April 21, 2005 – Although US semiconductor manufacturers still have 47% of the worldwide microchip market, only 20% of new, state-of-the-art production facilities now under construction are in the US. Lower tax rates and incentives that reduce the cost of capital in other countries – not lower labor costs – are the principal reasons why most new manufacturing facilities currently being built are outside the US, according to the Semiconductor Industry Association (SIA).

“A dramatic shift in semiconductor manufacturing is now under way,” said SIA president George Scalise in testimony before the US-China Economic and Security Review Commission in Palo Alto, CA, today.

“Approximately two-thirds of the 300mm wafer fabrication facilities now under construction worldwide are in Asia, with a significant portion of those facilities in China. Chinese government policies – not lower labor costs – are the principal factor in a differential of more than $1 billion in the 10-year cost of building and operating a 300mm wafer fab in the US versus China,” Scalise said.

“Even an 80% differential in wage rates between China and the US is not a major factor in plant location decisions because semiconductor wafer fabrication facilities are capital- and technology-intensive,” Scalise continued. “Government incentives such as favorable tax treatment and other assistance programs account for approximately 90% of the cost differential. Like it or not, the reality is that government incentives play a major role in where investment takes place. Given the critical importance of semiconductors in driving US economic growth and ensuring our national security, maintaining a competitive semiconductor manufacturing capability and a supporting ecosystem must be an important priority for America’s federal and state governments.”

Scalise said the US needs a coordinated strategy to reduce the cost differential created by foreign government tax and incentive policies. He recommended a number of specific actions that Congress should take to change policies that discourage investment in capital-intensive manufacturing facilities in the US, including:

–providing federal tax holidays to match the tax holidays offered by overseas competitors;

–making the R&D tax credit permanent and enacting enhancements to make it more effective;

–allowing companies to expense high-tech manufacturing equipment in order to improve cash flow and stimulate investment in new equipment;

–re-examining international taxation rules and considering alternatives to the current rules on taxing foreign-source income; and

–enacting significant tax rate reductions to make manufacturing costs in the US more competitive with costs in other countries.

“Leadership in semiconductor technology is ours to keep, or ours to lose. The investments and policy changes needed to allow US manufacturers to compete in the face of foreign incentives designed to lure investment offshore are neither easy nor inexpensive, but it is vital that we make them. The first step is that we must choose to compete,” Scalise concluded.