Abu Dhabi's High-Tech Bet on Chips

Less than 300 miles from where Bahrain's royal family faces a youth-led uprising, Ibrahim Ajami is trying to foment a different kind of revolution among the students of Abu Dhabi, the capital of the United Arab Emirates. Ajami, 36, runs Advanced Technology Investment, a division of Mubadala Development, the state fund that has invested billions of the emirate's oil and gas wealth in businesses that are supposed to perpetuate the city-state's prosperity—and peace—long after its crude has run out. Two years ago, Ajami, a former Occidental Petroleum (OXY) executive, helped broker a Mubadala-financed deal that merged the manufacturing side of Advanced Micro Devices (AMD), the U.S. chipmaker and archrival of Intel (INTC), with Chartered Semiconductor Manufacturing, Singapore's contract chip business. The result: GlobalFoundries, the third-largest contract chip manufacturer in the world, with plants in Asia, Europe, and the U.S., and an 86 percent stake held by Mubadala. In January, not long before the uprisings that engulfed Egypt and Libya, GlobalFoundries announced plans to double spending on new plants and equipment to more than $5.4 billion in 2011.

GlobalFoundries, which had $3.5 billion in revenue in 2010, packs a lot of punch. "They are coming to the market with state-of-the-art plants," says Jim McGregor, an industry analyst at research firm In-Stat. "Only a handful of people can do the high-end stuff, and there's increasing demand for that." Abu Dhabi hopes to have a chip plant up and running in the emirate itself by 2015: The plan is to build a tech complex that will also attract chip-design and software companies.

Before that can happen, though, the city has to develop a workforce capable of competing with chip workers worldwide. "You need the roads, the infrastructure, and the power and the water. You need the right regulatory environment," says Ajami. "More importantly, you need the talent."

GlobalFoundries is now largely run by Americans. Yet the Abu Dhabi government is convincing students like Sara Al Braiki that their brightest prospects lie in electronics and not in the petrochemical industry. "We need innovation. We need to think in different ways," says Al Braiki, a mechanical engineering student at United Arab Emirates University. Al Braiki was one of 60 students who spent four days last year in Dresden, Germany, touring semiconductor plants and meeting with engineers and executives. She also notes that her group was split evenly between men and women, notable in a largely male-dominated region.

While Mubadala, whose investments run the gamut from Formula 1 to buyout giant Carlyle Group, can bankroll GlobalFoundries' ambitions, Ajami says Abu Dhabi's wealth may also prove an obstacle. Unlike Taiwan and Korea—which he's studying to learn how smaller countries can break into new industries—Abu Dhabi doesn't have the threat of national extinction driving its people to throw themselves behind economic development, he says. The United Arab Emirates had a per capita gross domestic product of $57,744 in 2009, ahead of the U.S. and Japan. "In Abu Dhabi right now there is no burning platform. People are comfortable," he says. Ajami and other Abu Dhabi officials say they want to toughen the emirate's people by exposing them to demanding businesses.

Contract chip manufacturing certainly fits the bill. A microprocessor—the kind of chip made by the AMD factories that were acquired—packs more than a billion transistors into a device the size of a thumbnail. Some of the layers deposited on discs of silicon during their manufacturing are just one atom thick. It takes an average of two years and $5 billion each to build and equip the plants that make these and other chips. In this highly cyclical industry, chip demand can fall off in a few months, so the consequences of missing production deadlines or making the wrong product are severe. AMD reported cumulative losses of more than $6 billion in the three years before the sale of its plants was completed in 2009.

The record of Gulf states in weaning themselves off oil economies isn't good, says Kristian Coates-Ulrichsen, who teaches Arab politics at the London School of Economics. Oman and Bahrain are more than halfway through their 25-year plans to end their citizens' dependence on state jobs. Yet their progress has been slow, he says. Unless the ruling families of the prosperous Gulf states can modernize their economies, they risk the kind of unrest that overturned governments elsewhere in the Arab world. "The Gulf has already shown it's not going to be immune to these forces," says Coates-Ulrichsen.

The bottom line: Abu Dhabi hopes to build a successful chip industry as part of a bid to avoid the turmoil that has bedeviled other Arab regimes.

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