Britain now favourite to win Siemens plant

Britain has emerged as front runner for an investment of at least pounds 1bn by Siemens, the German industrial group, despite a last-minute setback.

Siemens' board met in Munich late on Friday to formally approve plans to build a semiconductor plant on north Tyneside, but the meeting broke up without agreement.

One of the other countries trying to win the investment - Austria, Portugal and Ireland - may have offered an 11th hour improvement in the amount of the state aid available. The Department of Trade and Industry had been put on alert to prepare an announcement today.

German sources close to Siemens said that the UK was still favoured by most of the board, and that a site in north-east England - rather than Scotland's "Silicon Glen" - was preferred.

Siemens' plant would be one of the UK's largest ever inward investments, creating more than 2,000 jobs, and would make microchips for mobile telephones and smart cards. The first phase of the investment would cost up to DM1.5bn, and the second phase between DM500m and DM1bn.

Last week, Siemens' chief executive, Heinrich von Pierer, said that the UK was just one of a number of European locations being considered, and that a decision would be made this summer. He admitted, however, that John Major, the Prime Minister, and Michael Heseltine, Deputy Prime Minister, had personally intervened to try to win the project.

It is understood that locating the plant in Scotland was a seriously considered, but the expansion of the electronics industry in Scotland has already soaked up much of the available skilled labour.

A Siemens spokesman in Germany said that there had been a board meeting on Friday, but would not say what was discussed. Nor would he say when directors would next meet.

The company is desperate to internationalise its manufacturing operations further because of two factors: the strength of the German mark and a recent engineering wage settlement which has pushed up costs.

Siemens estimates that an 8 per cent appreciation of the mark this year will cut about DM3bn from the company's sales, while about 7.6 per cent will be added to wage costs.

The company, one of Europe's largest electrical and electronics groups, already has a semiconductor plant in Dresden, but building a second factory on a green-field site in north-east England would be cheaper in the long term than expanding at home.

Any grant aid to Siemens by the UK is likely to be closely scrutinised by the European Commission.

The recent award of an pounds 80m package towards Jaguar's pounds 400m investment in a new car plant is being reviewed by Brussels regulators, who have vowed to get tough with attempts by governments to get round aid restrictions.

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