Electronics majors weigh semiconductor leap on policy push

Second mission is expected to follow ₹The 76,000-crore chip incentive plan, launched five years ago, will focus on developing a more comprehensive ecosystem of semiconductor components. The policy change is prompting electronics manufacturing services (EMS) companies, which often rely on low-margin assembly work, to examine whether they can move up the electronics supply chain.

“Companies that missed out on ISM 1.0 now have another window to move into semiconductor manufacturing. We at Syrma SGS will be examining the policy guidelines and will make serious efforts to enter this space,” said Jasbir Singh Gujral, managing director of Syrma SGS. Mint.

Dixon Technologies, meanwhile, took a more reserved stance. “We will evaluate (ISM 2.0) once the detailed guidelines are out,” said Saurabh Gupta, Dixon’s chief financial officer and group chief financial officer. Mint.

Marked targets

Dixon, of course, has hinted at semiconductor targets before. In the company’s third-quarter earnings call a year ago, chief executive Atul Lall told analysts the company was in “active discussions” with a foreign technology partner to set up a display manufacturing facility with a net investment of $3 billion. This plan has not come true so far.

Analysts say the strategic appeal is clear, even if short-term scale is limited.

“Most semiconductor projects will not have the kind of scale that mobile phone and consumer electronics assemblies bring for EMS firms. However, moving into semiconductors will be significantly beneficial in the long run, as companies will be able to expand margins through vertical integration of a product line and closer control of the entire electronics value chain,” said Harshit Kapadia, vice president at brokerage firm Elara Capital.

If their plans come to fruition, Syrma SGS and Dixon will join a small but growing group of manufacturers nestled between electronics assembly and semiconductor manufacturing.

Unlisted Tata Electronics, which started out as a contract manufacturer assembling Apple iPhones, in February 2024 announced a chip factory in Dholera, Gujarat, expected to be operational by mid-2027. Taiwan’s Foxconn started semiconductor manufacturing in India in partnership with HCL Group in May last year. Kaynes Technology announced an outsourced semiconductor assembly and test (Osat) facility in September 2023. All three were supported under ISM’s first tranche of incentives, alongside nine other initiatives focused mostly on assembly and testing.

Ashok Chandak, president of industry body India Electronics and Semiconductor Association (Iesa), said the semiconductor move could increase the long-term value of EMS firms.

“Electronics manufacturers are naturally suited to enter the semiconductor industry as they already have sectoral expertise in high-tech manufacturing. For most EMS firms, the ability to enter semiconductor component manufacturing will mean memory and storage chip assemblies as well as composite chips for industrial electronics. All of these will add incremental value to the business that electronics manufacturers are currently pursuing,” Chandak said.

capital barrier

Availability of capital remains a hurdle, but analysts do not see this as a major concern.

“Except Dixon, which took a hit in the markets due to its over-reliance on the slowing mobile phone market, all other EMS firms grew during a tough December. This suggests that investors and shareholders are looking favorably on them, and it is unlikely that any of them will struggle to raise enough capital to venture into semiconductor manufacturing and assembly,” Elara’s Kapadia added.

The pressures on existing business models are obvious. While Dixon, India’s largest listed EMS firm, saw a 28% sequential decline in revenue due to the slowdown in the global mobile phone market, Syrma SGS, which has a more diversified mix covering laptops, IT and telecom hardware and industrial electronics, reported a 10% sequential revenue increase in the December quarter.

Ankush Wadhera, managing director and partner at BCG and India leader in semiconductors, said ISM 2.0 is designed to push the ecosystem upwards.

Wadhera said the second chip incentive plan will focus on “building upstream semiconductor capabilities beyond assembly-led growth with a focus on equipment, materials, full-stack design, industry-led R&D, skills and creation of Indian IP”.