Return to Virginia Business - December 2002

by Robert Burke

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Amidst great fanfare, one of the state’s first “fabs” or semiconductor fabrication plants arrived in suburban Richmond five years ago. The 800,000-square-foot state-of-the-art facility, a joint venture of Motorola and Siemens, opened before television kleig lights and bunting. Then-Gov. George Allen touted the facility as proof that Virginia was morphing into the “Silicon Dominion” that might someday rival the U.S. West Coast in the then hot field of placing powerful electronics on incredibly thin silicon wafers.

Well, it didn’t turn out that way. Instead of leading the Commonwealth to a bright new technology future, it instead ended up as a shining example of the vagaries of the global semiconductor industry. Set back in the woods of the mostly empty White Oak Technology Park, the plant employs 1,750 people and still holds rooms full of advanced technology running 24/7, cranking out memory products for PC makers like Dell and Compaq. But a second factory building attached to the first sits empty and unfinished. Munich, Germany-based Infineon, a Siemens spinoff that became the plant’s sole owner in 2000, had launched a $1.5 billion expansion there. Last year, it indefinitely shelved the project amid its own losses and a 32 percent drop in the market.

That hasn’t been the only tough news. In September Motorola announced what everybody already has known for years — that it wasn’t going through with long-delayed plans to build a chip-making plant on Richmond’s west side suburbs of Goochland County. And, at the state’s other major chip factory in Manassas, Japanese electronics giant Toshiba early this year closed down the FlashVision memory production line it had just opened, and then it sold the plant on the cheap to Idaho-based Micron Technologies, putting 280 people out of work.

Even so, prospects may not actually be all bad. Both the Micron and Infineon plants in Virginia are primed to host the next wave of chip-making efficiency using 300-millimeter wafers, which at 12 inches are about four inches bigger than the 200-mm wafers commonly used today. The bigger the wafer, the more chips a factory can make per wafer and thus save money. Lots of money. “Our business is one of managing your costs,” says Henry Becker, managing director at the Infineon plant. “You can’t control the price.”

The heart of the Infineon plant is a series of clean rooms along a white-walled corridor. Powerful fans pull air through the plant to filter it — protecting the chips from contaminants is critical, so workers wear “bunny suits” and masks to reduce the spread of dust or lint. Nobody goes into the clean rooms without the right garments. “It’s all about keeping dirt off the wafers,” says Becker. In each of the rooms are duplicate pieces of equipment, for steps such as polishing wafers or etching a pattern on the chips, which are smaller than a postage stamp. The chips go through 250 to 300 steps, depending on what they will be used for. An automated system carries batches of wafers in bar-coded bins between clean rooms.

Micron says it has set up a pilot 300 mm production line at the Manassas plant that it can launch quickly if and when the market demand rebounds. “We don’t see anything like that happening in the next year or so but it’s possible,” says Micron spokesman Sean Mahoney. “This is a very volatile industry and we have to react fast. The equipment is being installed, and we’re going to be prepared to do what we have to do.” Infineon says it’s waiting for the market too, before buying the equipment to get its second factory running.

To be sure, the industry has grown quickly here: Exports of integrated circuits from Virginia have risen from $33 million in 1997 to $720 million in 2001. That surge pushed electrical machinery exports to $1.92 billion, making it the state’s top export, exceeding even tobacco, which has been the top trade product for centuries. (That’s partly due to tobacco’s decline — its exports have declined $1.3 billion over the same five-year period.) Plus, the industry employs more than 4,600 people. Virginia ranks 12th in the nation in semiconductor-related jobs with wages here averaging about $53,000 a year, according to the Semiconductor Industry Association.

