Let's do something different this time. For this video,
I am going to shift focus from Asia to talk about the United Kingdom.
Northeast England was once a heavy industry powerhouse. But when those industries declined,
the region struggled to come up with its next growth industry.
So when Siemens Semiconductor pledged in 1995 to invest over a billion pounds for a
semiconductor fab, the area was overjoyed. The Queen showed up and everything.
But the plant never had a chance. Siemens closed it after just 15 months of operation.
An aborted attempt to revive the plant fell through.
What happened here? In this video,
we are going to look at semiconductor manufacturing's failure in North Tyneside.
The UK as you might recall from a certain CGP Grey video is made up of four countries.
Northeast England is a first-level region within England and is by far
the least populated with less than 2.7 million residents.
Northeast Englanders have the lowest median gross annual earnings in England.
And as of 2012, the highest proportion of population claiming income support.
Northeast England has been a frontier land dating back to the Roman days.
It has had a significant employment gap with the rest of the UK since the 1930s. In 1995,
the unemployment rate was 9.1%, 50% higher than in the rest of the UK. Its economic
challenges today date back to certain political and historical conditions.
The area has long been dependent on heavy industry and its rich coal mines. In the years after World
War II, the British government nationalized the Northeast's coal and steel industries.
The Ministry of Fuel and Power wanted to maximize the output and employment
of these areas' resource economies. So they argued
that no new male-employing manufacturing industries should be introduced to them.
This left Northeast England dangerously dependent on these two industries.
So when de-industrialization started in the 1980s, the residents had to little
to turn to as an alternative. The tensions culminated with the Miners' Strike of 1984-85,
with the miners striking not for higher wages but to keep the mines from being closed.
Upon the strike's defeat, the miners came back to work but found,
much to their shock, that the mines were now depleted of cheaply mined coal.
Imported coal was too cheap. Thousands of miners ended up losing their jobs.
So entering the 1990s, Northeast England finds itself lost at the margins of the global economy.
Their people have the less-than-totally-undeserved notion that people back in London don't really
care all that much about them as compared to other areas in the UK.
For instance, the Barnett Formula, a 70s-era Treasury mechanism that
allocates public services spend amongst the four countries.
Scotland, Northeast England's neighbor to the north, gets substantially more public spending,
and uses it to provide more attractive investment packages to multinational companies.
This is why the dreams of a semiconductor manufacturing facility resonated so strongly
when the German company Siemens approached them about a possible investment opportunity.
Siemens is an old-fashioned German company. Founded in 1847,
the company developed a solidly comfortable and profitable position within its home country.
The German government supported Siemens for the sake of nationalism and employment.
For instance, the Bundespost (NOT Bundesbank), the German state-run postal service
and telecommunications business that existed from 1947 to 1985. In the 1980s it announced
that it would give orders only to firms that produced their equipment in Germany.
Most of those orders went to Siemens and SEL (Standard Elektrik Lorenz). Siemens charged
the state outrageous prices with margins north of 100%. Over the years, the company leveraged those
domestic profits to diversify into many different product lines and countries, including the UK.
By the 1980s, deregulation was the trend in the US and the UK. Siemens suddenly found itself
needing to compete and management felt that they had to respond. A decision was made where the
company would become more international, shareholder-friendly and market oriented.
The global semiconductor industry on the whole was doing quite well back then.
Microsoft had just released Windows 95, an OS so hot that people waited in lines at
retail stores to buy it. Mobile phones had started to become a thing around the world.
The mass adoption of this powerful software drove demand for computers and in turn, semiconductors.
The semiconductor industry grew 29% in 1993, 32% in 1994, and 42% in 1995. In 1995, the industry
invested $30 billion on new chip fabrication facilities, known as fabs in the industry.
Siemens Semiconductors benefitted from this market. For most of its existence,
the department served as the company's in-house producer making chips for its other divisions.
But in the 1990s, it started competing for its own customers. They focused mostly on
niche markets that are aligned with the rest of the group's other product lines.
For instance, Application Specific Integrated Circuits
or ASICs made for the telecommunications, mobile phone, and automobile industries.
Sales grew 40% a year in the early 90s, driven by high consumer electronics and telecom demand
in its core European markets. By 1994, Siemens was the 12th largest semiconductor maker in the world.
But the company felt that it had still so much opportunity to seize,
especially internationally. The company had a solid 7% market share in the Europe market.
But only 1.9% market share worldwide. Plenty of room to grow.
Thus Siemens Semiconductor in 1994 set forth an internal plan to triple their existing chip sales
and enter the industry's top ten rankings. A major part of that plan
involved "internationalizing" the company.
That means establishing semiconductor activities outside of its core German areas.
Assembly and packaging plants in Malaysia and Portugal. Strategic alliances with
Japanese and American semiconductor makers. Electronics assembly plants in China. And so on.
