COMMERCIAL NEWS

New York, N.Y. — Barnaby J. Feder reports that I.B.M. said that it would spend $2.5 billion to build “the world’s most technologically advanced” chip factory in East Fishkill, N.Y.

The project will be eligible for a package of tax breaks, grants and other incentives amounting to $660,000 for each of the 1,000 permanent jobs it is expected to create. State officials said the investment would be profitable for taxpayers in the long run.

The announcement comes just seven years after the International Business Machines Corporation, the lower Hudson Valley’s largest private employer, rocked the region with large-scale cutbacks. The factory would represent the single largest investment in New York State by a business and the largest in the computer giant’s history.

I.B.M. will build the factory within a building where it had shut down a major chip production line in 1993, at the tail end of cutbacks that led its work force in the region to tumble from 30,700 workers in 1985 to fewer than 14,000. Although the area has since rebounded and now has one of the lowest unemployment rates in the state, state and local government officials have avidly courted the company.

Gov. George E. Pataki hailed I.B.M.’s return to large-scale chip production in the region as an internationally visible endorsement of his efforts to make New York more attractive to businesses. “New York’s ability to compete against other states and nations to win I.B.M.’s historic investment is an indisputable validation of the turnaround in the New York State business climate,” Governor Pataki said in a Midtown news conference with Louis V. Gerstner, I.B.M.’s chairman and chief executive.

The new factory will be among the first in the world to make chips on silicon wafers that are 12 inches in diameter, rather than the current industry standard of 8 inches, allowing two and a half times as many chips to be made from a single wafer. It will also make use of a number of I.B.M. innovations, including copper circuitry and patented methods for placing transistors on microscopic layers of insulation to increase speed and cut power consumption.

I.B.M. said it would spend an additional $2.5 billion to expand I.B.M.’s semiconductor manufacturing capacity at its existing plants in Burlington, Vt., and overseas while the East Fishkill factory was being built.

Although Mr. Gerstner said that I.B.M. could have built the plant anywhere in the world, there were signs for several years that East Fishkill was the front-runner because I.B.M. already had many of the regulatory permits needed.

I.B.M. had said in 1997 that it would spend $700 million to move research and development efforts for the next generation of chip technology into the vacant building, and local officials were told then that a decision to expand to a full-scale production line was a strong possibility, according to Roger Akeley, Dutchess County commissioner of planning and development.

Under the current plan, the research and development operations will move into the building in the middle of next year and will occupy about one-third of the space. I.B.M. expects to employ about 1,400 construction workers and reach full production in 2003, with 1,000 permanent workers on the payroll.

While state officials cited the Pataki administration’s tax cuts, regulatory reforms and investments in education as important lures for I.B.M., more direct financial incentives clearly played a role as well.

Under legislation passed early this year that focused economic development efforts on designated “Empire Zones” like I.B.M.’s sprawling East Fishkill complex, the company will get $475 million in state tax credits. It will also be eligible for $28.75 million in state grants and loans and $156 million in state and local tax benefits related to construction.

The Empire Zones are intended to allow new plants like I.B.M.’s to operate nearly tax-free for up to 10 years, the state said.

However, during the next seven years, the state calculates that I.B.M.’s investment will generate more than $1 billion for the state economy, said Charles A. Gargano, chairman of the Empire State Development Corporation.

Local officials welcomed I.B.M.’s plans but cautioned that at a time when business in the region is booming, the expansion would lead to new strains on transportation, housing and the environment.

“This is an ideal location for industrial growth and these are good jobs,” Mr. Akeley said. He noted that I.B.M. officials had told him wages for the highly skilled work force the plant will employ would average about $50,000 annually.

But, Mr. Akeley added, the expansion could exacerbate the existing shortage of affordable housing for low-wage workers. It will also require building a water pipeline from Poughkeepsie so that the East Fishkill complex, which now draws water from an aquifer, can be supplied from the Hudson River.

Representatives of local small and midsize manufacturers like Harold King, director of the Council of Industry of Southeast New York, said they are nervous about the impact I.B.M. could have on the local labor market, which is already showing the effects of 20 consecutive quarters of economic growth. According to a July survey, wages in the region had risen 4 to 5 percent, up from 3 to 4 percent in earlier surveys, Mr. King said.

“It’s hard for all companies in the region,” said Thomas Phillips, a former I.B.M. employee who is now executive director of the Hudson Valley Technology Development Center in Fishkill. “The No. 1 issue is the available work force.”

For all that, Mr. Gerstner cited the region’s skilled workers as a fundamental reason for the investment decision. I.B.M. executives said they would recruit from other I.B.M. plants around the world as well as locally.

One obvious target, an adjacent chip plant that I.B.M. recently sold to Philips Semiconductor, is largely off limits under the terms of the two companies’ agreement, according to John E. Kelly III, the senior vice president who oversees the I.B.M. microelectronics division.

Some of the new workers will come from I.B.M.’s close relationships with programs that train computer researchers at the State University of New York and Rensselaer Polytechnic Institute.

That was underscored by the presence at the news conference of Alain Kaloyeros, executive director of the New York State Center for Advanced Thin-Film Technologies at SUNY Albany. The center is planning to build a $300 million research laboratory using technology similar to that at I.B.M.’s East Fishkill site. “We are thinking of painting it blue,” Mr. Kaloyeros joked, referring to I.B.M.’s nickname, Big Blue.

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