A factory doomed from the first

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WHEN THE Queen opened Siemens' pounds 1bn semiconductor plant on Tyneside just 14 months ago, it seemed that the region had at last left its smokestack image of steel, coal and shipbuilding behind and joined the vanguard of the high-technology revolution.

The gleaming new facility, so the Queen told her audience of local dignitaries and business leaders, "brings the country to the forefront of semi-conductor manufacturing".

In retrospect, the writing was probably already on the wall. The plant had been conceived at a time of rising demand and healthy prices.

But it was born into an industry in sharp decline and suffering from chronic overcapacity.

The go-ahead for the plant was given by Siemens bosses in Munich in May, 1995. Within hours of the announcement, local job centres in Wallsend and North Shields were flooded with inquiries. One centre took 4,000 calls in just three hours.

At the time industry's appetite for semi-conductors was rising sharply and so were the hopes on the Tyneside. Siemens estimated that the worldwide market would grow by some 80 per cent to $200bn a year by the time the plant was fully operational.

But by the time of the official opening in May, 1997, at the Hadrian Business Park, a 20-minute drive north of Newcastle, it was already obvious that the forecasts were wildly out.

Instead of the market rising by 15 to 20 per cent a year, it has remained static. The result was a massive oversupply of manufacturing capacity and an equally predictable slump in prices.

The price of a 16 megabyte D-RAM, the standard industry chip, had fallen from $55 to under $10. It has since slipped to less than $3.

Within months of the Tyneside plant opening, Siemens scrapped plans for a second phase of development which would have cost another pounds 400m and created 500 more jobs.

Meanwhile, the pain was being felt elsewhere as manufacturers across the closed, mothballed or sold capacity in the face of mounting losses.

The carnage was exacerbated by the determination of Korea, which accounts for an estimated 40 per cent of the industry, to keep its factories going. The result was a stupendous semi-conductor glut and widespread dumping of chips.

The red ink flowed freely among the chip manufacturers. NEC, Fujitsu and Toshiba of Japan reported falls in profits of 55 per cent, 88 per cent and 89 per cent respectively last year. Mitsubishi and Acer both shut down semi-conductor plants.

Siemens decided to confront its own chip crisis two weeks ago after disclosing that its semi-conductor business would make losses of DM1bn (pounds 350m) this year.

The group made it clear that action would be needed to stem the "appalling" losses.

But as recently as last week, it appeared that the Tyneside plant - of all five Siemens semi-conductor plants - would emerge relatively unscathed. Alan Wood, the chief executive of Siemens plc, briefed journalists that the facility was as competitive and efficient as any in the world.

His bosses in Germany decided otherwise. The other four plants were difficult to close for a variety of reasons.

The Dresden plant was inviolate because it is a symbol of Siemens faith in German unification, the French plant is jointly owned, the US facility has the world's biggest market on its doorstep and the Taiwan plant has a huge labour cost advantage.

That left just one location. And yesterday Tyneside paid the price.