Intel Opts for China

India loses bid to land new $2.5-billion wafer fab.

March 26, 2007

By Chi-Chu Tschang

In the ongoing China

versus India debate, Intel has weighed in. Chalk up another win for China.

Intel scouted locations in India, China, and several other countries before announcing Monday it would invest $2.5 billion to set up a 300-millimeter wafer fabrication facility, dubbed Fab 68, in the northeastern Chinese port city of Dalian.

Intel’s decision to choose Dalian for its first new Asian wafer fab in 15 years helps China extend its semiconductor lead over India. It also underscores the growing importance China, Taiwan, South Korea, and Japan have assumed not just as manufacturers, but also as consumers, of computers, cell phones, and other electronic products.

“Semiconductor manufacturing in China is better than India,” said Tina Tang, a Beijing-based analyst with Gartner market research firm. “In India, the consumption of the electronics equipment is still low.”

China became the largest consumer for integrated circuits in 2005 as a result of Lenovo, Dell, Apple, and other tech companies outsourcing their manufacturing to China.

India, which competed vigorously to land Intel’s new fab, has one government-owned semiconductor manufacturing facility to make microprocessors for its defense industry. China has several fabs, but they have been unable to keep pace with demand in the world’s fastest-growing semiconductor market.

Analysts said one major reason why Intel chose China is logistics. By locating Fab 68 in Dalian, Intel’s microprocessors can be flown to its customers in Beijing and South Korea in one hour, or Japan in two hours.

Investment Paying Off

The Chinese government’s massive investment, accounting for roughly 9 percent of its GDP, into ports, airports, roads, and other infrastructure projects in recent years is now starting to pay off. India underinvestment into infrastructure projects, only 4 percent of GDP, has been one major reason why high-tech companies have not flocked to set up factories there.

Moreover, the Chinese government has been more eager to roll out the red carpet for foreign investors, especially Fortune 500 companies. Intel had been in talks with the Indian government for several years about setting up a fab in India. But talks reportedly fell through because Intel wanted too many concessions which the Indian government was not willing to grant.

But in China, local government cadres, such as Dalian Mayor Xia Deren, are more willing to offer preferential tax treatment and market access policies because their promotion takes into account how successful they are in attracting foreign investment plays. Intel CEO Paul Otellini declined to elaborate at a press conference in Beijing today on the preferential policies Intel received from the Chinese government to invest in Dalian.

Observers said Intel’s investment was a win for China and the United States. By manufacturing 90-nanometer chips in Dalian, Intel is doing Beijing a favor by helping China climb up the high-tech value ladder. Even though the microprocessors made in Dalian will be two generations behind Intel’s state-of-the-art 65- and 45-nanometer chips, China has few fabs with the most up-to-date technology. The deal also keeps out of Chinese hands technology that has possible military applications.

Meanwhile, Intel’s decision to set up a US$2.5-billion fab in China will bring in a lot of business for American equipment manufacturers and help shave a little off China’s trade surplus with the U.S., which reached a record US$232 billion in 2006.

“This deal can also reduce the pressure from U.S. government because China today has a lot trade surplus,” said Byron Wu, China research manager at iSuppli Corp research firm.