Explained: Why Vedanta-Foxconn’s semiconductor plant will reduce the cost of tech, but not by 60 per cent

In a major step for Make In India, Vedanta and Foxconn will be setting up a semiconductor factory in Gujarat for Rs 1.54 lakh crore. Speaking to CNBC-TV18 about the development, Vedanta Chairman Anil Agarwal stated that ‘Made in India’ semiconductors could have a big impact on the prices of finished products. 

We then went on to say that once the glass or the displays that are currently made in Taiwan and South Korea start getting manufactured in India, the price of a finished laptop that costs about Rs 1,00,000 today, would then cost Rs 40,000. That’s a reduction of 60 per cent.

India will emerge as one of the world’s biggest contributors of silicon chips and semiconductors in the years to come. It is not a question of if, but when. However, for the prices of finished tech products to fall by 60 per cent, it will take us a considerable time. Moreover, it will take a considerable volume.

Developing new products is expensive even if it uses tech and components that has been around for a while. The sheer among of R&D, marketing research and licencing fees that goes into making a smartphone or a laptop is mindboggling. The actual cost of raw material, components, as well as labour to put everything together is significantly less, when we consider the cost per unit.

Then, there’s the fact that tech companies often don’t plan on relinquishing their profit margins, even if the manufacturing costs come down. Let’s take Apple as an example. 

It takes Apple about $570 or roughly Rs 45,000a to make one iPhone 13 Pro. This includes the raw material, labour, shipping, and marketing. Apple sold the 128GB variant of the iPhone 13 Pro in India for about Rs 1,20,000. That same iPhone 13 Pro would have cost $899 or Rs 72,000 in the US or Canada. 

Back in April, Apple started making the iPhone 13 in India, at the Foxconn factory in Tamil Nadu. Theoretically, Apple should have offered a discount, or better yet reduced the price of the iPhone 13 in India, now that the device was not subject to the same number of taxes as before. 

However, we are only seeing a discount on the iPhone 13 series now, after the launch of iPhone 14, and the fact that many e-commerce platforms are trying to sell their stock around the festive season.

Continuing with Apple, let’s look at another example. The iPhone 14 Pro costs about $999 in the US, whereas in India it starts at Rs 1,29,900. In about a month, Apple will start making the iPhone 14 Pro in India, along with the rest of the iPhone 14 series. Will Apple revise the price of the iPhone 14 Pro and sell it for cheaper? Or, will Apple start providing a discount on the iPhone 14 Pro? Not likely.

India-made semiconductors and displays will surely drive down costs by a significant margin. Tech companies will easily be able to reduce their input costs by up to 15-20 per cent. If the proposed semiconductor factory hits the economies of scale early on, tech companies may even be able to drive down input costs by up to 30 per cent.

The costs of finished tech products will go down significantly for sure but it is unlikely it will be by 60 per cent. The larger question, however, is whether or not end consumers are passed on this benefit.

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