Chipmakers face the heat of slowdown, but India investments may continue

A steadily rising inventory of unsold electronics around the world, coupled with growing concerns of inflation and geopolitical concerns, is causing the biggest chipmakers and contract manufacturers in the world to take a cautious approach for the coming quarters. This could have a trickle-down impact on investments that global majors such as Taiwan Semiconductor Manufacturing Company (TSMC) and Hon Hai Precision Industry Co — better known as Foxconn — may have planned for the coming quarters.

On Thursday, October 13, TSMC reported an 80% jump in its quarterly net profit, which rose to $8.8 billion. However, even as TSMC beat market estimates for the September quarter, chief executive C.C. Wei said that its net capital expenditure for the rest of FY23 has been slashed by 10% — down to $36 billion until March 2023. He further added that there could be a “likely decline” in the global semiconductor market, and TSMC is “not immune” from the downturn despite its dominant market position.

Foxconn, too, advised caution in its outlook for the rest of the year, in an earnings call announcing its September sales. Even as the company reported its highest-ever monthly revenue of $25.9 billion for last month — reporting a record sequential rise of 83.2% — the company cited “the dynamics of inflation, the pandemic, and the supply chain” as key reasons of concern.

Industry analysts state that the cutdown in capex for global supply chain majors is not unexpected, since consumer inventories have risen to very high levels due to a fall in consumer demand. Navkendar Singh, associate vice-president of client devices at market research firm International Data Corporation (IDC) India, said that the slowdown projection is in line with tapering demand globally. “Even enterprises are spending cautiously, and orders are getting delayed or canceled, as companies put a freeze on hiring and rethink growth plans,” he said.

This slowdown in demand has been projected for the immediate quarters in the global information technology (IT) services sectors, too. While India’s IT majors — Tata Consultancy Services, Infosys, HCLTech and Wipro — all reported revenue growth, analysts spotted a drop in the number of new and active deals among most IT sector players to underline a cautious approach among enterprises.

To be sure, enterprises and their demand for connected, digitized services — through internet of things (IoT) deployments in energy generation, and the demand for data centers in banking, financial services and insurance (BFSI) — contribute significantly to the demand for chips among enterprises.

Even as this demand falls, stakeholders of the Indian semiconductor industry remain confident that there would not be a straight-up impact on India’s scope to attract investments in its fledgling semiconductor industry.

Vivek Tyagi, chairman of industry body India Electronics and Semiconductor Association (IESA), said that there “could be some slowdown in the investments that global supply chain majors make, in the coming quarters.”

“However, it is important to note that semiconductor investments in the country would not come off the back of cutting edge chips, which is where the slowdown would be. For instance, the automotive sector in India has a demand for chips that are between 28nm (nanometer) and 90nm die size — and this sector is likely to continue with a simmering demand going forward,” Tyagi said.

He further added that the Indian semiconductor industry is also presently at the stage of attracting investments to set up facilities, which are largely long-term efforts.

“As we see it, the demand slowdown and caution in expansion of investments would remain for another 18 to 24 months, following which the global supply chain would stabilize. India, in the meantime, could attract assembly, testing, marking and packaging (ATMP) and outsourced semiconductor assembly and test (OSAT) facilities,” he said.

The union government’s production-linked incentive (PLI) plan for semiconductors presently offers a 50% cash benefit for companies that invest in semiconductor facilities, without a minimum cap on investments. Tyagi highlighted that this, coupled with state-wise land and employment benefits, could see India continuing to receive investments for the semiconductor sector — even if it is at a slightly reduced pace.

Rajeev Khushu, advisor and board member of IESA, added that Bengaluru already has over 80 companies of varying sizes associated with semiconductor manufacturing. “The global conditions could lead to some amount of slowdown, but companies are definitely not holding back on their investments to diversify the supply chain,” he said.

Khushu added that most major companies in the global semiconductor space already have plans and facilities in India, or are planning the same. He added that a recently concluded semiconductor conclave saw “multiple leaders in the semiconductor space remain optimistic about their opportunities in India.”

Both Khushu and Tyagi also agree that the recent slew of federal regulations restricting access to advanced technologies in China could see India gain a trickle-down benefit in the long term.

“Because of this, companies won’t refrain from making incremental investments in facilities in India to get a first-mover advantage — even if there is an overall slowdown,” Khushu highlighted.