Intel Eyes Expansion in China

It's set to announce plans to build a $2.5 billion chip-manufacturing plant, which will be a milestone for the tech behemoth

Somewhere within the vast bureaucracy of the People's Republic of China someone jumped the gun on the world's biggest chipmaker.

Word leaked that China's National Development & Reform Commission gave Intel (INTC) the go-ahead to build a $2.5 billion chip-manufacturing facility in the northeastern city of Dalian, although Intel declined to comment on the matter.

While Intel declined to confirm the construction plans, rumors have been circulating for some time. Indeed the company has made no secret of plans to beef up manufacturing in mainland China (see, 3/29/06, "Tech's Faster Boat to China").

Cornering Chipsets

The plant, when built, will be Intel's fifth facility in China in a decade. Intel first opened a plant building flash memory chips in Pudong, China, in 1997 and added a second in 2001. A third was opened in Chengdu, China, in 2004, and a fourth is due to be completed this year.

The new facility will focus on manufacturing chipsets, which are critical components inside a computer that provide operational glue between the main microprocessor, which Intel also makes; other systems such as memory chips; and input devices like the keyboard and mouse.

Aside from being the world's biggest maker of microprocessor chips, Intel also dominates chipset manufacturing, accounting for about half of the $8 billion generated by chipsets in 2006, according to Mercury Research, a market-tracking firm based in Cave Creek, Ariz. Other companies in the business include graphics chipmaker Nvidia (NVDA) and its main rival ATI, now a unit of Advanced Micro Devices (AMD), also Intel's main rival in microprocessors.

Taiwan Example

Intel builds its chipsets using manufacturing technology that is one step behind the bleeding edge of its microprocessor manufacturing technology, says Dean McCarron, head of Mercury Research. While microprocessors are built on technology that allows for transistor sizes of 65 nanometers, Intel's chipsets are for the most part built on earlier-generation technology with transistor sizes of 90 nanometers. "Usually what Intel has done, is it takes a factory that has been making microprocessors, and when it's time to migrate to the new technology, it makes chipsets in the older factory," McCarron says. "By that point the plant is fully amortized, and so it's a good way to get a free fab."

Chipsets currently sell to PC manufacturers like Dell (DELL), Hewlett-Packard (HPQ), Gateway (GTW), and Apple (AAPL) for an average price of $20 to $25, McCarron says. So Intel would be likely to benefit from the lower labor costs available in the China.

Intel's main manufacturing facilities for microprocessors are in the U.S., Ireland, and Israel. China's government has been trying to put some steam into the development of its chip-manufacturing industry, in part by emulating the success of neighboring Taiwan, whose contract chip-manufacturing sector—powered by companies like $8.1 billion Taiwan Semiconductor Manufacturing (TSM) and $3 billion United Microelectronics (UMC)—is enormous. China's Shanghai-based Semiconductor Manufacturing International (SMI) is by comparison much smaller, having reported 2005 sales of $1.7 billion.

U.S. Base

For Intel, shifting manufacturing operations to China could raise political hackles in the U.S., where it currently operates some 2.1 million square feet of manufacturing in California, Oregon, Arizona, New Mexico, and Massachusetts. But recent sales trends suggest that the plant may have as much to do with meeting demand in the local market as it does with cutting labor costs.

According to Intel's most recent annual filing with the Securities & Exchange Commission, revenue derived from sales to customers in China and Taiwan accounted for more than $12.1 billion, or some 34%, of the $35.4 billion total for fiscal 2006. This makes sense since most computers, notebook computers especially, are manufactured by companies in Taiwan and China for companies including Dell, Gateway, HP, and Apple.

But by far most of Intel's most valuable manufacturing operations are in the U.S. In 2006, the company said more than $11.6 billion of its $17.6 billion of plants, facilities, and equipment was located in the U.S., while $2.8 billion was located in Ireland. The remainder, some $3.8 billion, is in other countries, including Israel, Malaysia, Vietnam, and China. While landing an Intel plant may be an economic win for China, the majority of Intel's manufacturing is still done in the U.S.

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