Lobbyists for Samsung Electronics deserve to drink magnums of the finest champagne after pulling off a fabulous deal.
Taylor, Texas has won the the right to host the South Korean giant’s latest semiconductor factory. Locations in Phoenix and Upstate New York also vied to host the new plant. Phoenix recently enjoyed its own economic victory, besting Oregon as the site of TSMC’s new US facility. Upstate New York has been home to various chip factories including those operated by GlobalFoundries, so that area was also in with a shot.
Under the plan, likely to be announced by governor Greg Abbott as soon Tuesday afternoon local time, Samsung will spend US$17-billion on facilities and equipment to create 1 800 new jobs with production likely to commence in 2024, Bloomberg News and Dow Jones both wrote earlier.
What makes this such a great outcome for Samsung is that it was most likely going to expand in that region anyway
What makes this such a great outcome for Samsung is that it was most likely going to expand in that region anyway. But by pressing various locales for incentives including tax breaks and subsidies, Samsung was able to test the waters to see how eager other governments might be. This is how corporate welfare has operated for decades, and in this case the company worked the system perfectly.
History doesn’t look kindly on such competitive auctions, though. Local governments often get pitted against each other, only to find the sums they commit don’t translate into their purported economic benefits. Foxconn Technology Group’s expansion in Wisconsin is the most infamous, with the mid-Western state offering a record $2.9-billion in incentives¹. But the Taiwanese supplier to global clients like Apple ended up falling far short of its committed goals and had to drastically scaling back its plans.
Extracted commitments
Samsung Austin Semiconductor has been churning out chips in the region for a quarter century. Last year it purchased 258 additional acres of land close to its existing campus, the Austin Business Journal reported in December. Executives at the time said that no expansion was imminent, and the purchase was merely to allow flexibility.
But you don’t buy a huge tract of land for flexibility unless you have an intention of using it. Samsung is an electronics maker, not a property speculator.
In the end, it settled on a site 25km north-east of its current location and extracted commitments from the local government of Williamson County to build around 15km of new roads and prepare the land for Samsung’s arrival.
The company got almost everything it asked for. According to the local Community Impact Newspaper, it had rejected $650-million in incentives, which would have been 10 times larger than the package it got in 2006 for its existing chip plant. Instead, Samsung sought a 100% reimbursement on property taxes for 20 years. What it got was 90% for the first 10 years and 85% for the subsequent decade. Plus all those new roads.
Also significant is the fact that it managed to circumvent a 50% limit imposed on such reimbursements for business expansion. Instead, Community Impact Newspaper wrote in January, Samsung seems to have convinced local officials that its plans represent either a relocation or are of high enough importance to warrant an exception to the rule.
Williamson County is convinced that it’s a good idea. Or at least it wants the rest of us to believe so. To support their decision to offer such sweeteners, local officials assert that Samsung “made a $4.5-billion economic impact” in central Texas in 2019 alone, having “supported” 10 000 jobs and paid $445-million in salaries. In other words, Samsung had $450 000 of economic impact per worker. Taxpayers aren’t supposed to question these numbers.
Although it does make sense for Samsung to expand in Texas, there also are good reasons not to. A vast power outage in February that shut its plants was a huge blow to production, and helped exacerbate the global chip shortage. It’s ironic that they’re expanding in the US to ameliorate supply chain disruptions when Samsung’s biggest problem in the past year was caused by poor American infrastructure.
Texas gets the chip plant it was likely to get anyway, and the lobbyists receive congratulations for a job well done
New York State probably wouldn’t have been the best choice, but politicians there don’t want to give up on the notion that the region can be a player. Arizona, meanwhile, has quietly grown into the true Silicon Valley, since there are more chips made there than in California. With TSMC’s new factory and major Intel facilities, that state already has the suppliers in place.
Whichever location Samsung chose, it was in a no-lose position thanks to economic policies that have governments pay to compete with each other. Now Texas gets the chip plant it was likely to get anyway, and the lobbyists receive congratulations for a job well done. — (c) 2021 Bloomberg LP
¹The package could have stretched to as much as $4.5-billion, based on hitting various goals