Tata Group's $125 million acquisition will one day be used as a case study for Indian industrial policy. The conglomerate has a great probability of success by buying its way into iPhone manufacturer, teaching rival empires like mining group Vedanta Ltd. the better way to industrial expansion.
Wistron Corp., a Taipei-based computer, server, and smartphone manufacturer, is gradually quitting the business of assembling Apple Inc.'s flagship product. It sold a Chinese unit that builds iPhones to Luxshare Precision Industry Co. for 3.35 billion yuan ($457 million) two years ago. It announced the sale of Wistron InfoComm Manufacturing (India) Private Ltd., often known as WMMI, to Tata Electronics Private Ltd. on October 27.
Both parties had been negotiating for approximately a year, so this agreement was eagerly awaited. According to Wistron's annual report, WMMI's revenue and operating profits are improving, but the division is losing money after taxes. Despite the current collapse in the global smartphone industry, Tata should be able to return the company to profitability within a few years. That was the simple part
Tata is fighting against Foxconn Technology Group and Pegatron Corp., both of whom are expanding in India. There's a reason Wistron has had trouble breaking into Apple's supply chain. Both larger competitors are more skilled at a broader range of production procedures, including the parts that go inside as well as the assembly of partially completed electronics subsystems.
Tata, at least, has gotten off to a good start. Tata Electronics describes itself as a "Tata group venture with expertise in manufacturing precision components." This is the most profitable component of electronics manufacture, and it is where Foxconn began 30 years ago, with the Taipei-based firm today producing more than 70% of Apple's iPhones. Purchasing a high-end factory from Wistron to go into assembly is an incremental step for Tata, rather than a total restart, and bodes well for the company's future development.
In contrast, billionaire CEO Anil Agarwal of Vedanta is looking to diversify into semiconductors. A year ago, the business announced grandiose ambitions to build a new semiconductor facility in Gujarat, using Foxconn as a partner. The figures were illogical at the time, and the project is much less so now.
The initial numbers of roughly $20 billion in investment and 100,000 employment do not correspond with the semiconductor industry, which is capital intensive but employs very few people. Taiwan Semiconductor Manufacturing Co., on the other hand, is the world's largest specialized chipmaker, although it only had 73,000 employees at the end of last year. Vedanta's strategy includes the less technologically intensive business of chip testing as well as flat-panel displays, although the figures it released appear to be more for government officials entrusted with dishing out subsidies than any genuine plan.
Foxconn withdrew its sponsorship within a year, which was not surprising given that it committed only $119 million and only signed a memorandum of understanding days before Vedanta needed to submit its application for government funds.
Vedanta's move to diversify away from resources and mining is not a mistake in and of itself. After establishing Nanya Technology Corp. in 1995, Taiwan's Formosa Plastics Group rose to become one of the world's largest memory-chip manufacturers. But only after leveraging a dominant position in plastics to become a key supplier of printed-circuit boards built of fiberglass, while another division began in PC sales before shifting into computer assembly. Other electronics behemoths such as Nokia Oyj (pulp, rubber) and Nintendo Co. (playing cards) come from more traditional origins.
Instead, Vedanta's great mistake has been to pursue new, headline-grabbing companies like chip fabrication before understanding the fundamentals. There are several business models it may pursue, including designing and manufacturing its own chips, manufacturing for external clients, and even entering the capital-intensive memory sector. Each path faces tough competition, and there's no evidence that Vedanta has an advantage in any of them. Even if it could carve out a niche, there is a larger issue at hand: nationalism.
Political pressure and national security concerns have prompted governments to fund new TSMC facilities in Europe, the United States, and Japan. Tokyo is also spending money to establish a local rival called Rapidus Corp. and to subsidize a new factory built by Taiwan's Powerchip Semiconductor Manufacturing Co. and a local investment company called SBI Holdings Inc. Meanwhile, Beijing continues to prioritize semiconductor independence in government policy.
Political pressure and national security concerns have prompted governments to fund new TSMC facilities in Europe, the United States, and Japan. Tokyo is also spending money to establish a local rival called Rapidus Corp. and to subsidize a new factory built by Taiwan's Powerchip Semiconductor Manufacturing Co. and a local investment company called SBI Holdings Inc. Meanwhile, Beijing continues to prioritize semiconductor independence in government policy.
Instead of plunging into the extremely volatile chipmaking sector, Vedanta should take a step back and begin with more labor-intensive operations such as testing, packaging, and assembly, as US memory-chip leader Micron Technology Inc. is doing in Gujarat. Or it may follow Tata's lead and engage in product assembly, a field ripe for additional Indian investment as global brands strive to lessen their reliance on China.
Diversification and regeneration of Indian business is the appropriate path. However, industrial strategy should be focused on what makes sense rather than what creates headlines.