October 29, 2010    Volume 17, No. 17

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Intel CEO Says U.S. Would Lose No Tax Revenue By Providing Companies With Tax Holidays To Open Plants And Hire Workers


By Richard McCormack
richard@manufacturingnews.com

The United States can emerge from its economic downturn but only if the federal government changes tax policies and creates incentives for companies to build new factories in America, according to Paul Otellini, President and Chief Operating Officer of Intel Corp. "We do not face insurmountable issues," Otellini told a meeting of the Council on Foreign Affairs in New York. "We've been here before and we've demonstrated that we can persevere."

But it will require the federal government to realize that it must revive American manufacturing. "I propose that we take a page from other [countries'] playbooks and provide attractive incentives for companies to build factories here that will employ our workers," says Otellini.

It costs Intel $1 billion more to build a factory in the United States than it does in China -- and it is not because of cheap labor. Ninety percent of the difference comes from the Chinese government providing Intel with capital grants, equipment grants, tax holidays and incentives.

"We should offer tax credits in the five- to 10-year range -- or tax holidays -- to companies both domestic and foreign that want to set up or expand a factory in the United States," says the Intel boss. "This will bring more manufacturing back to the U.S. It will employ our workers. It will stimulate the economy -- all at no cost to us. It's time to show the world that America is open for business."

Providing a company with a tax holiday will not cost the government anything, he added. "It's not like it's taking away from existing revenue or spending. In fact, immediately those workers will pay taxes on day one and you will have new jobs. At some point in time, the enterprise will pay taxes once it gets up and running. To me it's almost a no brainer in terms of funding. It funds itself. You put people back to work. You get them off unemployment and get them working again. That starts generating taxes. They aren't paying taxes when they're on unemployment."

Intel does this "offshore all the time," Otellini says. "We're building factories in Ireland, Israel, China or Malaysia and you get an incentive package that [includes] an end-of-the-year tax holiday or equipment credits or something like that worth several hundreds of millions of dollars because people want companies like ours to invest there and to hire their folks. What's different about Mississippi versus Malaysia? You're not taking anything away from the tax rolls that is there on the day you give that grant. You're just deferring when that company pays something on the corporate side knowing that you care about jobs for people, which create taxes on day one."

The federal government can help the country get back on its feet by reducing corporate tax rates so they are about equal with those of foreign competitors. Doing so will help "reverse the flow of capital and jobs out of this country," Otellini adds. "The U.S. is still the largest market for many products. Our workforce is smart and conscientious with an outstanding work ethic. We need to unleash them and rebuild our manufacturing base."

Governments at all levels must start removing regulations and barriers that deter investment in manufacturing facilities. "Given the urgency of our situation, we should create a fast-track permitting process for companies that want to build new factories here," he says. "Someone who wants to invest and employ Americans shouldn't have to wait for years to get a permit to do so."

Otellini says that almost all of Intel's primary competitors are in Asia and that they are provided with substantial leverage over American companies. "In the case of Samsung, which is a large competitor of ours, Korea basically [provides it with] zero taxes and free money," says Otellini. "You have people that work in standards that would not be acceptable to American workers. They have a different level of productivity. It's not something I aspire to, I just say that's a difference. They can get more out per nickel, so you have to watch that."

The way to counter those advantages is through the use of "intellectual capital to build better products," says Otellini. "In the case of China, it's just a matter of resources coming against you."

Intel still has 75 percent of its factories located in the United States, and sells 75 percent of its products overseas. Intel has kept most of its production in the United States because of its workforce and because "the security and safety that you get by operating in the United States is exceptional, and we shouldn't discount that." It's also still the largest market in the world for computers.

"But if I look at the rest of the semiconductor industry -- and leave Intel out -- we're the last one standing in the United States. No one else has built a new factory in [the United States] in five or 10 years. Everyone is building either offshore or through joint ventures somewhere else." Not building any new factories in the United States "ain't good," says Otellini, particularly since semiconductors are still the world's most important technology.

When asked what Obama's policy should be toward China, Otellini replied: "I'd tell him not to start a trade war with your banker. I'm sort of a free trade guy. I think that we should spend all of our energies right now trying to fix issues in this country and not lecture others."

Obama would do well to replace his departing chief economist Larry Summers with a competent business person, says Otellini. "When you look at the people at [the] Commerce or Labor [departments] -- they weren't people who ran businesses. I think it's telling that there's not a former CEO or a current CEO sitting in the cabinet or any senior advisors. I think it's telling that you don't currently have a view that the private sector is the engine of the economy. You need to surround yourself with people of diverse opinions. I don't think we have a sufficient diversity of thought there to arrive at the right answers."

If policies are put in place to rebuild the manufacturing base for 21st century products, then the United States can capitalize on the "tidal wave" of creativity and new invention occurring within the economy, Otellini says. Americans should not be feeling so gloomy, he counsels. Innovation is alive and well. The evidence: the smart phone was not introduced by a traditional telecommunications company like Motorola, Samsung or Nokia, but by a computer company called Apple. Another: "Who could have predicted that the fastest growing mobile operating system in the world would be designed by a search engine company -- Google?"

Other massive transformations are on the immediate horizon, he notes. The television is on the verge of changing more in the next 12 months than it has in the past 50 years, due to the integration of the Internet into the TV set. "The surest sign that we are in the middle of a burst of cutting-edge innovation is to look at how much the traditional market and industry boundaries are shifting around us," he says. "Whenever this has happened, job and economic growth have followed."

Another reason for Americans to be more optimistic is that the United States is driving these changes. "It's the job of the government to ensure that the opportunity is here for that to happen in this country and not somewhere else," he says.

When asked if he thought the rise of the Tea Party would change policy in direction of the industrial incentives he described, Otellini said: "I'm not sure that the winning side will have internalized the reality of what's going on. That's what I worry about is that we switch to leaders and have the same thing."

Otellini says having to get on the pulpit to promote American competitiveness is something "I would rather not do, but I do it because, quite frankly, until I did it in Aspen, nobody else was doing it. Now we've got a dialogue. I don't pat myself on the back for that, but it got people saying, 'You know what, there may be something there.' That's how change happens. This kind of change takes one or two things at a time. You stop doing bad things and you start practicing some good things. I see us stopping some of the bad things. I see the brakes being hit in Washington on some of these things. Hopefully, over the next few years, we can get some of the good things enacted and get the competitive juices unleashed again. We may not be able to out-cheap China and India, but we can outsmart them and out-productivity them and out-think them in the way we construct the jobs."


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