Intel's $7 billion 'Made in the USA' investment

Why not just build chips in low-wage countries?

WASHINGTON -- It's been a dismal decade for manufacturing, with the more than 2 million U.S. jobs heading overseas.

Then, along comes Intel Corp. today, announcing a plan to spend $7 billion to upgrade its manufacturing in the U.S. -- a move that will retain or create about 7,000 jobs.

Intel is facing the same economic headwind slowing down all tech companies, and its revenues dropped 23% in the last quarter.

But CEO Paul Otellini detailed investment plans for facilities in Oregon, Arizona and New Mexico -- and not in China.

There are a lot of reasons why Intel may want to move quickly to build manufacturing capability for its next-generation 32-nanometer chips, and why the U.S. remains the best place to make them, according to analysts.

Frank Gillett, an analyst at Forrester Research Inc., said Intel's road map for producing the new processors was established long ago, and not moving ahead with this plan would have meant breaking the schedule, exposing the company to competitive risks.

The new chips, code-named Westmere, won't appear in servers until the end of this year or early next year, and by then, business spending on technology may be rebounding, said Gillett. "It would be hard to argue that they shouldn't be making this investment," he said.

Intel could have, theoretically, moved the manufacturing of the new chips overseas to a low-wage country. Manufacturing jobs have been flowing overseas: From 2001 to the middle of last year, the U.S. lost about 2.3 million manufacturing jobs, according to a Congressional Research Service report (PDF document).

Foreign nations are also offering Intel hundreds of millions of dollars in incentives. But the labor savings and financial incentives don't offset the capability that the company has here, says Otellini.

Analysts agree. "One of Intel's tremendous strengths is process control [in making chips]," said Leslie Fiering, an analyst at Gartner Inc. The company has a high level of quality assurance that it can scale, she said. "This is a major technology skill" that would cost huge amounts of time and money to transfer, Fiering said.

Much of that skill level is a product of the talent coming from U.S. universities, a point made today by Otellini, who urged investment in education. Intel employs about 45,000 people in the U.S.

"Our standard of living doesn't allow us to compete for low-wage jobs," said Otellini, who added that the biggest threat to the U.S. was an erosion of education.

Intel made today's announcement in Washington, which, as part of its stimulus plan, is also about to pump billions of dollars of new spending on broadband, IT and a variety of programs likely to increase demand for IT and products made by Intel.

Otellini pointed to many areas in the more than $800 billion in the stimulus plan that he supports, while also calling for a "culture of investment."

It's an argument he appears to have backed up with his own $7 billion investment today.

Copyright © 2009 IDG Communications, Inc.

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