Successful location strategy for semiconductor operations and suppliers

Authors: Darin Buelow and Lara Wigmore

Spurred by the CHIPS Act, both US-based and foreign semiconductor companies are announcing new chip fabs in the US, and suppliers and vendors are likely to be fast followers, creating new clusters. This is a big shift from the trend of the last three decades, which saw a tremendous concentration of fabs in Asia, which currently produces approximately 75% of the world’s semiconductors. The CHIPS Act is designed to strengthen the domestic semiconductor industry and prompted companies throughout the value chain to investigate expansions of their footprint for R&D, manufacturing, assembly, packaging, and testing. Additionally, countries around the globe have their own policies to promote investment, presenting chip producers and suppliers with a dizzying array of options, many of whom have little experience in structuring or executing a site selection process.

Semiconductor industry projects can require significant capital expenditure with demanding technical and infrastructure needs, as well as access to a substantial technical workforce that is scalable and sustainable. With complex country, state, and local incentives at play, and dozens of other cost and non-cost considerations to balance, how do companies get the location decision right?

Specifically for semiconductor OEMs and suppliers, we encounter three key considerations that are critically important to drive favorable outcomes in location strategy: ecosystems, utility infrastructure, and time horizons.

First, companies must consider the importance placed on the presence of a semiconductor ecosystem and whether the new location must be physically close to key suppliers and/or customers. A 2022 fab announcement in Ohio is an example of “build it and they will come” versus fab announcements in Arizona and Texas where there is an existing and mature ecosystem. Next, companies need to carefully analyze their utility needs, in particular, the 10-20 year ramp-up of electric, water, wastewater, and gases needed for chipmaking. Considering that the electric, water, and wastewater requirements can rival that of a moderately-sized town, and the rise of more comprehensive and rigorous ESG compliance standards, companies should strongly consider water reclamation and other conservation measures. Finally, companies should consider success factors across both near-term and long-term time horizons. Near-term success factors include site suitability, talent presence, and utility readiness, while success factors on an extended horizon might consider climate change, water sustainability, and longer-term talent trends.

Beyond these key considerations, here are five tips to help get to the right location decision:

1. Bring objectivity to the process. Location decisions are complex, multi-disciplinary, and often fast-paced and therefore require that organizations pull subject matter experts from teams spanning strategy, R&D, global facilities and design, finance, talent, government affairs, tax, legal and others. Such a team is critical to bring objective views from each discipline and inform the search with the right data and evaluative criteria.
2. Agree on success factors before considering any specific locations by creating a unified understanding of what success looks like. During the project inception, the executive team should gather leaders to develop a mutual understanding of the objectives and align on the critical success factors so that the organization can move as one.
3. Allow proper time and resources to conduct the evaluation with enough depth to uncover potential risks and development issues. Securing a site does not start and end after one visit to a single community. It is a time-intensive process that requires a dedicated team with specialized skills and an iterative approach to refine and revise solutions, engage the right team at all levels of government, and work step-by-step.
4. Be inclusive by starting broad and then following a reductive and data-driven process of elimination that not only leads to the right location decision, but also instills greater confidence in the process. If stakeholders require a rationale for elimination of a jurisdiction, the team will have the facts to defend it and put concerns to rest that the process was biased.
5. Maintain competition by always having an alternative. Targeting multiple finalized locations improves the outcome of the negotiations and helps to mitigate risk in the unfortunate event that a fatal flaw is identified at a late stage in the structuring of the deal.

Every location decision is a critical milestone that locks companies into structural costs and talent markets for years, if not decades. With the right approach, semiconductor OEMs and their suppliers will maximize their competitive advantage by placing their assets in the most favorable geographies, enabling access to innovative talent, optimized operating costs, and minimized risks.