Springs’ Intel loss is China’s gain

Chip-making giant Intel Corp. (Nasdaq: INTC) still hasn’t confirmed this week’s announcement by China’s government that it has won approval for a new $2.5 billion chip fabrication plant in northwest China. But the story’s now been reported by nearly every major news organization, including China’s official Xinhua “People’s Daily” newspaper, so the chances of the deal being consummated seem increasingly likely.

The news comes less than two months after Intel announced plans to sell its Colorado Springs semiconductor plant, which the company bought in 2000. Up to 1,000 workers may be laid off if a buyer is not found that wants to continue operating the plant. Intel briefly flirted with further expansion in the Springs in 2002, before dropping plans to buy land for a second production plant near the city’s airport.

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Intel in Colorado Springs

Meanwhile, Intel announced a couple of weeks ago that it will spend up to $1.5 billion to re-tool its Rio Rancho fabrication plant, or fab, near Albuquerque, N.M., to produce chips using its next-generation 45-nanometer technology.

What’s it all about? Why is the world’s largest chip-maker apparently getting out of Colorado, while expanding and opening new facilities elsewhere?

Under pressure
Intel, whose sales declined nearly 9% last year, is coming under increasing competitive pressure from arch-rival Advanced Micro Devices Inc. (NYSE: AMD). And with a relatively new CEO — Paul Otellini — at the helm, Intel is re-thinking many of its product and manufacturing strategies. It’s announced plans in recent months to lay off more than 10,000 workers, while diversifying into new markets, such as NAND flash memory chips, and bailing out of communications chips and other areas that have been less successful than it had hoped.

So what do China and New Mexico have that Colorado doesn’t?

In the case of China, the attraction clearly is easier access to the world’s biggest potential consumer market, which boasts several hundred million increasingly affluent middle-class buyers. China also has become the electronics manufacturing capital of the world, consuming some $37 billion worth of chips last year. And despite its lingering reputation as a backwards Third World locale, China’s universities are turning out many thousands of bright, disciplined and relatively low-cost, engineers every year, making it an attractive recruiting spot.

As for New Mexico, Intel’s Fab 11X there is one of the company’s largest and most advanced facilities, equipped with state-of-the-art clean-room and automated materials-handling equipment. A few years ago it was the first Intel plant upgraded to handle the latest 12-inch silicon wafers. Intel has been operating in New Mexico since 1980, and now employs more than 5,000 people there.

What Intel has in New Mexico is deep roots, as well as a massive multi-billion-dollar investment in leading-edge production facilities.

Aging facilities, little investment
Its Colorado Springs fab, on the other hand, dates back to the early 1980s, when it was built by Mostek, before being sold to United Technologies, then Rockwell, then Intel. Although the aging facility has been updated several times, it was never designed for today’s latest manufacturing technology.

Colorado Springs made sense for Intel nearly a decade ago when the company was seeking lower-cost U.S. locales outside of Silicon Valley to recruit new talent and build chips, while trying to avoid over-dependence on its operations in New Mexico and Arizona. Since then, however, the company has begun shifting more of its manufacturing investment abroad, first to Ireland and Israel, then to Vietnam, and now China.

Farewell to U.S. chip manufacturing?
Chip making in the U.S. is simply less viable than it used to be, especially with foreign governments willing to offer billions of dollars in tax breaks and other incentives to attract new factories, plus access to barely tapped pools of workers who’ll work for far lower wages than Americans.

A handful of companies, including Texas Instruments, are still building new chip fabs in the U.S. But for the most part, the industry’s future manufacturing expansion will take place overseas. Even much of the chip design still being done here will soon be heading abroad.

The lesson for Colorado — and other U.S. states that wish to remain players in the $260 billion chip industry — is to focus on retaining as much of the marketing, finance, administration, logistics and other support operations as possible. Even more important is to do whatever it takes to foster and nurture the development of new fabless chip companies.

Sure, we should try to hang onto the manufacturing facilities we already have, for as long as we can. But don’t count on them staying forever. For most chip companies, manufacturing has become just another commoditized service to be outsourced. The headquarters is still what counts.

As long as Colorado and other regional U.S. semiconductor centers remain attractive places to live for those who run the industry’s established companies — and the entrepreneurs and financiers who launch new chip ventures — we still have a chance of staying in the game.

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