Taiwan's Foxconn has announced its withdrawal from a $19.5 billion semiconductor joint venture with Indian conglomerate Vedanta, dealing a setback to Prime Minister Narendra Modi's plans to develop chipmaking in India.

Last year, Foxconn signed an agreement with Vedanta to establish semiconductor and display production facilities in Modi's home state of Gujarat.

A statement from Foxconn provided no details, stating only that the company has decided not to proceed with the joint venture. As a result, Foxconn will remove its name from the entity, which will now be fully owned by Vedanta.

Vedanta expressed its commitment to the semiconductor project and stated that it has arranged alternative partners to establish India's first foundry. The company affirmed its dedication to realizing Modi's vision.

Sources familiar with the matter indicated that concerns over delays in approval of incentives by the Indian government contributed to Foxconn's decision to exit the venture. The government had also raised questions regarding cost estimates for requesting incentives.

Chipmaking is a key focus for India's economic strategy as it seeks to establish a new era in electronics manufacturing. Foxconn's withdrawal poses a challenge to Modi's ambitions of attracting foreign investments in domestic chip production for the first time.

Neil Shah, Vice President of research at Counterpoint, commented that the collapse of this deal hampers the "Make in India" initiative and raises doubts for other companies, including Vedanta.

Deputy IT Minister Rajeev Chandrasekhar sought to downplay the impact, stating that Foxconn's decision does not affect India's plans. He emphasized that both companies are valued investors in the country and that it is not the government's role to intervene in their private partnerships.

Foxconn, primarily known for assembling Apple products, has been expanding into chips to diversify its business beyond smartphones. While chip manufacturing is currently concentrated in a few countries, such as Taiwan, India aims to establish itself as a player in the sector. The Vedanta-Foxconn venture, which was announced in Gujarat last year, was hailed by Modi as a significant step toward achieving India's chipmaking ambitions.

However, the project faced obstacles from the start. Talks to involve European chipmaker STMicroelectronics as a tech partner were deadlocked, and although they managed to secure licensing technology from STMicroelectronics, the Indian government insisted on the European firm having a more substantial stake in the partnership, which STMicro was reluctant to provide. Simultaneously, another planned investment by the global consortium ISMC stalled due to Intel's acquisition of Tower Semiconductor, a key technology partner.

Despite these challenges, the Indian government remains optimistic about attracting investors to the chipmaking sector. Micron recently announced plans to invest up to $825 million in a chip testing and packaging unit in India. Alongside support from the federal government and the state of Gujarat, the total investment in the project is expected to reach $2.75 billion.

In 2020, India received three applications under a $10 billion incentive scheme aimed at establishing semiconductor plants. Apart from the Vedanta-Foxconn venture, Singapore-based IGSS Ventures and the global consortium ISMC, which includes Tower Semiconductor, submitted applications. However, progress on the ISMC project has also stalled due to the acquisition of Tower Semiconductor by Intel, and IGSS Ventures halted its plans to re-submit its application.

India has reopened applications for the incentive scheme to attract more companies interested in chip manufacturing. The country expects its semiconductor market to be valued at $63 billion by 2026.