February 09, 2010 Evolution of a chip plant By DREW KERR-dkerr@poststar.com
MALTA - No matter how you look at it, New York is making an investment that will pay dividends in the long run.
That was the response from GlobalFoundries supporters when asked recently why New York - cash-strapped and in search of savings anywhere they can be found - should stand by the $1.2 billion incentive package used to lure the computer chip maker to the state, even as the company's wealthy Abu Dhabi investors move to take full ownership of the business.
"At first blush, you say, The state government and the economy is in trouble; why would you give $1.2 billion for any economic development project, much less one backed by a country with wealth?' " said Travis Bullard, a GlobalFoundries spokesman, during a recent interview. "But this is an investment in jobs, and in the economy of the state, and I think it's reasonable to say this package was key to our being here."
The questions about New York's incentive package were raised after the Advanced Technology Investment Co., an investment company owned and funded by the oil-rich government of Abu Dhabi, filed an application last month seeking permission to take full ownership of GlobalFoundries.
The application was made with the cartel office in Germany, where the company also has operations.
The development is the latest in a series of bids by ATIC to take a firmer hold on GlobalFoundries, a partnership forged with financially struggling Advanced Micro Devices in late 2008 as a way to prop up AMD and diversify Abu Dhabi's economy.
Under the partnership's original terms, ATIC sought to hold a 56 percent stake in the company, leaving the remaining shares in AMD's hands. ATIC also agreed to give AMD a $700 million cash payment and take on $1.2 billion of AMD's long-term debt in the deal.
The ownership levels quickly changed, though, and ATIC now holds a nearly 66 percent stake in GlobalFoundries, built around a new "foundry" business model in which the firm offers its production facilities and expertise to computer chip designers around the world.
AMD, the company to which New York's incentive package was originally offered, is playing a diminishing role in the business as a result. AMD-controlled seats on GlobalFoundries' board of directors, for example, recently dropped from four to three. ATIC officials now hold the remaining five seats.
Representation on the board - and the influence that comes with it - is likely to decrease further as ATIC moves to invest more capital in the company and AMD declines to share in those expenses, officials from both companies said.
The share of GlobalFoundries stock owned by AMD will also diminish as the company declines to participate in the so-called "capital calls."
AMD spokesman Drew Prairie said the company, based in Sunnyvale, Calif., had long envisioned it would play a lesser role in GlobalFoundries' affairs as AMD sought to shed high production costs and instead focus its efforts on computer chip design.
But a number of events "accelerated" the divestiture process, he said, pointing specifically to GlobalFoundries' recently completed merger with Singapore-based Chartered Semiconductor Manufacturing.
That deal, which added another 150 customers to GlobalFoundries' client roster, received regulatory approval in December and was successfully completed in January, according to company officials.
How quickly AMD will withdraw fully from GlobalFoundries remains uncertain, but Prairie said the ownership structure "will not change overnight."
The company's infrastructure is important to New York because local economic development officials hope GlobalFoundries will someday build more computer chip factories on the Luther Forest Technology Campus, where it is now constructing a $4.5 billion facility.
GlobalFoundries purchased 222 acres at the tech park last year and will have room for another two factories even after the initial 883,000-square-foot facility is finished in 2012, an operation expected to directly employ around 1,400 and carry an annual payroll of around $88 million.
ATIC officials, though, have suggested they would like to have such a facility in their own country, too, as they look to expand their economy into arenas beyond oil.
ATIC officials also signed a memorandum of understanding in January with the Korea Semiconductor Industry Association, pledging to partner on new initiatives in that region in the future. The association works to advance the semiconductor industry in South Korea.
"South Korea's semiconductor industry is tremendously innovative and is an amazing source of insight and talent," ATIC's chief executive officer, Ibrahim Ajami, said at the time.
Responding to questions about that pact, Brian Lott, a spokesman for ATIC, said ATIC has no plans to develop a facility in South Korea, and that the partnership is focused more on research and development, education and training.
Such collaboration could ultimately have a positive impact on the New York factory, he said, "as commercial dialogue leads to potential new business opportunities."
