It is one of the biggest electronics manufacturing projects announced in recent years, and it may be one of the most significant. In late June, Nano-Tech Silicon India, a chip startup company backed by South Korean entrepreneur P. June Min, broke ground for a $600 million wafer fabrication plant on the outskirts of Hyderabad, India. When volume production begins in mid-2007, the plant is expected to turn out thirty thousand 8-inch wafers per month, mostly with chips for consumer electronics products. A second phase of development may involve another $2.6 billion of investment over an undisclosed period of time.
For India, the plant may be of historic significance. It is the country's first large-scale wafer fabrication plant and will provide employment for about 1,200 workers. But the follow-on investment, both by companies seeking to supply the fab and by companies expected to use the fab's output, may spark the growth of an electronics hardware industry to complement the country's well-established software efforts.
So the government of the Indian state of Andhra Pradesh, of which Hyderabad is the capital and largest city, is rolling out the red carpet. It is providing 50 acres of land free for 30 years as well as 10,000 gallons of water per day and all the power needed to run the plant. The state will subsidize the interest on the construction loans, and its Industrial Infrastructure Corp. took a 20 percent stake in Nano-Tech Silicon India.
But the incentives didn't figure in his decision, says Min, who didn't even consider his home country for the project. "We're coming into India because it will be a big market and there are good human resources here," Min says.
Min's priorities in choosing India for his wafer fab reflect how site selection for electronics facilities has become an integral part of meeting a company's strategic objectives. Efforts to reduce costs have led to a massive shift of electronics manufacturing to Asia. But as Min's move shows, access to a market can also be the prime driver in a site selection decision. Finally, tapping a pool of talent is a third consideration. Incentives, although nice, shouldn't unduly influence the decision.
"Site selection has become a very knowledge-intensive and highly technological process," says J. Michael Mullis, president and CEO of site selection consulting firm J. M. Mullis. Mullis and other site selection specialists say that identifying and then balancing these four criteria has become all the more critical with the intensification of global competition.
An industry on the move
Globalization has become a fact of doing business in practically every industry sector. "But electronics has become more global than most other industries," says Roel Spee, associate partner of Plant Location International, a part of IBM Business Consulting Services. "Electronics is mobile, in that you have lots of choices of where to locate operations," he adds.
One consideration in this mobility is the ever diminishing difference in form and function between the electronics products popular and available in different countries. The prime example is Apple Computer's iPod digital music players; identical models are sold throughout the world. The same is not true, for example, in processed food, where even neighboring countries often have such differing cuisines that it is difficult for one processing plant to serve the needs of an entire region.
A second factor Spee cites is the light weight and high value of most electronics products, which make the logistics of shipping relatively easy. Electronics plants don't necessarily have to be located near seaports, for example. Many electronics products are now shipped by air. The exception: bulky products, such as large television sets; it still makes sense for such products to be built near the market in which they will be sold. Toshiba, for one, manufactures the overwhelming majority of its consumer electronics products in Asia. But the large televisions the company sells in North America are produced in factories in Mexico and Tennessee.
Finally, the complex wiring and multiple components of previous generations of electronics have largely been replaced by integrated circuits, which are produced in capital-intensive and highly automated factories. "The skill sets needed for assembly operations are not as in-depth as they have been historically," says Mullis. This means that for much electronics assembly work, companies can look for workforces that are easily trainable rather than highly skilled.
And the winner is, China
Spee says the mobility of electronics production and the globalized competition in mass-produced electronics mean that "finding low-cost production bases has definitely been the most important driver for the last five years." Two other main factors affecting location decisions include access to markets and the need to tap a pool of skills either unavailable or in short supply at home.
China has been the big winner in attracting electronics investment, because it scores something of a trifecta on those three criteria: Manufacturing costs are low, it has a burgeoning market, and it has an able and growing pool of talent. William Dodson, an American who consults for multinationals doing business in China, says, "These foreign-owned facilities started out exporting to home markets, but now they are interested in the Chinese market as well as the wider Asian market." He adds that more recently China has become a center for design and development work, thanks to "the hundreds of thousands of engineers being pumped out of the universities every year."
Consultant Mullis points to mobile phone production as an example of the global shift in electronics manufacturing. He says his firm helped both Motorola and Ericsson find mobile phone production sites in the U.S. years ago. "But those locations today are either distribution centers or repair centers," he says. Production has been moved abroad.
