Intel to invest in U.S. manufacturing

Intel announced today that it will invest $6-8 billion in the U.S. to build a new plant in Oregon and to improve existing  manufacturing facilities.  (See WSJ 10/19/10).  This investment will give them the capability to produce chips with 22 nanometer circuits, whereas the previous wave of investments gave it 32 nanometer capability. (A nanometer is one billionth of a meter – a couple of billion dollars to produce lines that are a billionth of a meter wide!)

The interesting part of this story is that Intel is sticking with U.S. production.  The potential allure of overseas production is not from the typical “cheap labor” issue, but rather because foreign governments are willing to hand out considerable subsidies for building a chip plant in their territory.  Intel estimates that the potential subsidies are equivalent to $1 billion, a considerable portion of the cost to build the plant.

So why is Intel sticking with the U.S.? Unlike apparel, they are not concerned about “made in America” – they will gain no premium in the market for made in America.  Unlike autos, their product is not expensive to move around the world, so local production to avoid higher transportation costs is not a concern. Nor is there a concern about tariffs or labor unions.

The issue is production yield – when you first start making chips, some of them, maybe even most of them, don’t work. The trick to make an investment in capacity pay off is to improve yields as fast as possible. And yields don’t improve because of better equipment, but rather because the equipment is used more effectively – engineers and line workers need to find out what particular recipe generates the best yield. Thus, improving yields requires intelligent experimentation, i.e., a skilled workforce.  It follows that Intel must believe that a U.S. workforce can improve yields faster than an overseas workforce, fast enough to  justify the additional $1 billion in cost.  It will be interesting to see how long that U.S. advantage can last.

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