February 12, 2010    Volume 17, No. 3

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U.S. Becomes A Bit Player In Global Semiconductor Industry: Only One New Fab Under Construction In 2009

By Richard A. McCormack

The United States is not a desirable place to build a new semiconductor wafer fabrication (fab) plant. Such plants are massive, costing upwards of $8 billion and generating thousands of direct and indirect high-paying jobs, spinoff revenue for local communities and massive investments in research, equipment and materials. Semiconductors sit at the top of the electronics industry pyramid. The United States invented the technology, but it's become a small player as measured by global production.

In 2009, 16 fabs began construction throughout the world. One of them was in the United States, according to Daniel Tracy, senior director of industry research and statistics at Semiconductor Equipment Materials International. Seven of the fabs that began construction will produce light-emitting diodes, one of the most promising energy-saving technologies developed in 50 years. None of those fabs will be in the United States.

The only semiconductor fabrication plant that started construction last year in the United States is in Saratoga County, N.Y., a GlobalFoundries facility that will produce 40,000, 300-mm wafers per month (at 28 nanometers and below).

China led the world last year in new semiconductor factory construction, with six fabs, followed by Taiwan with five, and Korea, Japan, the European Union and Southeast Asia, all with one apiece.

As of 2009, the percentage of global semiconductor production capacity located in the United States was 14 percent, down from 25 percent in 2005 and 17 percent in 2007. Japan has the highest share of global capacity (at 25 percent), followed by Taiwan (18 percent, up from 11 percent in 2001), Korea (17 percent, up from 11 percent in 2001), Europe and the Middle East (11 percent), China (9 percent, up from 2 percent in 2001) and Southeast Asia (6 percent).

The United States does lead the world in one category, however: closures. In 2009, 27 fabs closed worldwide, with 15 of them in the United States (followed by four in Europe, four in Japan, two in China, one in Korea and one in Southeast Asia). The number of closures last year almost doubled from the previous year, when 15 fabs were shut down worldwide, again, with the largest number in the United States (at four).

Why is the United States losing out on the next phase of the semiconductor boom? "It's not direct labor," says George Scalise, president of the Semiconductor Industry Association. "It's not materials -- they cost the same everywhere. If you go down the list of expenses, every-thing is the same, except for tax policies and subsidies."

Every country except the United States tries to attract investment in semiconductor manufacturing by offering companies tax holidays, tax abatements and subsidies. "Sometimes the land is given to you free," says Scalise. "Other services, such as water and electricity, are made available to you at favorable rates. What it boils down to is that there is a constructed comparative advantage" available in other nations.

If a semiconductor manufacturing company wants to make an investment in another country those incentives will save at least $1 billion in costs over a 10-year period compared to operating a plant in the United States.

If the United States wants to remain in the global semiconductor ballgame, then it is going to have to pony up. "If you talk about a $5-billion fab that you put in the United States, the incentive program over a five- to seven-year period would be a total of $1 billion," says Scalise. "Now that is not very much money when you think about the four-X multiplication factor of that investment in the thousands of new jobs, economic vitality and the supply lines that go into those plants."

Without new manufacturing plants, the U.S. economy is facing perilous times. The semiconductor industry has entered the nanotechnology era, and the manufacturing processes it is developing for the deposition of materials will transform the next generation of products and determine the economic fate of countries.

The semiconductor industry operates in an "innovation ecosystem" whose two primary pillars are manufacturing and research and development. Without one, there cannot be the other, according to a largely ignored report from the President's Council of Advisors on Science and Technology (PCAST) and authored by Scalise. The United States economy cannot be dependent on "knowledge" if its research and development is "de-coupled" from manufacturing.

"Design, product development and process evolution all benefit from proximity to manufacturing, so that new ideas can be tested and discussed with those working 'on the ground,' " says the report that was released during the George W. Bush administration entitled "Sustaining the Nation's Innovation Ecosystems, Information Technology Manufacturing and Competitiveness." "As the velocity of technology development accelerates, the interdependency between new research and manufacturing becomes vitally important, and those linkages are provided by people. Locations that possess both strong R&D centers and manufacturing capabilities have a competitive edge."

The U.S. leadership in high technology is at risk if the manufacturing "anchor" is damaged, said the PCAST study. "Other countries are moving swiftly to co-locate R&D centers of excellence next to the manufacturing plants they attract." China's swift entry into this arena "has created a new level of nervousness, because of its size and its commitment to a high-tech industrial policy." PCAST points out that "China also has a flexible, entrep-reneurial culture, which some of its neighbors do not."

Politicians in Washington "keep stumbling around and have been absolutely ineffective in doing anything about" improving the competitive underpinnings of the United States high-tech industry, says Scalise. "If the competition demands that you put in place incentives and subsidies then that is what you have to do to win."

The U.S. government might chafe at the idea of providing incentives as being "corporate welfare," but this attitude is not helping improve the fortunes of the high-tech industry or its hundreds of thousands of well-paid workers. In its annual jobs forecast released in December 2009, the Bureau of Labor Statistics said that semiconductor manufacturing will lose 146,000 jobs over the coming decade, from 432,000 in 2008 to 287,000 in 2018, a decline of 34 percent.

"People want to turn the cart over and ask, 'Is this corporate welfare?' -- as if you're bailing somebody out," says Randy Goodall, former director of business development at Sematech, the semiconductor manufacturing R&D consortium. "But the fact is if a company like AMD wants to build a new $4-billion or $5-billion manufacturing facility that will draw supply chain players, universities, researchers and engineering around it, it's going to be a powerhouse in your economy. If you're going to do that, then buying them -- if you will -- is very different from propping up some old manufacturer that isn't competitive with someone in another part of the world. In that case, propping them up artificially so you don't lose the jobs is corporate welfare. In the other case, you're in the marketplace for economic development drivers and you're buying one. It is a free market. You don't have to participate. You don't have to go buy anything that you don't want to go buy. Governments have to decide whether they want to participate -- 'Will we go get things?' Some of the states have made that decision: they're going to take a shot at it and bring these things in."

Scalise says that it is time for Washington politicians to do "what they said they were committed to doing, which is to create high-value jobs and create exports. They have to have the courage and the political will to do the right thing. It is time for them to act."

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