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Semiconductor Industry

Intel Invests in the U.S.

Moving against a tide of gloomy sentiment in corporate boardrooms, chip giant Intel (INTC) on Feb. 10 announced plans to invest $7 billion over the next two years to expand and transform three U.S. manufacturing plants. The new "super-fabs" could slash the costs to make everything from PCs and cell phones to set-top boxes and retail-sale systems.

As early as this fall, the company plans to begin shipping in volume the world's first microprocessors created at the atomic 32-nanometer level—transistors so small that 4 million of them could fit on the period at the end of this sentence. To deliver the chips quickly, Intel plans to begin retooling chipmaking plants in Arizona, New Mexico, and Oregon, where a total of 7,000 people will be employed.

By shifting to a more efficient manufacturing process, Intel aims to outpace rival Advanced Micro Devices (AMD) in its core PC business. And it hopes to make inroads selling chips for consumer electronics, cell phones, and other Internet-connected devices. Such chips could substantially lower development costs for Nokia (NOK), Samsung, Sony (SNE), and other manufacturers struggling to outdo each other with cutting-edge TVs, phones, and other devices. "The chips [that the new fabs] produce will become the basic building blocks of the digital world, generating economic returns far beyond our industry," Intel CEO Paul S. Otellini said in a speech at the Economic Club in Washington, D.C.

An Emphasis on Commitment

The move represents a manufacturing coup for Intel. Otellini used his speech before lawmakers, reporters, and businesspeople to highlight Intel's commitment to investing in the U.S. at a time when many other manufacturers are seeking government bailouts. "We're investing in America to keep Intel and our nation at the forefront of innovation," he said.

In San Francisco shortly after the speech, Intel executives are expected to reveal computers running on the 32-nanometer chips, months ahead of schedule, and announce that consumers and businesses will be able to buy the superfast, energy-efficient systems as early as September.

The massive investment comes as companies across the U.S., Europe, and Asia have announced plans to slash capital expenditures in a bid to conserve cash. A study of announcements from major companies in Europe and the Middle East found they planned on average to cut capital spending by a third, moves that could knock as much as three percentage points of economic activity off the world's gross domestic product, according to a report released on Feb. 9 by Fitch Ratings.

Intel executives had been signaling for weeks that the chipmaker remained on track to spend $5.2 billion, or roughly the same as it spent on capital improvements in 2008, to move to the 32-nanometer manufacturing process. Most analysts, however, expected the company to delay volume manufacturing until early 2010. Accelerating job losses in the U.S. and abroad over the last few weeks point to continued weak corporate and consumer demand for pricey new PCs and servers, researcher IDC said in a report released on Feb. 9.

Stealing a March

Even so, the move is classic Intel. The company's competitive advantage for decades has been driven largely by its heavy investments in manufacturing. The chipmaker has dominated the PC market, taking an outsize share of the profits, by investing heavily to make semiconductors more cheaply and efficiently during downturns. Conservative and cash-strapped competitors fall months behind Intel in terms of cutting-edge technology and cannot compete effectively on cost.

AMD, for instance, is only now beginning to ramp up its 45-nanometer production, the generation of chipmaking before the 32-nanometer Intel is scaling up. And a joint effort between IBM (IBM), Chartered Semiconductor (CHRT), and Samsung to develop a common 32-nanometer process technology across all three companies' semiconductor manufacturing facilities is only now in the testing phase.

"We recognize risk-taking is not a move that is common at the moment," says Intel Executive Vice-President Sean Maloney. "But when you can build faster, cheaper, simpler, more attractive, and more compelling devices, it's a safer bet than you'd imagine."

The chipmaker is doing some belt-tightening in the wake of a 90% drop in fourth-quarter profits. On Feb. 5, Intel announced it was shuttering a chipmaking plant in Shanghai, China. Weeks earlier, the company said it planned to cut as many as 6,000 manufacturing jobs and shut down four facilities in California, Oregon, Malaysia, and the Philippines.

Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.

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