Given the water economics of semiconductor manufacturing, Intel’s decision to build two foundries in Arizona looks shortsighted

West and East Mitten Butte Monument Valley Arizona USA | Photo by Mlenny on Getty Images

Amid a global semiconductor shortage, Intel’s new CEO, Pat Gelsinger, announced plans in mid-March that it would onshore American manufacturing capabilities by investing $20 billion to build two foundries in Arizona. This announcement comes just as Taiwan’s semiconductor manufacturing industry, which produces 50% of global supply, contends with a severe drought, increasing anxiety around the shortage.

Though the company was likely lured to the state by generous tax breaks, no amount of government subsidies can change the fundamental fact that with current technologies, the average foundry consumes as much water in a year as a city of 50,000 people.

Years from now, Intel’s decision to pursue water-intensive manufacturing in a desert may look like a self-inflicted wound.

Prolonged periods of drought have afflicted the American southwest since 2000. The Colorado River is Arizona’s largest renewable water source. Scientists are warning that the river’s flow, which is sensitive to warming, may decrease by 25% by 2050.

The decision to build two foundries in Arizona exposes Intel to unnecessary climate change risk. This has potential ramifications for Intel’s long term value, and more importantly, American national security.

The semiconductor (also referred to as “chip”) shortage is primarily the result of geopolitics. As a part of escalating confrontation between the United States and China, the Trump administration placed sanctions on Huawei Technologies, China’s communications giant and national darling. These sanctions banned the sale of American-designed chips to Huawei Technologies, even if they were manufactured in a third country. In anticipation of this ban coming into effect in September 2020, Huawei Technologies stockpiled chips from Taiwan Semiconductor Manufacturing Company (TSMC), effectively buying up a large portion of global supply.

The chip shortage has hit American automakers especially hard. GM and Ford estimate that this year, earnings will be cut by $1.5 billion and $1 billion respectively.

Semiconductors play an ever-increasing role in modern economies, with applications ranging from autonomous vehicles to artificial intelligence. America sees a secure and steady supply of chips as integral to its economic and national security. Current supply chains are heavily weighted in Asia, particularly in Taiwan. This is of special concern to America, as China has historically seen Taiwan as a wayward province which must be reunified with the mainland, even at great cost.

Should China gain control over Taiwan and stop shipments, it could bring the American economy to its knees. The Biden administration sees this as an existential threat and has commissioned a 100-day review of semiconductor supply chains. Calls will likely come out of this report to onshore semiconductor manufacturing.

Just as the chip shortage can be seen through the lens of geopolitics, Intel’s decision must be as well. The company’s stock has floundered since 2018, prompting both the hiring of Gelsinger and calls from activist shareholders to “go fabless”. The “fabless” model entails Intel designing cutting edge semiconductors and outsourcing all manufacturing to firms like TSMC. This is the opposite of what the Biden administration wants, which has asked Congress to approve a $50 billion subsidy to support American production of semiconductors. Intel hopes to manufacture chips for both its own use and TSMC’s big customers, such as Apple.

Intel is far from the only company that has bet on manufacturing in the Southwest. Robust internet infrastructure, cheap energy, transportation links to both Mexico and California, and a favourable regulatory environment all contribute to the region’s growing reputation as a manufacturing hub. Arizona specifically is a “right to work” state, making it harder for unions to form and facilitate collective action. Additionally, states like Arizona have historically offered generous tax breaks and subsidies to companies looking to set up large factories. The state’s governor, Doug Ducey, has proven highly pro-business, seeing regulation as inherently antithetical to a strong economy. Arizona also boasts a growing research and development scene for manufacturing technology at the university level.

Though all of these factors may cumulatively explain Intel’s decision, the region’s water insecurity may end up costly in the long run. The semiconductor manufacturing process is highly water intensive. It involves layers of conducting and insulating materials being deposited on the chips before patterns are etched into them to create circuits. This process takes hundreds of steps, many of which require ultrapure water as a medium for chemical reactions to take place in, and then for thorough rinsing before and after. The average semiconductor factory uses up to 15 million liters of water per day.

42% of Arizona’s water supply comes from groundwater. This is effectively a non-renewable resource as water is being extracted from Arizona’s aquifers much more quickly than they are being filled up. The Colorado river represents 62% of the remainder. As previously stated, output of the river is expected to decrease substantially in the coming decades. Combine this with Arizona’s fast-expanding population, and the state’s unenviable position downriver of both Colorado and Utah, and you have substantial water security risk. This could lead to skyrocketing water bills for Intel.

Considering the useful life of Intel’s foundries is likely decades long, unless it has developed proprietary methods to slash water consumption by a big factor, it should consider future capital projects in water-abundant areas such as Michigan and Wisconsin.