The state was lucky to get a piece of the market while it could. Motorola’s 1995 announcement that it would build a $3 billion chip factory in Goochland County was kind of a surprise, says Gene Winter, senior vice president for the Greater Richmond Partnership. “They kind of found us initially,” he says. “We weren’t targeting semiconductors.” Even though the plant never materialized, “It certainly led to a lot of good things,” says Rob McClintock, research director for the Virginia Economic Development Partnership. Motorola has donated surplus equipment to the Virginia Commonwealth University School of Engineering, which built its own clean room to give students experience in chip manufacturing. The other chip factories only came after the Motorola project was announced, he says. “It was only in the wake of the Motorola announcement that we had contact with” the companies that built the two existing factories, he says. “They didn’t think Virginia was a player.”

The late 1990s were good times for semiconductors. Worldwide sales rose from $126 billion to $204 billion in 2000. But the future isn’t nearly as bright, in part because of the ongoing tech slump and a ruthless global economy. Sales dropped to $139 billion last year and only slight improvement is expected this year. There is simply less demand these days for computers and servers and the other hardware that require memory chips. And, chips are increasingly a commodity like a T-shirt or a pair of jeans. A chip plant anywhere on the globe can make products equal to U.S.-based factories, only the labor costs are less.

Along with dropping sales, the arrival of 300-mm wafer production is a big financial hurdle for chipmakers. Building a factory that can handle the larger wafers can cost $2.5 billion or more, and the cost of outfitting an existing factory can top $1 billion. “The timing is really critical when considering that kind of investment,” says Micron’s Mahoney. When the market rebounds, “Then it will make sense for more companies like Micron and Infineon to go out and purchase the equipment.”

But only the biggest chipmakers can afford to build these new plants. For the rest it has become a risky move. So many chipmakers are turning to partnerships with like firms or using overseas chip factories for production. Why build a plant when the chips can be made by someone else? Southeast Asia is the hot spot for production, especially Taiwan. Five new 300-mm foundries are planned in Asia in the next few years. By the end of the decade half the world’s chips could be made in that region, says the Semiconductor Equipment & Materials International, a Silicon Valley trade association. Infineon, the industry’s sixth-largest chipmaker, already has a stake in two new 300-mm plants being built in Singapore. Financially, the firm is struggling. Infineon posted a $1 billion loss for its fiscal year ending Sept. 30.

While overseas chip makers have the upper hand because the sour economy has made cost-cutting the key priority, Virginia still has some appeal in the global market, Winter says. “You get the sense that the scales may have tipped too much” and that the big chip buyers like Dell or Hewlett Packard will get nervous about depending too much on overseas production. “Those major customers tell their suppliers you need to spread out your production and have some of it in safe haven,” he says.

The canceled Motorola plant killed one dream of Richmond area officials, who had hoped that a cluster of semiconductor factories would attract big equipment suppliers like Santa Clara, Calif.-based Applied Materials Inc. for research and development to support the factories. Eventually those suppliers would begin manufacturing that equipment locally as well. “That’s what happened in Austin and Boston,” Winter says. “That’s when you’d have an impact that would be comparable to tobacco in Richmond historically.” That cluster isn’t happening. Winter estimates the number of support companies statewide reached a peak of about 70 in anticipation of Motorola’s arrival but has since dropped to about 45 to 50.

When is the recovery coming? The consensus among industry analysts is next year, with market demand rising 20 to 30 percent. Infineon’s Becker shrugs. The semiconductor market has a history of manic highs and lows. “I think you could have found plenty of people a year ago to tell you it was [coming in] 2002.”

Despite the trends, Virginia’s economic developers are still trying to catch whatever expansion projects they can, attending industry events like last month’s Semiconductor Industry Association 25th anniversary in California. The presence of two relatively modern factories is reason to hope, Winter says. “We’re not older [factories] about to be cycled out and closed down.”

Maybe so, but the pressures to cut costs are intense in this sector and that makes it tough for U.S.-based factories to complete. Ask the people in Southside’s apparel industry, what’s left of it, about the power of global competition. Another boom is coming in the semiconductor market, but it may happen so far away that nobody in Virginia will hear it.

Return to Virginia Business - December 2002