From our Thought Leader Contributor, EY

Guest post by Adrienne Young, Corporate Real Estate (CRE) Senior Manager, Ernst & Young LLP; and Sara Lo, CRE Principal, Ernst & Young LLP (with consultation by Ronald Hofmeister, Transaction Strategy Principal, Ernst & Young LLP; and Brian Smith, Tax Principal, Ernst & Young LLP)

Amid ongoing supply-demand imbalances and rising geopolitical concerns, semiconductor companies are contemplating the establishment of new fabrication (fab) plants at strategic locations that can better meet the evolving needs of the market.

The process to build these plants is long and complex. It involves an array of different stakeholders and large amounts of resources. Fab plants are expensive to build due to both the technology inside them and the unique space requirements necessary within the facilities to create the chips. Regardless, the new plants are critical in creating chips that can support devices that are growing more capable all the time.

Chip industry adapts to meet demand

Shipping bottlenecks and supply chain constraints have affected companies across all industries. In the semiconductor manufacturing sector, these issues have led to longer lead times, forcing companies to rethink their inventory strategies. Many companies have shifted from a just-in-time to a just-in-case model. While excess and obsolescence (E&O) is always a risk for semiconductor products given their short lifecycle, mature inventory management processes can help mitigate E&O-related losses.

Rising freight and logistics costs are also putting a strain on companies trying to procure raw materials to minimize operational disruptions. This has led governments to incentivize investment from chipmakers through subsidies and favorable regulations. Considering the complexity and significant capital involved in chip manufacturing, this move can be a difference maker in facilitating the development of new fab plants.

Trade restrictions are another concern that needs to be addressed as companies evaluate their supply chain flow. Markets that recognize the opportunity in the chip industry are simplifying their cross-border trade processes and capturing a larger share of the global semiconductor supply chain. They are implementing trade facilitation measures, such as electronic submission of declarations, electronic payment of duties and fees, and electronic applications for refunds, to streamline the process and keep everything moving.

Building an ecosystem

The recently passed Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act in the US was created with chip manufacturing in mind. But its broader purpose is to build a full semiconductor ecosystem in the US, working in partnership with both private and public companies.

Before the CHIPS Act was passed in the US, non-US locations had an approximate 30% to 50% cost advantage due to incentives. For example, India offers a $10 billion incentive program for chip manufacturing with up to 50% government co-funding. Mainland China has a variety of policies, such as support for R&D, tax breaks and import tax credits. The Chinese Mainland government has made the import of equipment and raw materials tax free through 2030 for chipmakers. And in Ireland, the corporate tax rate sits at 12.5%, and the country also provides a 25% R&D tax credit.¹

Currently in the US, the $280 billion CHIPS Act aims to build a domestic US supply chain for semiconductor chips in the face of this foreign competition, spending billions on scientific and technological research to keep US industries competitive with these rival countries.² In addition, the US Facilitating American-Built Semiconductors (FABS) Act is offering private firms a 25% tax credit for investments in chip manufacturing. Tax benefits can also be found at the state level; for example, California’s $178 million tax credit for cutting-edge industries, which includes semiconductor development.³ 

Chipmakers have options and can evaluate the value of corporate tax rates, incentives and tax credits on R&D before arriving at a location decision. A lower tax rate effectively reduces tax burden and increases liquidity, allowing for more investment into research and upgrades to manufacturing capabilities.

Clusters boost performance, create synergy

Fab plant construction requires companies to take a holistic approach to the process. Prioritization and weighting of criteria for site selection depends on the current operations and outlook of the company. A thoughtful site selection strategy can create long-term value for semiconductor companies. Ideally, semiconductor manufacturers can build new facilities in industry clusters, areas where multiple semiconductor companies and related businesses have established a strong presence. The clusters, generally in a relatively small area, foster collaboration and promote synergies among businesses. Companies located within the clusters often achieve a higher level of performance and global visibility than a business operating independently.

Within the US, clusters have developed in Silicon Valley, Phoenix, Austin and Upstate New York. Other clusters are in Mainland China, Taiwan, Germany, Japan, Singapore and South Korea. Clusters are usually led by one or more large world-class manufacturers and a research institute. This partnership attracts enterprises to eventually create a semiconductor research and manufacturing ecosystem.

Location impacts project costs

Construction comprises approximately 20% to 35% of the overall cost of building a new fab plant (while equipment is estimated between 65% and 80%).⁴ Additionally, costs to build and equip fab plants increase as the node size gets smaller, given the complexity involved in manufacturing smaller chips. Location plays a major role in fab costs. For example, on average, the cost of building and operating a fab over 10 years is 30% higher in the US compared with Taiwan, Singapore or South Korea.⁵^,⁶^,⁷

Risks associated with return on investment (ROI) for fab plant development can be mitigated by advanced strategic and space planning, considering potential fab utilization and estimating operating expenses. A newly constructed fab can sometimes take 10 years (or more) to realize positive ROI when operating at 55% capacity.⁸

Availability of optimal parcels or existing properties in the selected markets that meet the infrastructure and transportation needs is critical when considering locations. Supply-constrained markets can lead to increased costs, delay opening of facilities and pose future operational challenges. Additionally, availability of land for manufacturing sites and vendors (e.g., construction, capital equipment, ongoing maintenance) needs to be considered for developing and operating new fab plants.

Real estate costs and financial models should focus not only on site and development costs but also ongoing operations, including facilities management, repairs, security, property taxes, insurance, utilities and networking, and building management systems. For certain developments, governments have provided incentives around sites, development costs and tax credits.

Industry clusters promote synergies

Building facilities near existing industry clusters promotes synergies among players, including access to a larger talent pool of both experienced and fresh graduates, attracted to the area by the wealth of technical jobs. Other benefits of co-locating in the same ecosystem include shared resources, improved collaboration, adequate logistics and utilities (e.g., wastewater treatment), and industry-friendly regulations, thereby reducing overall cost and operational friction.

Designing, building and operating fabs requires lots of qualified technical talent with diverse skill sets to manage each step of the value chain, including automation. Selecting sites near higher education and research centers could facilitate the competition for technical talent. Through partnerships with local technical institutions, semiconductor companies can develop a pipeline of talent at all levels, from apprentices to doctoral candidates, to gain a competitive advantage and sustain technical innovation. A mix of job skills is required for the construction of a plant, as well as running the plant. It is beneficial to locate in an area with a healthy supply of workers at varying levels of technical ability and skills.

Article references

• “House clears $280 billion ‘Chips-Plus’ bill for President’s signature, 243-187,” EY Tax News Update, https://taxnews.ey.com/news/2022-1144-house-clears-280-billion-chips-plus-bill-for-presidents-signature-243-187, July 28, 2022.
• “Trends in developing new semiconductor fabrication plants,” EY-Parthenon, August 2022
• “Morning Call”, Fubon Financial Holding Co., Ltd., January 2021.
• “The CHIPS and Science Act of 2022 and the U.S. Semiconductor Industry”, Regions Asset Management, August 2022.
• “America’s Lack Of Chips Is More Than A Blip”, Forbes, Inc. https://www.forbes.com/sites/deborahwince-smith/2021/06/29/americas-lack-of-chips-is-more-than-a-blip/?sh=14b1a1a51584, June 29, 2021.
• “Government Incentives and US Competitiveness in Semiconductor Manufacturing”, Boston Consulting Group and Semiconductor Industry Association, September 2020.
• “Semiconductor design and manufacturing: Achieving leading-edge capabilities”, McKinsey & Company, August 20, 2022.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

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