Finland's Nokia does a major, although undisclosed, share of its worldwide handset production and development work in China, with four manufacturing sites and five R&D centers. Nokia's $3.3 billion worth of exports in 2004 made it China's largest telecom exporter for the fourth year in a row. But China is also Nokia's second-largest market, with sales of $3.6 billion within the country.
Although China has become the leading target for investment in the electronics sector, it is also an example of how companies have to look closely at particular regions. Dodson says that roughly 50 percent of all foreign direct investment going into China is concentrated in Shanghai and two neighboring provinces, Zhejiang and Jiangsu. Another 30 percent goes into Guangdong province, which borders Hong Kong in southern China. The reason, Dodson says, is the concentration of infrastructure.
He explains that a bit over a decade ago, China's communist rulers decided to make Shanghai a model modern city that hopefully would outshine Hong Kong and become East Asia's financial and technological hub. It poured money into infrastructure. The region now has two of the largest airports in China, and broadband Internet access is widely available. And the three provinces have what is probably the best-developed highway network in the country, although it hasn't grown fast enough to outpace the growth in traffic.
The national government also took the step of creating one of the country's first industrial parks, getting help from the Singapore government, which had a track record of attracting multinational companies to its own industrial zones. Established in 1994, the China-Singapore Suzhou Industrial Park is in southern Jiangsu province, about 100 kilometers from Shanghai. The park provides such important benefits as centralized wastewater treatment tailored to the needs of industrial processes and backup electrical power. The park administrators have the authority to handle most routine approvals and permits.
And Singapore's record of clean (although somewhat heavy-handed) government provides reassurance for foreign investors, Dodson says. In its first decade, the park has attracted more than $20 billion in foreign investment and is home to more than 141 facilities employing more than 70,000 people. Electronics and information technology (including software) account for 58.8 percent of the investment there. Advanced Micro Devices, Samsung, Hitachi and Emerson are among the electronics companies with operations in the park. Perhaps just as significantly, Dodson says, Suzhou Industrial Park set a standard for planning and service that other industrial parks in China now have to match.
The downside, Dodson says, is that the vast majority of these parks are concentrated in just four provinces along China's southeastern coast, and that's beginning to affect labor rates in a way that Silicon Valley understands well. "Experienced employees in the region are beginning to understand their own value," he says. "There is a lot of job-hopping, and salaries are increasing 8 to 12 percent a year." But moving to less overheated job markets within China is tough. "When you move beyond a 200-kilometer [125-mile] radius from Shanghai, you can find yourself back a hundred years" in terms of infrastructure, Dodson says. And well-educated Chinese have little interest in living in the boondocks. Companies may be able to find less expensive factory labor, "but if you need engineers or designers—oh my goodness!—it is really difficult to find qualified staff," he concludes. Those kinds of salary increases affect decision-making about site selection.
Beyond China
As a result, increasing numbers of electronics companies looking for low-cost manufacturing sites are bypassing China's overheated coastal areas and investing in other emerging markets in Asia and Eastern Europe. "Companies have recognized that in many emerging markets, the business environment is not that bad," says Spee. The term "business environment" covers political stability; the amount of corruption; the state of the infrastructure; the regulatory framework; and if managers will be dispatched from headquarters, the quality of life for expatriates.
One of the newest targets for electronics investment in southeast Asia is Vietnam, which, Spee says, "was not on the map five years ago." Japan's Nidec, a major maker of precision electric motors, earlier in 2005 broke ground on its third factory in Vietnam and is already planning an additional $500 million worth of investment in the country, which is likely to create employment for 5,000 workers. A company spokesman says Nidec already has a large presence in China, so its building of factories in Vietnam is to take advantage of a relatively untapped labor pool. The Japan External Trade Organization (JETRO) recently reported that in the first seven months of this year, Japanese companies invested $176 million in 45 new projects, quadruple the rate of the same period last year.
And in Eastern Europe, Mullis says, "We're finding very qualified, dependable workers who can climb learning curves quickly." An added advantage for Eastern Europe is its proximity to the lucrative Western Europe market. One big winner has been the Czech Republic, which is benefiting from plans by Philips Electronics of the Netherlands to create more than 3,000 manufacturing jobs in the country.
