Breaking through trade barriers

Date: 05/09/1996

By Tim Jones

EUROPE is making a rod for its own back by erecting trade barriers against imports of computer components, warns a representative of the world's biggest semi-conductor manufacturer.

“We believe this is both a cost for the consumer and for the manufacturer,” says Keith Chapple, managing director of Intel UK and strategic director for Intel Europe.

“To be globally competitive, we need to eliminate as many of those extraneous costs as we possibly can.”

Intel - a US-based company with an annual sales revenue of 13 billion ecu, of which about 3 billion comes from Europe - has a major stake in bringing down these barriers. Its business is global, relying on input world-wide and exporting components for use by other companies in their branded personal computers.

The EU's common external tariff on computer memory components ranges from 12&percent; to 14&percent;, while that for uncut wafers - the basic material for making micro-chips - is around 8&percent;.

Both exporters to the EU and large parts of the indigenous industry oppose the tariffs and yet, some would argue, the barriers encourage American firms such as Intel to relocate labour-intensive manufacturing plants in Europe so as to sell on to the local market.

“That is a reasonable argument,” admits Chapple, “but if you can drive away some of these costs, then you can make the local environment in Europe just as inexpensive as elsewhere and eliminate a barrier to coming here and manufacturing. Then, if it makes sense for you to have your manufacturing plant close to your market so that it can be more responsive, you will do it.”

In the late Eighties, Intel had to make such a choice. With annual sales revenue in Europe edging towards 1 billion ecu, the company felt the time had come to start manufacturing in the old continent.

“It was important for us to become established in Europe and, remember, at that time there was a lot of talk about the creation of a Fortress Europe. This concentrated people's minds,” says Chapple.

Intel decided to build a huge semiconductor wafer fabrication plant - known as a 'fab' - at a cost of more than 600 million ecu, along with a 30-million-ecu assembly plant for personal computer (PC) systems.

“We needed to come to Europe, but the plant still had to be competitive. We have ten fabs spread around the world. They are all part of a manufacturing network and it is vital that they are competitive in their production costs.”

A fab must be, as Chapple puts it, “the cleanest place on earth”. The tiniest particle of dust cannot be allowed to settle on a chip with several million transistors. The equipment used to manufacture chips out of wafers is highly expensive. Intel could not risk making a mistake with such a huge fixed investment.

The company scoured Europe and, in the end, chose Leixlip, County Kildare, in Ireland. At the end of 1995, the firm's investment in Ireland topped 800 million ecu and it employed 4,000 people.

So happy is Intel with the plant that a new fab is currently under construction and is expected to be open from 1998.

“We made the reinvestment because we were particularly happy with the first investment,” says Chapple. “In Ireland, they speak English, they have an excellent education system, it is a young economy, there is good availability of land and a very good development authority.”

Chapple mentions the subsidies and inducements to invest last.

“We looked throughout Europe before we made that decision,” he says, adding his voice to the consistent complaint of inward investors. “Continental Europe is certainly more restricting in terms of cost and labour laws; it is definitely not as easy an environment as that in the UK and Ireland.”

The main task for the EU should be to ensure that the environment is ripe for this kind of major investment. Jobs will come when companies feel comfortable sinking their cash into huge projects.

At the same time, Chapple argues, simply encouraging liberalisation of the markets of the future will help bring Europe up to the level of sophistication in the 'information society' enjoyed by the US. “We want to encourage the liberalisation process and encourage as many competing infrastructures as possible,” he says.

Chapple produces figures showing that information technology accounted for only 2.08&percent; of gross domestic product in Europe last year, compared with 3.34&percent; in the US. Spending per head on IT last year stood at 529 ecu in Germany and 830 ecu in the US.

With an open and competitive telecommunications market, companies will fight to build the high-quality networks needed to ensure fast traffic for transmitting data.

“We want to get plenty of broad-band network capability established throughout Europe,” said Chapple. “The PC is becoming an increasingly important tool, but it does not live in isolation. We need to be able to communicate and that means rapid availability of broad-band networks.”