Samsung’s Texas Deal Shows it Makes More than Great Chips

(Bloomberg Opinion) -- Lobbyists for Samsung Electronics Co. deserve to drink magnums of the finest champagne after pulling off a fabulous deal.

Taylor, Texas, won the the right to host the South Korean giant’s latest semiconductor factory, the company said Tuesday local time.  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 Taiwan Semiconductor Manufacturing Co.’s new U.S. facility. Upstate New York has been home to various chip factories including those operated by GlobalFoundries Inc., so that area was also in with a shot.

Under the plan Samsung will spend $17 billion on facilities and equipment to create more than 2,000 new high-tech jobs with production to commence by the end of 2024. The news was announced at a press conference in Texas featuring Governor Greg Abbott, Senator John Cornyn and Samsung Vice Chairman and Chief Executive Officer Kinam Kim.

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 Midwestern state offering a record $2.9 billion in incentives.  But the Taiwanese supplier to global clients like Apple Inc. ended up falling far short of its committed goals and had to drastically scale back its plans.

Samsung Austin Semiconductor LLC 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 real estate speculator.

In the end it settled on a site 15 miles northeast of its current location and extracted commitments from the local government of Williamson County to build around 10 miles 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 it helped exacerbate the global chip shortage. It’s ironic that it’s expanding in the U.S. to ameliorate supply-chain disruptions when Samsung’s biggest problem in the past year was caused by poor American infrastructure.

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 Corp. 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.

The package could have stretched to as much as $4.5 billion, based on hitting various goals.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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