"Our focus is on building out the investments we've committed to in New York, Dresden, (Germany) and Singapore," he said, referring to other locations where GlobalFoundries has production facilities.
The company's investment in New York, Lott added, will "lay the groundwork for a robust semiconductor ecosystem" in the region and could ultimately lead to future development.
"ATIC entered this industry to win market share which, if successful, will enable GlobalFoundries to add capacity at all its global locations," he said.
GlobalFoundries' Bullard said the location of future production facilities - which typically have a lifespan of around 10 years before updates are necessary to meet demands of new technology - will depend in part on customer demands, but he largely agreed with Lott's assessment.
In most instances, he said, one production facility serves as a "hub," and yields future development because vendors and the needed infrastructure are already in place, and the costs of starting again elsewhere are prohibitive.
"ATIC has always been honest about the fact that they want these kinds of facilities in their country, but it doesn't mean there won't be a second or third fab in New York," Bullard said. "If you look around the world, it's hard to find a place where one semiconductor facility exists on its own."
When and if GlobalFoundries will actually need additional production capacity remains a matter of speculation, but the company has grown rapidly since its creation nearly a year ago.
With the Chartered merger complete, GlobalFoundries has gone from a 3,000-employee company serving just one customer - AMD - to a 10,000-employee company with more than 150 customers.
Global demand for semiconductors - used in computers, cell phones and other electronic devices - is also expected to rise next year after global sales fell to $266.3 billion last year, a drop-off of around 9 percent from 2008, according to the Semiconductor Industry
Association.
Ajami, ATIC's CEO, meanwhile has said he hopes to take hold of as much as 30 percent of the foundry market within the next three years - gains that would position GlobalFoundries as the second-largest foundry operation in the world. The largest is the Taiwan Semiconductor Manufacturing Co., which controls nearly half the market. The United Microelectronics Corp. controls 20 percent, and GlobalFoundries holds around 15 percent.
GlobalFoundries' rapid ascension is already yielding measurable results. Together with Chartered, the firm reported on Jan. 13 that it saw revenue of more than $2 billion in 2009, and company officials have said they expect a double-digit rise in profits this year as the economy rebounds.
That profitability, coupled with Abu Dhabi's bid to take full ownership, has provoked at least one early skeptic of the incentive package put forth by New York - money that is already being put to use - to suggest state leaders may want to re-visit the incentives used to attract the computer chip maker to Saratoga County.
"It would be nice if we could go back and renegotiate to see if the company really needed all these incentives," said Ron Deutsch, a Greenfield resident who serves as the executive director of New Yorkers for Fiscal Fairness, a group that seeks to promote equity in the state budget. "At the very least, it wouldn't hurt to open that door."
The money saved, Deutsch said, could be better spent on any number of areas that could suffer under the state deficit, such as offsetting government deficits that threaten to leave thousands of government employees out of work.
GlobalFoundries' Bullard, though, said the company has no intention of not putting the state's incentive package - a combination of $650 million in cash reimbursements for construction costs and more than $600 million in tax breaks - to full use.
Already, the company has submitted nearly $49.5 million in expenses it hopes will be reimbursed by the state, which sold bonds last year to make the payments. The reimbursement submission remains under review, state officials said.
"GlobalFoundries fully intends to take advantage of everything that was agreed upon with the state of New York," Bullard said. "We'll get every dime out if we can."
State Sen. Roy McDonald, R-Saratoga, meanwhile, defended the package as an equalizer for upstate New York, a region he said has long been slighted by state leaders.
The money provided as an incentive to bring GlobalFoundries to the Luther Forest Technology Campus in Malta pales in comparison to incentives used to keep Wall Street in New York City, he said, "and at least this one's in our back yard."
"We're in an international economy, so what would be the option other than this?" McDonald asked. "Is everybody going to go cut wood or pump gas? Do we let these plants go elsewhere, or do we get in the game?"
Competing in a global economy is always going to come with some level of uncertainty and risk, McDonald said, and, "if it fails, it fails, but at least you tried."