As part of this move, Siemens drew up plans for four new large-scale fabrication plants.
In 1995, Siemens approached the Invest in Britain bureau
to talk about possibly establishing a wafer fabrication facility in the UK.
The company had recently finished a 16 MB DRAM facility in Dresden with much success.
This new fab would be an exact copy of the Dresden fab. It would cost about 1.1
billion British pounds or 785 million USD and directly create 2,000 new jobs.
Fully realized, it would be the UK's biggest ever inward investment to date.
Siemens was also considering Ireland, Austria, Israel, Singapore and Vietnam as other possible
locations for this new fab, with Ireland and Austria the biggest competitors.
Siemens had multiple criteria. It needed good, skilled people at low cost,
excellent water and power infrastructure, geological stability and ample government support.
The town of North Tyneside in Northeast England checked all the boxes. The area boasted skilled
technician-level people with a willingness to work around-the-clock shifts. Siemens could recruit
educated electronics and computing graduates out of the local universities or from nearby Scotland.
And salaries there were 50% lower than in Austria or Germany.
When Siemens officials conveyed concern about electricity infrastructure,
the government offered them a direct connection to the national grid - the
first time a private company has ever been offered as such.
Local development agencies in Northeast England for their part worked hard to
schmooze and win over Siemens officials. They took them out on nights in Newcastle,
drove them around North Tyneside to tour the area, arranged university
professors to give presentations and, of course, offered ample government support.
The Wall Street Journal reports that UK public support in the project totaled 64
million pounds or 45 million USD, though not all of it was ultimately used. Some came in
the form of tax exemptions and others in grants and job training subsidies.
It sounds like a lot, and it kind of is, but Ireland and Austria offered more
lavish and transparent support. Austria in particular offered 120 million dollars (NOT GBP)
or 85 million pounds (NOT USD). And at the same time, it is hard to say that it was a bad investment.
There were a lot of legit reasons for offering such a package.
Siemens Semiconductor was a globally famous name. These opportunities did not come along very often.
Snagging the Siemens fab would also further establish the area as a semiconductor destination.
Fujitsu built a Northeast England fab back in 1989,
having received a subsidy package three times as large.
So, adding Siemens to the area would push suppliers and semiconductor companies to
set up regional offices there. It could potentially kick off an entire industry.
And of course, the UK government saw the opportunity to transfer technology and skills
to the local population as well as the chance to replace semiconductor imports from Europe.
This trade impact was a very big deal at the time.
Siemens really could have put the fab anywhere. Expanding the existing facilities in Austria was
probably the least riskiest option. But in the end, the money made sense
and the company wanted to commit to the UK market. UK revenue grew 25% each year from 1985 to 1995.
Siemens was the UK's thirteenth largest R&D investor overall, third largest in the
electronics space. They employed 10,000 workers in the country across a dozen manufacturing sites.
A fab would be a nice new addition. Hours after the deal was struck
and the announcement made, local job centers were inundated with job inquiries.
One center took 4,000 calls in three hours.
Semiconductor fabs are built in phases. This
is so that they can start producing wafers to sell as soon as possible.
Semi manufacturers want to take advantage of favorable industry conditions while they last.
The North Tyneside fab was no different, and by all accounts it seems like construction went off
without a hitch. Two phases were announced. Phase 1 would be finished in mid-1997,
producing 16 MB DRAM memory units with a 0.35 micron process.
Phase 2 would come after that, producing the more advanced 64 MB memory units
using a 0.25 micron process. Capacity would be upped to 20,000 wafer starts a month
and meeting the full 2,000 job requirement.
Contractors broke ground on the fab before the company even owned the land.
Siemens wanted to go so fast they couldn't wait for concrete to dry
so they brought in an innovative steel frame to build around.
Siemens completed the fab in just 376 days. Production began in May 1997,
just a year and a half after breaking ground. The Queen herself traveled to Newcastle to
tour the facility in fuzzy slippers and cut the ribbon. She told the audience:
> [The North Tyneside fab] brings the country to the forefront of semi-conductor manufacturing
Looking back on these remarks now, knowing what we know, it makes me feel kind of sad.
In 1997, Siemens delayed phase 2 of the Tyneside plant. Then in July 1998, they announced that the
whole thing would close by the end of the year. The fab had not even been open for two full years.
I feel like it is necessary to go over what went wrong. What we now
know is that the North Tyneside fab had always been on thin ice.
The DRAM market is immensely volatile, extremely prone to rogue waves of over-supply. The reason
for this is that these memory chips are a cheap commodity that, at the low end, competes on price.
Memory is easier to fab right off the bat and the product has little differentiation from
other low cost competitors. And there are many competitors, especially out in Asia.
South Korea in particular as they have 40% of the market. Scale,
leading edge technical mastery, and market position are what matters in this industry.
Knowing this, Siemens' decision to equip the fab with the older 16 MB memory technology
was particularly perilous. It was already going out of date by 1995.