Not all of the emerging markets are faring equally well. Mullis notes that 10 years ago, Mexico was an extremely attractive electronics investment destination. "But one Mexican state governor told me recently that Mexico is hearing the job-sucking sound of China," Mullis says, referring to Ross Perot's famous criticism of the North American Free Trade Agreement.
Mexico is still attracting a few new projects. Motorola, Jabil Circuit and Siemens have all recently announced that they were either expanding existing facilities or planning new ones in Mexico. But the scale of the investments and the number of jobs that will be created are small compared to what is going to China, India and Eastern Europe. The chief attraction is proximity to the U.S. market. Mullis says that even though China's wages may be rising, they are still a fraction of Mexico's, and he doesn't see the gap closing anytime soon.
Staying close to home
Although it may seem that all electronics production has moved to low-cost developing countries, a lot of investment is in fact still being made in developed markets. IBM's Plant Location International data on recently announced electronics investments shows that China and India rank first and second. But Japan ranks third and the U.S. fourth (IBM counts cross-state investments by U.S. companies as cross-border deals). And in fifth place is Taiwan, which is already well beyond developing-country status.
Spee says the attractions of Japan, the U.S. and Taiwan are access to markets and the availability of highly qualified personnel. "It is not manufacturing activity driven by low costs that is going to these countries," he says.
Many of the new projects are focused on R&D activities. IBM, Texas Instruments, Micron Technology and AMD are all enhancing their R&D or test centers in Japan. Some of the heaviest foreign investments in Japan, though, are in semiconductor manufacturing facilities. These are primarily through joint ventures with Japanese companies. SanDisk and Toshiba are building a joint-venture wafer fabrication plant to expand flash memory capacity. AMD and Fujitsu are expanding a memory chip fab. And Intel is putting $100 million up as its share of an expansion of memory chip maker Elpida Memory. Toshiba spokesman Keisuke Ohmori says the company does make some lower-end discrete semiconductor products in Malaysia, Thailand and China. But Ohmori adds that the need for ever greater speed and efficiency in moving the most-advanced chips from design to production means keeping leading-edge semiconductor manufacturing in Japan, close to the company's R&D centers.
The Japanese are not alone in continuing to build capacity in their home market. Intel also recently announced a major expansion of its production facilities near Alberquerque, New Mexico. Spee and other consultants point out that for facilities requiring such a large capital investment, the cost of labor becomes a secondary consideration.
Tempting incentives
Consultants agree that after generating a short list of sites that satisfy the cost, market access and labor pool requirements, an electronics firm might look at incentives when making the final decision. Incentives are most often in the form of tax breaks and subsidized loans but can also include such options as staff training. Governments often commit to upgrading relevant infrastructure to suit the needs of a particular project, if it is big enough. And when a proposed megaproject fits the long-term goals of a region, there can be capital participation by a local or national development corporation. "The worst decision that can be made is to select a site based on incentives if other factors don't meet the project criteria," says consultant Mullis.
Just as competition in the electronics business has globalized, so has competition among countries and localities trying to attract investment. This has resulted in a proliferation of incentive offerings. But incentive packages are also getting more carefully structured. Mullis says that four or five years ago, companies could count on getting their tax breaks even if investment and employment never reached the levels originally intended. Now, Mullis says, incentives are far more carefully constructed. "If you reach only half of the investment and employment you said you would, your benefit is likely to be half of what you negotiated," he says.
Incentives can also vary according to how desperate, or not, a locality is. China is now trying to cool off the pace of foreign direct investment, by phasing out some of the tax breaks formerly given to foreign enterprises. "The Chinese are not going to kill foreign direct investment, but they might get more discerning about the investments they will accept," predicts Dodson.
On the other hand, Mullis says, for certain "megaprojects," such as auto assembly plants and semiconductor manufacturing facilities, localities feel they must chase after them at all costs.
That seems to be the case with the generous package offered to Nano-Tech Silicon India. But in an indication of how competitive incentive offerings have become, Min suggests that he might have gotten an even better deal in China. But he emphasizes that he never considered building this plant anywhere but in India, because he sees an opportunity to pioneer a new market: India "is definitely the next frontier for the semiconductor industry."
