These mega roadblocks could bite into Tatas’ ambitious chip plans

Amid reports that the Tata Group is in talks with the governments of Karnataka, Telangana and Tamil Nadu for a $300 million semiconductor plant, a research note has raised concern that the plan may face several impediments. A shortage of raw materials — both in the country and outside — due to COVID may be its biggest challenge, though there are other issues, too.

It may be recalled that the Tatas, earlier this year, finalised a plan to develop an indigenous chip factory as the pandemic triggered a shortage of chips and semiconductors worldwide. The shortage affected a plethora of industries such as electronics and automobiles, which are yet to recover from it.

A research report by Fitch Solutions, part of Fitch Ratings, said there were reasons for the worldwide chip shortage apart from COVID. There were extreme weather events and natural disasters in producing countries, such as a drought in Taiwan, and hurricanes and flooding in the US, it pointed out. Also, a major fire at Renesa’s plant in Japan and other events impacted global supply chains, it said.

Multiple targets, key issues

The Tata Group said it would build a chip plant with an aim to support its own operations that need semiconductors, and to help the nation be self-reliant in this aspect. To facilitate this, the group planned to run the new unit as an outsourced semiconductor assembly and testing facility.

The conglomerate’s decision has been hailed for tapping an enormous need at the right time. It is seen to capitalise on the Centre’s policy initiatives such as Make in India and Production Linked Incentive (PLI) schemes.

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The Tata Group was set to choose between Tamil Nadu, Karnataka and Telangana for the location by the end of this month, and commission the plant by late 2022. According to the plan, the unit would source silicon wafers from semiconductor foundries such as Taiwan-based TSMC.

However, since offshore chip foundries are already facing huge demand, they may not be able to adequately cater to the Tatas, said the report. “The reliance on silicon wafers made by offshore foundries, growing geopolitical tensions in the region and the emergence of new COVID variants all pose considerable downside risks to Tata’s plans,” it observed.

The report further said Tata’s inexperience in the chip-making industry may prove a big hurdle.

Disruptions from COVID variants

The emergence of COVID variants, that are feared to enjoy greater immunity against antibodies, may make the supply scenario more difficult, said Fitch Solutions.

The Delta variant had had its epicentre in Asia, a semiconductor hub. Since the region has lower vaccination rates than the advanced West, it may be hit hard if the Omicron variant turns virulent.

The chip shortage is not likely to ease until the middle of next year, said the report, adding that supply issues may last well into 2023. “Continued border closures and localised lockdowns following the emergence of new variants will continue to place pressure on semiconductor supplies and strengthen the risk of shortages continuing well into 2023, adding downside risk to Tata’s investment,” the report said.