International Tax Panorama

Taiwan’s Foxconn said on Monday it has withdrawn from a $19.5 billion semiconductor joint venture with Indian metals-to-oil conglomerate Vedanta, in a setback to Prime Minister Narendra Modi’s chipmaking plans for India.

Foxconn, the world’s largest contract electronics maker, and Vedanta signed a pact last year to set up semiconductor and display production plants in Modi’s home state of Gujarat.

“Foxconn has determined it will not move forward on the joint venture with Vedanta,” the electronics maker said in a statement, without elaborating on the reasons.

But the project to make India a semiconductor hub was always in trouble.

The discussions between Vedanta-Foxconn semiconductor consortium and STMicroelectronics, on its entry into the deal as a technology partner were stuck due to factors like technology transfer, duration of the partnership, and the funds to be invested by each company.

Limitation of Technology Transfer 

One of the primary obstacles is that STMicroelectronics, a Dutch multinational corporation, wants to limit the scope of the technology transfer and also have a sunset clause regarding the duration of the joint venture..

STMicroelectronics also has some reservations regarding its investment in the (Vedanta-Foxconn) combine. They want Vedanta to take the lead and invest more.

What is a Sunset Clause?

A sunset clause, or a sunset provision, can be defined as a clause in a regulation or a contract that will automatically expire on a specific date. 

How this clause affects the joint venture? 

Now STMicroelectronics wants to exit the joint venture after 5 to 10 years. During that duration, it can complete technology transfer. 

But the Vedanta-Foxconn combine wants the European chipmaker to stay on for longer.

STMicroelectronics’ inclusion in the Vedanta-Foxconn chipmaking project as a technology partner is crucial as it would help the consortium qualify as a beneficiary of the Centre’s Rs 76,000 crore incentive plan.

Waiting for another Technology Parter?

Also the India Semiconductor Mission was waiting for Vedanta-Foxconn JV to onboard a technology partner with a production-grade license to give the go-ahead for the next phase.

According to the government’s rule for the semiconductor incentive plan, applicants must showcase their expertise in the specialised domain of semiconductor manufacturing. To get government’s nod for the project, the interested parties must either possess a fabrication unit capable of producing semiconductor chips in the 65-28 nanometer (nm) range, or have “production-grade licensed technologies” to manufacture 28 nm chips.

Besides this, they must provide evidence of their capabilities in advanced node technologies through licensing or development, as outlined in the official guidelines.

Brief Background of the Foxconn-Vedanta Joint Venture : 

Vedanta along with Foxconn revealed their intention to establish a semiconductor manufacturing facility in Gujarat. The Vedanta Foxconn joint venture had signed an agreement with the Gujarat government to invest Rs 1,54,000 crore to set up a semiconductor plant and had finalised Dholera Special Investment Region near Ahmedabad for setting up the factory.

During the India Today Conclave held in March, billionaire Anil Agarwal said that he is keen to make India a semiconductor hub, and promised to produce cheaper, quality and innovative semiconductors and displays in the next two and a half years.

Agarwal said that his company has signed a memorandum of association (MoUs) with 100 Japanese companies, which will help him achieve this dream. He further foresees over 700-800 companies associating with Vedanta.

Agarwal said this cluster of over 100 companies will help manufacture cheap and quality raw materials (semiconductors and display), which can be used in manufacturing electronics in India, which is not profitable today.