Although U.S. semiconductor manufacturers hold 47 percent of the worldwide microchip market, only 20 percent of new production facilities under construction are in the country, the result of other countries with lower tax rates and incentives that reduce the cost of capital, the Semiconductor Industry Association (SIA) contended today.

Further, these lower tax rates, not a lower cost of labor, are the main reason why most new manufacturing facilities currently being built are outside the U.S., the San Jose-based industry group said.

“A dramatic shift in semiconductor manufacturing is now under way,” said SIA President George Scalise in testimony before the U.S.-China Economic and Security Review Commission in Palo Alto, Calif. this morning.

“Approximately two-thirds of the 300mm wafer fabrication facilities now under construction worldwide are in Asia, with a significant portion of those facilities in China,” he continued.

“Chinese government policies -- not lower labor costs -- are the principal factor in a differential of more than $1 billion in the 10-year cost of building and operating a 300mm wafer fab in the U.S. versus China,” Scalise added.

Even an 80 percent differential in wage rates between China and the U.S. is not a major factor in plant location decisions because semiconductor wafer fabrication facilities are capital-intensive and technology-intensive, the SIA believes.

Approximately 90 percent of the cost differential is accounted for by government incentives such as favorable tax treatment and other assistance programs that play a major role in where investment takes place.

“Given the critical importance of semiconductors in driving U.S. economic growth and ensuring our national security, maintaining a competitive semiconductor manufacturing capability and a supporting ecosystem must be an important priority for America’s federal and state governments,” Scalise further said.

To reduce the cost differential created by foreign government tax and incentive policies, the SIA proposes that the U.S. Congress change policies that discourage investment in capital-intensive manufacturing facilities in the U.S.

Suggested policy changes include providing federal tax holidays to match the tax holidays offered by overseas competitors; making the R&D tax credit permanent and enacting enhancements to make it more effective and allowing companies to expense high-tech manufacturing equipment in order to improve cash flow and stimulate investment in new equipment.

The SIA also proposes the re-examination of international taxation rules and consideration of alternatives to the current rules on taxing foreign-source income and enactment of significant tax rate reductions to make manufacturing costs in the U.S. more competitive with costs in other countries.

“Leadership in semiconductor technology is ours to keep, or ours to lose,” Scalise noted.

“The investments and policy changes needed to allow U.S. manufacturers to compete in the face of foreign incentives designed to lure investment offshore are neither easy nor inexpensive, but it is vital that we make them,” he continued. “The first step is that we must choose to compete."