Plants back home in Germany were already starting to crank
on 64 MB. Part of the reason why Siemens wanted a cheaper location to build the fab in
was to keep building these older memory modules at a profit and maximize their return on investment.
I read one source say that the fab was originally going to do logic chips, but no other source has
said the same. Seems it was always going to be 16 MB memory. Had there been a choice back then
(though I don't think there was), it would have made more sense to push for the Tyneside fab
to make either leading edge 64MB DRAM or logic chips like those from Intel and AMD.
In 1998, the semiconductor market crashed. In memory specifically,
the price per megabyte plummeted from $27 to just $4 by the time the Tyneside plant opened in 1997.
And then crashed yet further to just $2 per megabyte by 1998.
Chips that used to sell for $50 in 1995 sold for $1 in 1998.
Semiconductor giants in South Korea, teetering on the brink from the Asian Financial Crisis,
produced as many memory wafers as they can to stay afloat. Industry-wide profits collapsed.
Japan's Fujitsu and Toshiba profit fell nearly 90%. Acer and Mitsubishi shut down plants.
In the year ended September 1997,
Siemens Semiconductor made 109 million Deutsche mark or $65 million USD profit.
By 1998 the same time period, that had crashed to a stunning loss of 1.2 billion Deutsche mark
or $722 million USD. A third of Siemens' business divisions made a loss that year,
but the semiconductor division's was especially appalling.
Siemens Semiconductor needed to cut costs. And unfortunately that meant closing the UK plant.
Economically, it lacked scale. It was not fully built out yet.
Having just a third the capacity of the company's Dresden plants, it was too small.
Furthermore, the UK plant had no big backers inside or outside the company.
Siemens would never dare touch its Germany or Austria plants. And its plants in the US,
France, and Taiwan were joint ventures that the company could not easily remove itself from.
Inside the company, the pro-British management who got the plant built in the first place
lost their jobs, including the CEO. The new Siemens Semiconductor CEO was not necessarily
anti-Britain, but he was very pro-Germany. He implemented a number of cost cutting measures,
and downsized the company in an effort to refocus on its core market.
The exit was extremely messy. Closing down North Tyneside would cost nearly a quarter
of a billion dollars. This represented 45% of the division's projected loss that year,
but reduced its over capacity by just 20%. Siemens had to pay back some amount
of government grant money, something probably north of 15 million pounds.
In August 1999, Siemens Semiconductor was spun off into a new company, Infineon Technologies AG.
The workers lost their jobs, but what was going to happen to the facility?
For a few months, various rumors of buyers floated around. Finally in September 2000,
a semiconductor firm called Atmel emerged as a white knight to save the facility.
Atmel produced a variety of higher value semiconductor products,
avoiding things like mass-commodity DRAM memory. This included flash NAND memory,
radio frequency ICs, and logic products. They had been one of ARM's first licensees.
The company paid Siemens 25 million pounds or 35 million USD for the facility.
They then announced that they would invest 700 million pound
or 800 million USD to retool the place to make flash memory and microcontroller circuits.
Flash memory and microcontrollers are definitely more stable markets than DRAM.
But nothing in the electronics industry was safe from the dot com crash in 2001.
Atmel lost 31 million pounds or 45 million dollars and revenues declined by 23%. The company laid off
26% of its workforce, 2,600 people, interrupting its Northeast England plans.
Things recovered though, and for a few years Atmel never really ruled out making
a new commitment to the fab. But finally in 2006, they committed to a "fab-lite" model
that saw them let go of four fabs, including the North Tyneside fab in 2007.
TSMC bought all the semiconductor production equipment,
and the now-empty buildings were sold off. With that, the semiconductor dream finally ended.
Today, the fab facility has been turned into a business park.
The Cobalt Business Park features some government offices, call centers, and regional offices.
The North Tyneside fab closure was not an isolated occurrence. 1998 alone saw the loss of 3,400
manufacturing jobs in Northeast England. Factories belonging to Electrolux, a Swedish company, and
Pringle, a luxury knitwear company, also closed. Then finally, the Fujitsu fab closed as well.
The local economy’s curse is that it lacks native corporate leaders. All of these lost factory jobs
were provided by companies from elsewhere. They had little attachment to the place,
and when financial crisis struck, they favored their home land.
It would be very interesting to investigate why the area and its
government could not nurture such a native manufacturer, but that is for another video.
Like as I said back at the start of this video, North Tyneside and the
rest of Northeast England have yet to return to its past glory days.
But there are a few green shoots, ironically coming out of the energy space once again.
Renewable energy companies have begun investing in Northeast England,
and it looks like there is a growing wind industry there. The Dogger Bank Wind Farm for instance is
poised to be one of the biggest in the world. It is a little bit of good news to end with,
for a place that has seen a lot of bad news for a really long time.