Tata Group's Big Leap In The Semiconductor Industry

After having a blast over the weekend, I got back to my hometown on a Monday morning.

Monday blues started to hit me hard as soon as I was about to step down from the bus. The feeling intensified when I had to deal with rickshaw drivers demanding exorbitant rates to reach my destination.

However, I was saved from sinking deep into Monday blues, all thanks to a blue auto rickshaw…an electric auto rickshaw.

As it costs less to run an electric auto, the driver was ready to take me home at a price I wanted to pay.

People like me are slowly switching from petrol to electric vehicles, because of various reasons. The entire auto industry stands under a roof of revolution because of the onset of electric vehicles (EVs).

And when we talk about EVs, it is impossible to not mention the Tata group. The Tata group has always welcomed new business opportunities with wide arms and EVs was no exception.

After riding the EV wave, Tata group has now announced its plans to foray into the semiconductor industry.

At present, semiconductor chips are the brain behind most electrical and electronic equipment that require some form of computing intelligence. Beginning from smartphones to electric vehicles, semiconductor chips are required everywhere.

In July 2022, the group announced its first step in the semiconductor industry. After many rumours, on 8 December, N Chandrasekaran- chairman of the Tata group, finally announced the group's plan to enter into semiconductor manufacturing, assembly, and testing.

Let's understand how deep the plans go and by when the group will finally manufacture chips.

Tata Group's Big Semiconductor Plans

In a recent interview, N Chandrasekaran stated that Tata Group, under Tata Electronics (TEPL) will set up an Outsourced Semiconductor Assembly and Test (OSAT).

OSAT, also referred to as assembly, testing, marking, and packaging (ATMP) units, plays a crucial role in semiconductor manufacturing as they package and test the silicon chips made at the foundries before they are shipped to the market.

Tata Group incorporated TEPL in 2020. TEPL is a greenfield venture with expertise in manufacturing precision components.

The salt-to-steel conglomerate intends to invest US$90 billion (about Rs 7,452 billion) in the semiconductor industry across the group companies over the next five years. It plans to foray into advanced chip manufacturing, popularly known as fabs, in a few years.

N Chandrasekaran also mentioned the possibility of partnering with existing chip manufacturers and eventually launching an upstream chip fabrication platform.

The upstream process of wafer fabrication is more challenging both technologically and financially than the downstream steps of assembly and testing.

Also, this isn't the first move by the group in this industry. Earlier in June 2022, Tata group companies – Tata Motors and Tejas Networks entered a strategic partnership with Japanese semiconductor manufacturer Renesas Electronics Corporation.

The tie-up will help Tata Motors tide over the global auto chips crunch that has affected its earnings and resulted in production cuts and even temporary plant shutdowns. According to the India Electronics and Semiconductor Association, India's semiconductor market is expected to more than double between 2021 to 2026 and reach US$ 64 billion (bn).

It is a known fact that most of the chips are manufactured in Taiwan. TSMC, the world's largest contract chip manufacturer, started making semiconductor chips in 1987.

According to estimates, 90% of 5 nanometre (nm) chips are mass-produced in Taiwan by TSMC.

However, the tensions between China and Taiwan have led to a global chip shortage.

Increasing tensions between the US and China are encouraging global chip makers to change their supply locations.

This has a paradigm shift and these chip makers are currently concentrated on moving to East and Southeast Asia.

Both the Indian government and the Tata group are placing their bets to ensure this shift will make India a new hub for semiconductor technology.

Now, let us take a look at the government initiatives for the semiconductor industry.

Government Initiatives for Gearing Up the Indian Semiconductor Industry

The government is very focused on its important objective of building the overall semiconductor ecosystem and ensuring that, in-turn, it catalyses India's rapidly expanding electronics manufacturing and innovation ecosystem.

In December 2021, the vision of Atma Nirbharta in electronics & semiconductors was given further momentum by the Union Cabinet chaired by Prime Minister Narendra Modi approving the Semicon India programme with a total outlay of Rs 760 bn for the development of semiconductor and display manufacturing ecosystem in our country.

However, the incentives and policies announced in December were very complicated and confusing. After nine months, in September 2022, the government brought in reforms to the policy.

The modified schemes for setting up semiconductor fabs and display fabs in India shall extend financial support of 50% of project cost on a pari-passu (equal footing) basis to applicants who are found eligible and have the technology.

They should also have capacity to execute such highly capital and resource intensive projects.

At least 20 such units of compound semiconductors and semiconductor packaging are expected to be established with government support under this scheme.

Investment Takeaway

The Tata Group is in a position to leverage its presence in the global markets. Once it is successful in semiconductor assembly and testing, distribution may not be that cumbersome for the group because it already has global supply chains in its existing businesses.

Also, developing semiconductor chips will help the company in boosting its EV initiative. The semiconductor chip is a very important component for EVs.

If a sister concern is manufacturing the chip, then of course Tata Motors will benefit. It won't have to worry about shortages anymore.

Reduced costs and reduced delivery time will also be added benefits….

Hence, the Tata group is looking forward to achieving many aims with just one move of entering semiconductor manufacturing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com