ought to slow down and make a start in more labor-intensive businesses like testing, packaging and assembly — akin to what US memory-chip leader Micron Technology Inc. is planning for Gujarat. Or it could copy Tata and head in the direction of product assembly, a field ripe for further Indian investment as global brands seek to reduce reliance on China.