Intel set to showcase China operation

Chipmaker's decision to hold developer conference in Beijing next week emphasizes how important China is to its future.
Written by Tom Krazit, Contributor
Intel is taking its biggest show of the year on the road--and the first stop is indicative of its future plans.

Next week's Intel Developer Forum will be held about 6,000 miles to the west of its usual location in downtown San Francisco. Beijing will play host to the semiannual conference, which gathers Intel's customers, partners and beat reporters for discussions about the company's plans and performance. The conference kicks off Tuesday with an opening address from Ian Yang, the head of Intel's China operation.

Intel usually takes the speeches and presentations from a San Francisco IDF to various other sites around the world. But this time it will unveil its news in Beijing, with no plans for a U.S. counterpart until later this year. CEO Paul Otellini will be a notable no-show, but other Intel heavy hitters will be present to talk not only about the company's upcoming products, but its increasing focus on China as a base of operations.

Technology companies have been obsessed with China for years, eyeing its residents both as customers and workers. China's economy is still on fire, and its people and businesses have more and more disposable income to spend on PCs, mobile phones, televisions and all the other accoutrements of a modern techie. The PC manufacturing industry--especially the fast-growing notebook sector--has set up shop in China to take advantage of the lower cost of labor.

Intel's mission in China is twofold. Like the rest of the technology industry, it sees a source of future growth to offset the maturing PC markets in the U.S. and Western Europe. Industry experts differ on the best products for those emerging markets, but Chinese customers will snap up PCs--and Intel wants to be inside a healthy portion of those systems.

The company's recent announcement that it plans to build a chipmaking factory in Dalian, however, signals that Intel has grander plans than aggressive sales and marketing for China. The company already has a significant presence in China with assembly and test plants located close to the country's burgeoning PC manufacturing industry. But building a plant is a much more expensive and statement-making proposition.

Billions of dollars are required to build a modern chipmaking factory, even an outdated one like the plant Intel is planning for Dalian. Intel isn't going to save a whole lot of money on labor costs, because the real outlays in chip manufacturing are for sophisticated equipment, said Risto Puhakka, an analyst with VLSI Research.

Plus, Intel's plant will be a so-called "greenfield" project, arising on a site where the company has never built a factory, Puhakka said. "It's the first greenfield site for Intel in 15 years."

The plant itself will be outdated by Intel's standards to comply with export regulations designed to prevent certain countries from acquiring the latest and greatest technology. When the factory is completed in 2010, Intel is expected to produce less-important products there such as chipsets or communications chips--rather than top-of-the-line processors--using older technology.

But the technical know-how associated with running a modern chipmaking facility will rub off on aspiring Chinese engineers and entrepreneurs who might want to some day run their own plant, said George Scalise, president of the Semiconductor Industry Association, a trade group representing U.S. chip companies.

"They have the foundries now," Scalise said, referring to Chinese companies such as Semiconductor Manufacturing International Corp. "At this point, they are still struggling to some degree, but they are getting better, and most of the technology and capability they have today is from people that were trained here, worked here, and then moved on over."

This is an issue that some in the U.S. have worried about: If China demonstrates that it has suitable engineering know-how and infrastructure needed to support advanced chip manufacturing, more and more companies might decide to set up operations there and take investment dollars out of the U.S., Scalise said. And Chinese workers trained by foreign companies like Intel might go off and start their own chipmaking operations with funding from the Chinese government, potentially threatening Intel's business far on down the road.

The incentive is even greater when you consider what the Chinese government is willing to pony up to attract foreign investment and encourage domestic production, Scalise said. Intel has said it is receiving financial incentives from China that factored into its decision to build there, and while it hasn't said how much money is involved, it wasn't an insignificant amount.

But China still must demonstrate that it will abide by the rules of the World Trade Organization before U.S. chipmakers wholeheartedly embrace the country, Scalise said. The industry is still sore over a value-added tax that China placed on imported chips as a way of giving a boost to its fledgling domestic chipmaking operations, although the matter was resolved in 2004.

This also means enforcing intellectual property laws, allowing companies like Intel to preserve secrets about their chipmaking process, Puhakka said. And, of course, it means walking a delicate line between adhering to local laws and complying with Western practices around workers' rights and censorship--issues that have gotten other U.S. companies operating in China into hot water.

But Intel and the chip industry have a lot of time to consider the ramifications of its move into China, Puhakka said. "The fab signals that Intel is very serious about China. It's going to be a cornerstone of their future growth and future business."

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