A high-tech manufacturing crossroads

It goes by the anodyne moniker Fab 42, but the new Intel Corp factory being built in the Arizona desert is hardly a run-of-the-mill production facility.

At $US5 billion, it will be the most advanced chip factory ever constructed, producing microchips with transistors so tiny that over 100 million of them could fit on the head of a pin.

And it represents a giant bet by the world's largest semiconductor company that the United States can still be a good place to build things. If manufacturing is critical to jobs and long-term economic health, as many government and industry officials believe, then Fab 42 is an encouraging symbol of what could be.

Yet many technology executives worry that Intel's new factory is less a sign of things to come than the last gasp of an advanced manufacturing sector that could readily go the way of its lower-tech predecessors -- to Asia.

Those kinds of concerns have stoked an election-year debate on an old policy question: is there anything the US can or should do to support manufacturing and the benefits that go with it?

"There are a lot of companies that are moving operational resources out of the US and I have a tough time getting my arms around that being a good thing for us long-term," said Mark Adams, president of Micron Inc, the last remaining US memory chip manufacturer and historically a champion of government cooperation with the industry.

The loss of chip plants in the US is not because labour is cheaper abroad -- as in previous waves of manufacturing migration -- but rather due to lower tax rates, complex international supply chains and abundant skilled workers.

US President Barack Obama has made "insourcing" manufacturing jobs a key economic policy goal, and proposed incentives aimed at supporting advanced manufacturing.

His framework for business tax reform, unveiled in February, would cut the top corporate tax on manufacturing to 25 per cent, and even lower for advanced manufacturers. He would also make permanent a temporary research and development credit, a change that has been popular among both political parties and could cost $US99 billion over 10 years. His budget also calls for $US2.2 billion to support advanced manufacturing R&D, a 19 per cent increase.

The President's Council of Advisors on Science and Technology, which counts Google Inc chairman Eric Schmidt among its members, has gone further, calling for the launch of an "Advanced Manufacturing Initiative."

Invoking Sematech, an industry consortium which the US government supported in the 1980s to aid chip industry manufacturing, the council urged the government to "invest to overcome market failures, to ensure that new technologies and design methodologies are developed here."

But Obama's push to involve the government in rebuilding US manufacturing is controversial, with critics saying that most jobs attracted back to the United States would be low-paid and that US companies are better off focusing on design and invention. They point to Apple Inc, arguably one of the world's most innovative companies, and one that does no manufacturing.

Chip industry executives stress that advanced manufacturing is less about jobs created directly, which are relatively few but well-paid, than maintaining the know-how that's critical for long-term success.

Intel's efforts provide ammunition for both sides. The company has kept three-quarters of its manufacturing in the US Yet Intel also says it's cheaper to build overseas, and it could readily move more production offshore if it became more advantageous.

Chip manufacturers with intricate supply chains look at a range of factors when they decide where to add new facilities, but with corporate tax rates as high as 39 per cent, the United States is at a disadvantage compared with countries like Ireland, with a 12.5 per cent tax rate, and Israel, at 24 per cent, according to the Organization for Economic Cooperation and Development.

Taiwan, Singapore, Israel and other countries keen to woo foreign investors have offered a range of tax breaks and R&D tax credits that go beyond the perks available to manufacturers in the United States.

Unlike simpler manufacturing industries like apparel, semiconductor factories employ relatively few people, making labor costs only a minor factor. They do need access to highly skilled local labor, but that's becoming increasingly abundant as emerging economies like China become more sophisticated.

Mega-fabs

The cost of building semiconductor "fabs," or fabrication facilities, has been soaring for years, with each new generation of technology requiring more expensive and sophisticated production processes.

That trend long ago prompted many US chip companies to focus on design, and rely on contract manufacturers to build the products. That became more attractive as Asian companies like Taiwan's TSMC invested heavily in huge new factories, often with government support.

US companies accounted for half of the global chip industry's sales of about $US300 billion last year, with US plants producing some of the world's most advanced and valuable semiconductors. But just 16 per cent of the world's chip manufacturing capacity is located in the United States, steady for the past three years but down from 23 per cent a decade ago, according to SEMI, an industry association.

US semiconductor exports, inevitably, reflect the trend, dropping by $US3 billion last year to $US44 billion, according to US trade data. That's down more than a quarter from a 2001 peak of $US60 billion.

