Intel and AMD Take Chip Fight to China

Intel hopes its $2.5 billion investment in a new chip fabrication plant will win over computer makers in China

Intel's (INTC) announcement on Mar. 26 that it will spend $2.5 billion to build a new chip fabrication plant in the northeastern Chinese city of Dalian is another reminder of just how increasingly global the market share rumble is between the world's biggest semiconductor maker and arch-rival Advanced Micro Devices (AMD). Intel has long dominated the Chinese market, but AMD has been narrowing the gap.

Intel can't afford to surrender any more ground in China, which is the second-largest PC market in the world and is likely to pass the U.S. early in the next decade. PC vendors like Dell (DELL) and Hewlett Packard (HPQ) are pushing hard to win customers in China away from local champion Lenovo (LNVGY)—and unfortunately for Intel, many of the companies selling to Chinese computer users are showing a willingness to use machines powered by AMD chips rather than Intel's (see BusinessWeek.com, 3/22/07, "Grudge Match in China").

Intel still enjoys a considerable lead. According to market research group International Data Corp. (IDC), Intel has a commanding 92% market share in laptops, vs. just 7.5% for AMD. However, the smaller company is coming on strong in the desktop segment, which accounts for about two-thirds of the total PC market. Thanks to its partnerships with companies like Lenovo, AMD has grabbed 30% market share in desktops, forcing Intel below the 70% mark.

Cozying Up to Beijing

And AMD is not letting up. The company recently announced that it would be working with another Chinese PC vendor, TCL, to sell AMD-powered computers. That means all of the top local companies—including no. 2 Founder and no. 3 Tongfang in addition to market leader Lenovo—now sell AMD PCs as well as Intel machines. AMD has also made progress with the big foreign names, with HP and Acer among the companies putting AMD processors in their Chinese-sold computers.

The company has added Dell to its lineup, too. "All these major players are now with us," says Spencer Pan, an AMD general manager in charge of working with computer vendors in Hong Kong and the mainland. For AMD, 2006 "was a breakthrough year," he adds.

Now that AMD is leveling the playing field, the competition between the two companies to curry favor with Beijing is getting more heated. In that contest, Intel scores several points with its fab announcement. The Chinese government has made building a chip industry one of its top high-tech priorities.

The state has supported the growth of companies like Semiconductor Manufacturing International Corp. (SMIC), a Shanghai-based chip foundry. (In industry lingo, a foundry is a chipmaker that produces semiconductors on an outsourcing basis for other companies.) Getting Intel to commit to building a fab is therefore a big victory for the government.

"Grow With China Together"

Intel is working with the Chinese government in other ways. Last year it signed an agreement with China's Ministry of Information Industry to lead the development of a new computer designed specifically for use in the Chinese countryside. "We have to provide the right technology, making sure that it's innovative enough, easy to use, and can withstand a harsh environment," says Ian Yang, Intel vice-president and general manager for China. Intel engineers in Shanghai are working on the project and will be testing it in rural areas in five Chinese provinces.

AMD is eager to show that it, too, is committed to helping China build its high-tech prowess. The company opened a 100-person design center in Shanghai last year, AMD's second-largest, and AMD general manager Pan says that it will have 400 people two years from now. In 2005, AMD also agreed to transfer some design know-how to China's Ministry of Science & Technology and state-controlled Peking University, part of the Chinese effort to develop a locally made microprocessor that some day can rival the chips made by AMD and Intel.

Isn't it odd that AMD is helping a would-be rival? No, says Pan. "This is a potential competitor for AMD, but we are still doing that," he explains. "This is the commitment of AMD to the Chinese government. If you want to do business here in China, you have to grow with China together."

Pressure on Prices

The growing importance of the Chinese market isn't all good news for the two chipmakers. Chinese may be buying more computers, but they're also very price-conscious, and that's putting downward pressure on prices for both Intel and AMD, says Shane Rau, an IDC analyst who follows the semiconductor industry. "We are experiencing price erosion," he says.

For instance, he points out that IDC expects global PC sales to increase 11.3% in terms of units this year, largely driven by demand emerging from China and the other "BRIC" countries of Brazil, Russia, and India. However, growth in the value of the chips inside those PCs will be only 8% this year.

That's a reflection of smaller budgets in China. "A unit out of China is the same as out of the U.S.," Rau explains. "But if you look at the value of the chips inside the units being sold, it's not proportional. The value of the chips inside a Chinese PC is less." If the value of the chips inside a U.S. desktop might be $450, in a Chinese computer it might be closer to $350.