US seeks greater microchip industry protection

Security risk cited

TAIPEI - The migration of microchip production outside the U.S. poses a major threat to the nation's security and economy and the Department of Defense should take the lead in efforts to rebuild the industry at home, warns a recent report from a federal advisory committee. It points to China as a beneficiary of current trends.

"From a U.S. national security view, the potential effects of this restructuring are so perverse and far reaching and have such opportunities for mischief that, had the United States not significantly contributed to this migration, it would have been considered a major triumph of an adversary nation's strategy to undermine U.S. military capabilities," says the report, from the U.S. Defense Science Board Task Force on High Performance Microchip Supply, dated February 2005.

The report puts renewed emphasis on a call for revitalizing U.S. chip production in the face of its continued migration overseas, and warns that losing the manufacturing end of the chip industry ultimately puts research and development at risk since, historically, "R&D tends to follow production."

The task force is not part of the Department of Defense, but advises on science and technology matters, according to a department spokeswoman. The department does not comment on such reports, she said.

Task force members, which include chip industry leaders and academics, were not immediately available to field questions about the report.

The report, however, is just one of a number of alarms raised by U.S. lawmakers, government offices and organizations in recent years that the U.S. is falling behind in microchips as the industry's production center moves to Asia.

In the report, the task force placed part of the blame on better incentives offered by foreign nations, including tax breaks, market access requirements, subsidized infrastructure and low cost financing, that help offset the roughly $3 billion that a new plant costs to build today. The main cost associated with a new chip plant is production equipment, while labor is only around 5 percent, making incentives so important.

Intel, for example, operates more chip factories than any other company in the world, and has indicated that its next plant may be built outside the U.S. due to stronger incentives overseas.

The U.S. corporate tax rate of 35 percent discourages investment in the country, Intel Chief Executive Officer Barrett said in a wide-ranging interview with the IDG News Service Thursday. Companies that are mindful of their shareholders might have little choice but to build their next facility in a country with lower tax rates, he said, reiterating remarks he has made previously.

In an article for the Semiconductor Industry Association's winter quarter newsletter of 2005, titled "America Must Choose To Compete," Barrett specified: "We need tax policies that encourage investment both in bricks and mortar and in innovation. A permanent and improved R&D tax credit would be an immense stimulus for innovation, while policies that reward capital formation and investment would significantly narrow the difference in the 10-year cost of building and operating a fab in the U.S. and one in Asia. Today that difference is at least $1 billion."

Meanwhile, a breakdown in international agreements aimed at controlling the spread of advanced chip technology to nations considered potentially dangerous, like China, also needs to be addressed, the Department of Defense task force report says. The U.S. should work out bilateral agreements with economies like Japan, Taiwan and Europe to control chip technology exports, and replace international accords such as the Wassenaar Arrangement that have failed, the report says, with emphasis on controlling exports to China.

Over the past few years, a number of companies have worked with Chinese chip makers, such as Semiconductor Manufacturing International, on advanced chip technology. SMIC surprised observers last year by starting production at a state-of-the-art factory to produce 12-inch (300 millimeter) chip wafers, proving it could obtain leading edge production equipment with relative ease -- including gear from U.S. suppliers.

Keeping advanced chip production capabilities out of the hands of potential rivals is important for the U.S. because of the broad range of military hardware that semiconductors are used in today, including missiles, combat vehicles, and communications gear.

To ensure its own stable and trustworthy supply of microchips, the U.S. Department of Defense in late 2003 awarded a 10-year, $600 million contract to IBM to have its chips produced in Vermont.

(Additional reporting by Nancy Weil in Boston and Tom Krazit in San Francisco.)

Copyright © 2005 IDG Communications, Inc.

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