Most semiconductor R&D still takes place in the United States, but it's also declining in proportion to Europe, Israel, Singapore and other countries, according to a study commissioned by the Semiconductor Industry Association. Unsurprisingly, the US R&D decline is sharpest in the area specific to manufacturing chips.

The challenge of competing in chip manufacturing is growing even more daunting as the industry approaches a major hurdle that is so formidable -- but offers a huge advantage -- that rivals have begun working together.

Today, most fabs etch integrated circuits row after row onto silicon wafers measuring 300 millimeters across, which are then diced into individual chips. But the bigger the wafer, the cheaper each individual chip, so every few years, as technology improves, the industry moves to larger wafers.

Upgrading to the new 450 mm wafer size -- bigger than a large pizza -- is harder than it sounds. Only a handful of players with deep pockets will be able to play, experts say.

"There are something like 35 companies out there today that have 300 mm processing capability. There aren't that many companies that will be able to jump to 450 mm fabs. We think that number's probably five, maybe six," said Mark Thirsk, a manufacturing expert at Linx Consulting.

Personal contact

One of those companies will certainly be Intel. The company is sharply increasing its capital spending this year to $US12.5 billion from about $US10.8 billion in 2011.

With fabs in Arizona, Oregon, New Mexico and Massachusetts, Intel makes about three quarters of its chips in the United States -- and there are good reasons for it to keep favoring those locations.

Adding a new fab onto an existing site is much cheaper than starting from scratch at a new location, and speeds up completion by as much as a year. Fab 42, which will be upgradable to accommodate larger wafer sizes, is adjacent to a facility opened in 2007.

Intel's top manufacturing experts, responsible for keeping its technology years ahead of rivals, are mostly at US facilities, including a research center in Hillsboro, Oregon. As new manufacturing technologies are launched, Intel circulates engineers from its production fabs through Hillsboro to train and interact with experts there.

That personal contact, where experience is shared between researchers and the engineers who run Intel's fabs day-to-day, is invaluable to the innovative process, executives say.

But Intel's loyalty to the United States is not absolute. It has fabs in Ireland, Israel and even one in Dalian, China, launched in 2010. Intel may invest billions of dollars to expand or upgrade those sites in the future instead of in the United States if the benefits add up.

"You look at the whole world. In Ireland, we've done some investment to prepare that for next-generation technology when the demand is such that I need to add it. They essentially would be a site that might get the next generation technology. Similarly, Israel," said Josh Walden, Intel's general manager in charge of building and operating its fabs.

Intel has said it can cost $US1 billion less to build a fab abroad thanks to tax incentives and other perks. Walden weighs those cost advantages against the benefit of building fabs close to the chipmaker's R&D staff and extensive US infrastructure.

Intel and other chipmakers want a lower corporate tax rate in the United States and a quicker process for approving the building of new facilities.

Tech companies also want US colleges to turn out more engineers to help fill hiring gaps, and to allow more foreigners graduating from US universities to stay and work.

Just four per cent of US undergraduate degrees awarded in 2008 were for engineering, compared to 19 per cent in Asia, according to a recent report from the National Science Board.

History of support

Washington's current climate of spending cuts may not be ideal for discussing more support for industries showing no signs of imminent crisis. But the federal government in the past has pitched in to help the chip industry stay sharp.

In the 1980s, when stiff competition from Japan had the US memory chip industry against the ropes, the US government spent $US500 million to help Sematech improve equipment used across the industry, seen as key to national security and competitiveness.

Now, California congressman Mike Honda, whose constituency includes Silicon Valley, wants the Obama administration to put up money to make sure the 450 mm transition stays firmly rooted in the United States.

"The government has always had a major role in everything from Kennedy saying we're going to go to the moon to the development of the Internet," Honda said.

"If we don't get in line and get in sync and be agile in this, we're going to be left behind globally," Honda said.

Some government entities are already stepping up. New York State governor Andrew Cuomo has championed a plan to spend $US400 million on an engineering college in Albany as part of a wider deal for a consortium of Intel, TSMC, Samsung, IBM and Global Foundries to invest $US4.4 billion there over five years, some of which will go toward the 450 mm leap.

They will cooperate to set new standards, build and test prototypes, and help equipment makers redesign tools.