On a test track: Foxconn's venture with HCL puts sheen on OSAT biz in India

It is said to be a business with high volumes, but wafer-thin margins. However, being a key element in the making of semiconductor chips — which have widespread usage in electronic items, computers, and cars — Outsourced Semiconductor Assembly and Test, or OSAT, has become a burgeoning global business projected to be worth $47 billion this year and $70 billion by 2029.

The Indian government has turned its attention to OSATs in a bid to make the country a strategic player in the global semiconductor sweepstakes. It is offering a $10 billion financial package earmarked for semiconductor projects, which includes the project cost of an OSAT plant, so the country can straddle the entire ecosystem — from designing chips and fab plants producing wafers to testing and packaging for making the final chips before they are shipped to customers.

This is moving the needle.
 

Last week, HCL announced a joint venture with Foxconn in which the Taiwanese EMS (electronics manufacturing services) giant will have 40 per cent equity. This comes in the wake of a bunch of such ventures, with a combined investment of $1.3 billion, in various stages of progress. These include a venture between CG Power and Industrial Solutions and another that brings together Kaynes Technology and real estate giant Hiranandani Group’s Tarq Semi Conductors. There has been news of the Tata Group getting in as well, but most probably as part of its integrated fab plant that is in the works.
 

Micron, which is investing $825 million, is the first off the blocks and is setting up its captive testing and packaging unit for wafers — the latter will cost another $2.75 billion. Work is already underway in Sanand, Gujarat, and the country’s first “made in India” chips are expected to roll out by the end of December.
 

A semiconductor fab, or fabrication plant, is a factory that makes integrated chip circuits and silicon wafers. OSATs tests and packages chips as an outsourced contract from integrated device manufacturers, which both design as well as make the wafers themselves. IDMs that also have their own packaging and testing services — Micron is one of them — are known as ATMP players, which is short for assembly, testing, marking, and packing.
 

Riding the subsidy train
 

Subsidies can cover nearly three-fourths of the project cost, of which 50 per cent comes from the Centre and 20 to 25 per cent from states. That leaves the promoters to bring up only the remaining portion.
 

What’s more, OSAT units require lower capital and a shorter gestation period compared to a fab plant. The latter, on an average, would require investments of at least $4-5 billion and take three to five years to take off. An OSAT could start up with $300 million and begin running in a year to a year and a half.
 

Foxconn has identified India as a focal point in its semiconductor ecosystem. In addition to the OSAT venture with HCL group , it plans to set up a compound fab plant in India on its own, which will churn out chips for electric vehicles (EVs) as well as mobile devices. The OSAT project can be used to test and package chips being churned out from the proposed compound fab plant.
 

Foxconn also plans to set up an EV assembly plant in India where these chips will be used. At present, its parent group buys more than $30 billion worth of chips annually from across the globe. That bill will lessen once it starts making as well as testing and packag  ing chips in India. Roshni Nadar, chairperson of HCL Tech, said in Davos the group expects to leverage the OSAT plant to meet the growing domestic demand for semiconductors.  Micron initially wants to import wafers into its Indian plant, to be converted into chips through the OSAT unit before being re-exported to them. The plan in the next three years or so is to do the testing and packaging of chips in India and directly sell them to Micron’s clients within the country. For instance, Apple Inc is one of its large global clients and can become larger as it is in the process of shifting nearly 20 per cent of its iPhone production to India by 2026-27.
 

Executives in Micron told Business Standard earlier that the margins in the business could vary from 10 per cent to 40 per cent, depending on the product being made, though industry experts say the average is closer to 20 per cent.

 

Not an easy ride
 

For many Indian homegrown players, the opportunity lies in the large semiconductor market in the country. Counterpoint Research says the domestic market for semiconductors will be worth $64 billion by 2026. Indian players could undertake testing and assembly of wafers and chips in the country for global IDMs, other wafer producers, as well as fabless chip players such as Qualcomm and Mediatek.
 

A fabless company designs and markets semiconductors but outsources the hardware fabrication to a third-party. 
 

Another option is to simply import the wafer, do the packaging, and re-export at an attractive price to clients abroad. Local sourcing of semiconductors, estimated to be 10 per cent in 2022, can rise to 17 per cent as fab and OSAT plants come up in the country, says the India Energy Storage Alliance.
 

But fabless players such as Qualcomm say they are willing to shift chip making to Indian foundries and testing if they get the same global quality and price.
 

India faces tough competition and is, in fact, behind Malaysia, Vietnam, and The Philippines, which already have a vibrant OSAT-ATMP ecosystem. Micron’s Malaysian ATMP plant is training Indian engineers to run the Sanand plant, and some of the machines from its Penang unit are being shifted to initially churn out chips from the Indian unit. Top Taiwanese OSAT players are still not making a beeline for India. Six of the world’s top 10 OSAT players by revenues are Taiwanese. US based Amkor, the only one in the top 10 from the US, announced late last year it would set up a testing and packaging plant in Vietnam with an investment of $1.6 billion.
 

A senior executive of a leading US chip company points out: “OSAT players in Taiwan have been asked by their auto clients to hedge their bets and not have plants only in their country and China to avoid geopolitical risks. They are looking at Malaysia, Philippines and Vietnam, but India is not in their scheme of things.”
 

The automobile companies want predictability in government policy, low and stable tariffs, favourable taxation, flexible 

labour laws, and benevolent regulation and governance.

A lot could depend on how well Micron’s project takes off.

OSAT/ATMP PROJECTS ON THE ANVIL

• Micron Technology is investing $850 mn in an ATMP plant in Sanand for its own captive consumption
• HCL Group ties up with Foxconn, in which the Taiwanese giant will take 40% equity for $37.2 million, to set up an OSAT facility
• Kaynes Technology will invest ~2,800 cr for an OSAT plant in Telangana that will generate 2,000 jobs
• CG Power and Industrial Solutions has submitted a proposal in partnership with technology providers to invest $791 million 
• Hiranandani Group has chosen UP for an OSAT plant with a proposed investment of around ~2,500 cr
• The Tata group has said it wants to set up a unit, but it is not clear whether this will be part of a comprehensive fab-making project
   

Source: Public announcements and industry  
 

GOVT INCENTIVE FOR OSAT/ATMP

• Fiscal support of up to 50% of capex to those found eligible and having the apt technology
• Many state governments offer another 20-25% incentive, including cheaper land and water
• Purchase preference by the government under public procurement of electronics
• Up to 2.5% of the scheme outlay earmarked for R&D, skill development, training requirements

Source: Ministry of Electronics and Information Technology