Apple supplier Foxconn’s Indian chip business failure shows how tough it is for new players

foxcon is best known as the primary assembler of Apple iPhones. But over the past two years, the Taiwanese company has dabbled in semiconductors, betting that the rise of technologies such as artificial intelligence will drive demand for these chips.

But Foxconn’s foray into semiconductors got off to a rocky start, underscoring the difficulty for new players to enter a market dominated by established companies with enormous experience and highly complex supply chains.

“The industry presents new entrants with high barriers to entry, primarily high levels of capital intensity and access to coveted intellectual property,” Gabriel Perez, ICT analyst at BMI, a unit of the Fitch Group, told CNBC via email.

“Established players such as TSMCSamsung or Micron rely on several decades of R&D (research and development), process engineering and billions of dollars of investment to reach their current capabilities.”

Foxconn, officially known as Hon Hai Technology Group, is a contract electronics manufacturer that assembles consumer products like iPhones. But for two years, it has strengthened its presence in semiconductors.

In May 2021, it formed a joint venture with Yageo Corporation, which manufactures various types of electronic components. That same year, Foxconn bought a chip factory from a Taiwanese chipmaker. Macronix.

The biggest acceleration of efforts came last year when Foxconn agreed with Indian metals-to-oil conglomerate Vedanta to set up a semiconductor and display production plant in India in a $19.5 billion joint venture.

Neil Shah, vice president of research at Counterpoint Research, said Foxconn’s push into semiconductors was aimed at diversifying its business, and the company’s decision to launch an electric car unit is part of that plan. Its goal is to become a “one-stop shop” for electronics and automotive companies, Shah said.

If Foxconn could assemble electronic components and manufacture chips, it would be a very unique and competitive company.

Foxconn turned to India for its joint venture with Vedanta because the country’s government is looking to boost its domestic semiconductor industry and bring manufacturing back to shore.

“Foxconn’s decision to establish a joint venture in India responds to two key trends – one being the market’s growing role as a consumer electronics manufacturing hub, the second being India’s ambitions – mirroring other major markets such as the US, EU and mainland China – to grow its domestic semiconductor industry through government subsidies and regulatory incentives,” BMI’s Perez said.

This month, Foxconn pulled out of its joint venture with Vedanta. Both parties “have mutually agreed to part ways,” Foxconn said in a statement at the time.

“Both parties recognized that the project was not moving fast enough, that there were difficult gaps that we could not overcome smoothly, as well as external issues unrelated to the project,” Foxconn said.

Deadlocked talks with European chipmaker STMicroelectronics, which was the project’s technology partner, were a major reason for the company’s failure, Reuters reported this month.

Foxconn and Vedanta wanted to license STMicro’s technology and India wanted the company to have a stake in the joint venture, but the European chipmaker did not, Reuters reported.

Foxconn’s hurdles point to a larger problem: It’s hard for newcomers to get into semiconductor manufacturing.

Chipmaking is dominated by one player — Taiwan Semiconductor Manufacturing Company, better known as TSMC — which has a 59% market share in the foundry segment, according to Counterpoint Research.

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 investment to get where it is.

TSMC also relies on a complex supply chain of companies that make critical tools to enable it to manufacture the world’s most advanced chips.

Foxconn and Vedanta’s efforts appeared to rely heavily on STMicrobut once the European company was bailed out, the joint venture didn’t have much semiconductor expertise left.

“Both companies…didn’t have the core competency to make a chip,” said Shah of Counterpoint Research, adding that they depended on third-party technology and intellectual property.

Foxconn’s attempts to crack the semiconductor space show how difficult it is for a new entrant to do so, even for a $47.9 billion giant.

“The semiconductor market is very concentrated with few players who have taken more than two decades to evolve to this point,” Shah said, adding that there are strong barriers to entry, such as large investments and a specialized workforce.

“On average, it takes more than two decades to achieve the level of skill and scale needed to become a successful semiconductor manufacturing (fab) company.”