November, 2000
  Incentives Deal of the Month
   from Site Selection's exclusive New Plant database
 

IBM's Cutting-Edge $2.5 Billion Fab
Reaps $500 Million in NY Incentives

By JACK LYNESite Selection Executive Editor of Interactive Publishing

The chips made at IBM's new US$2.5 billion fab in East Fishkill, N.Y., will be very, very small - more than 1,000 times thinner than a human hair.

But the incentives for IBM (www.ibm.com) will be very, very big, topping $500 million. And total incentives over a 10-year span will likely top $660 million for the East Fishkill facility, which Gov. George Pataki hailed as "the single largest capital investment in New York's history."

That investment also rang up one of the largest incentives packages ever documented. Accordingly, that package will likely dominate much early discussion of IBM's project, which will create 1,000 new jobs at the Hudson Valley Research Park in Dutchess County (www.dcedc.com).

IBM Chairman and CEO Louis GerstnerBut there's another very large and very important element in the mix: IBM's chip strategy, which defies of much of the conventional wisdom that's driving Big Blue's competitors.

IBM's new East Fishkill fab will be the first to mass-produce 300-mm. (12-inch) wafers. The facility is scheduled to begin operations in the second half of 2002 and reach full production in early 2003. Heretofore, no IBM fab has produced wafers thinner than 0.1 micron.

The new plant is part of Big Blue's broader strategy to invest $5 billion in three continents, "the largest IBM capital investment ever," said Chairman and Chief Executive Officer Louis Gerstner.

Over time, the outcome of IBM's strategy may leave a far more lasting imprint on the business landscape than New York's mega-incentives.


ABOVE RIGHT: "A massive build-out of computing and communications infrastructure"
is creating "white-hot demand" for chips, said Gerstner.


Without Incentives, Project Would
Have Gone Elsewhere, Officials Assert

First, the incentives.

Big Blue is receiving $475 million in tax breaks and incentives for the East Fishkill facility, state and IBM officials disclosed. In addition, IBM is getting $28.75 million in state grants and loans.

In addition, by building the world's most advanced chip plant some 60 miles (97 km.) north of New York City, Armonk, N.Y.-headquartered IBM is eligible for another $156 million over 10 years in Empire Zone incentives. That $156 million would come from state sales tax exemptions, plus local tax breaks and other benefits

Alone, the $475 million in tax breaks and incentives equates to $475,000 for each of the cutting-edge fab's 1,000 new jobs - a figure sure to elicit howls of protest from the Corporate Welfare Chorale.

The economic development stakes for New York, though, are considerable. The East Fishkill fab could make the state a big-time player in the semiconductor game, industry analysts agreed. And without the hefty incentives, IBM would've located outside New York, state officials asserted. Had that come to pass, the Hudson Valley region would have also lost 1,400 existing IBM jobs, officials added.

IBM's incentives "are not money that we are giving away; they represent money that we would never get," asserted Michael McKeon, a spokesman for Pataki's office.


A Big Payoff for Chip Pursuit

New York's Hudson ValleyThe state approached IBM more than a year ago to expedite the negotiating process, according to New York officials. Before IBM decided on East Fishkill, New York had provided top management with a full outline of all state incentives and assistance.

Landing IBM's $2.5 billion plant marks a major coup for the Semiconductor Manufacturing Initiative - New York (Semi-NY), which Pataki launched in 1997 to attract a next-generation chip plant. Semi-NY provides pre-permitted sites for semiconductor manufacturers, adding speed in a market with very brief windows of opportunity.


IBM has long had a major presence in New York's Hudson Valley (pictured),
with some 4,700 current employees at its complex in East Fishkill.

The East Fishkill location was one of those pre-permitted sites. New York completed its environmental review process at IBM's Building 323 in East Fishkill nearly two years ago. "Today's announcement is the best possible scenario for Semi-NY," said Charles Gargano, chairman of the Empire State Development (www.empire.state.ny.us), the agency spearheading the Semi-NY initiative.

The East Fishkill location is also located in an Empire Zone, which qualifies IBM's for a host of other benefits. The Empire Zones were established earlier this year to replace the existing Economic Development Zones. Companies that invest in new facilities that create new jobs within an Empire Zone can operate virtually tax free for up to 10 years, receiving a wage tax credit, investment tax credit, employment incentive credit, tax reduction credit, real property tax credit, and sales tax exemptions.

The success of those incentives marks a far cry from the events of 1994, when IBM openly considered relocating its headquarters outside New York.

"At my urging, IBM decided to give us a chance to change the way we do business," Pataki said. "Building on the growth of Silicon Alley in New York City and our Semi-NY program, this investment in the Hudson Valley is a perfect example of how government and industry can work together to establish New York as a home to high-tech industry."


IBM Bucks Trend, Won't Cash In Chips

In addition to the $2.5 billion New York fab, IBM is spending another $2.5 billion to expand chip-making capacity at its 200-mm. fabs at plants in Burlington, Vt.; Yasu, Japan; and Corbeil-Essonnes, France (the latter part of Altis Semiconductor, IBM's joint venture with Infineon Technologies). IBM officials have not yet released projected investment and new-job figures for those three projects.

IBM also indicated that it will expand its worldwide organic and ceramic-chip packaging operations.

The $5 billion investment signaled that IBM is diverging from the strategies of rivals Lucent and Siemens, which have shed their semiconductor units. John Kelly, senior vice president and group executive of the IBM Technology Group, said that the company has "no such plans" for spinning off its microelectronics unit.

One reason for not cashing in the chips is the financial and logistics support that the semiconductor unit acquires because of its affiliation with IBM, company officials explained. IBM is also keen on the high margins and high demand anticipated for next-generation chips. Gerstner said a shift to network-centric computing will increase demand for low-cost, low-powered technology that provides high performance.

"The world of e-business is driving a massive build-out of the infrastructure of computing and communications," said Gerstner in announcing the New York fab. "That, in turn, drives demand for critical technical components like chips.

"Demand is white-hot in three critical segments -- chips for big servers, chips to power the explosion in Internet access devices and chips in the networking equipment that ties everything together," he continued. "That's why today's announcement is important -- important for our industry, our customers and our employees."


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