The Taiwanese company has been betting for years that the rise of technologies like artificial intelligence (AI) will drive demand for its microprocessors. But Foxconn’s rocky start illustrates the obstacles for companies looking to break into a market dominated by established companies with deep experience and complex supply chains.
“The industry has high barriers to entry for new players, mainly capital intensity and access to key patents,” said Gabriel Perez, an analyst at BMI, a Fitch Group subsidiary. “Semiconductor giants like TSMC, Samsung and Micron have spent decades on R&D, engineering processes and trillions of dollars in investments to achieve their current capabilities.”
Foxconn, formally known as Hon Hai Technology Group, is a contract electronics manufacturer that assembles consumer products like iPhones. Over the past two years, the company has increased its presence in the semiconductor sector.
In 2021, Foxconn formed a joint venture with electronics component manufacturer Yageo Corporation and acquired a chip factory from Taiwanese company Macronix.
Foxconn’s push into semiconductors is part of its diversification strategy, and the decision to set up an electric car unit is part of that plan, said Neil Shah, vice president of research at Counterpoint Research. The Taiwanese company aims to become a “one-stop shop” for electronics and auto companies.
If Foxconn could assemble electronics and manufacture chips, it would be a very unique and competitive business.
“Foxconn’s decision to set up a joint venture in India responds to two key trends, one of which is the growing role of the market as a manufacturing hub for consumer electronics, and the other is New Delhi’s ambition to develop domestic semiconductors through subsidies and incentives,” said BMI’s Perez.
Retreat in silence
This month, Foxconn announced it was pulling out of its joint venture with Vedanta. “Both parties acknowledged that the project was not progressing fast enough, there were challenges that we could not resolve smoothly, as well as some other external issues.”
According to Reuters, one of the main reasons for the failure was that negotiations with chipmaker STMicroelectronics, the project's main technology partner, fell into a deadlock.
Foxconn and Vedanta wanted to license technology from the European manufacturer, while the Indian government wanted the company to have a stake in the joint venture, but STMicro did not agree.
The failure of Foxconn, a $47.9 billion giant, shows how difficult it is for new companies to enter the semiconductor manufacturing industry.
Chip manufacturing is dominated by TSMC, a Taiwanese company that owns 59% of the global chip market, according to Counterpoint Research. The company has built its position through more than two decades of experience and billions of dollars in investment. TSMC also relies on a complex supply chain of companies that produce the critical tools used to found its most advanced chips.
Meanwhile, the Foxconn joint venture relies heavily on technology partner STMicro, and does not have much semiconductor expertise itself.
“Both companies lack core chip manufacturing capabilities,” said Shah of Counterpoint Research, adding that they rely on third-party technology and intellectual property. “The semiconductor market is highly concentrated with a handful of players that have taken more than two decades to grow to this point. On average, it takes more than two decades to achieve the level of skill and scale to become a successful fab company.”
(According to CNBC)
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