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Analysis: Intel's new China investment poses threat: analysts

"The learning curve of China will accelerate."

Patrick Liao, a semiconductor specialist with International Data Corp

Plans by US technology giant Intel Corp to build a huge semiconductor plant in northeast China are likely to send shockwaves through the region's fiercely competitive chip industry, analysts said.

It will serve as a wake-up call not just for Asian companies but also for governments, as the US$2.5-billion facility will help transfer know-how at a time when China is pushing hard to become a modern, high-tech economy.

"The biggest impact will be the improvement in China's manufacturing technology, and that's what other countries are afraid of," said Patrick Liao (廖光河), a Taiwan-based semiconductor specialist with International Data Corp.

The plant, to be located in Dalian, will initially produce relatively uncomplicated chipsets for computers, but it could eventually move toward greater technological sophistication, Intel said.

"The opportunity to do other products is really wide open so we will watch that as the market and various government regulations evolve," Intel president and CEO Paul Otellini told a briefing yesterday in Beijing.

There is no obvious historical parallel for the type of transformation that is in store for the regional semiconductor industry, and by extension all its technology producers.

China is much bigger than any of the existing chip powers, such as Taiwan, Japan, South Korea, Singapore and Malaysia. Its semiconductor industry is also developing at a much faster pace than in those counties, as technology advances and is disseminated at a higher speed than ever before.

It took Taiwan's semiconductor industry, which is a major producer of the type of wafers Intel intends to build at its China plant, a full 15 years to take off and become a major global player.

By contrast, high-end technology is likely to spread across China in just three to five years after Intel opens the plant and starts hiring local engineers, Liao estimated.

"The learning curve of China will accelerate as more and more people there will have access to high-tech manufacturing, design and quality," he said.

The establishment of an indigenous chip production ability was just a matter of time given the needs of China's enterprises, said Jeter Chang, a researcher at the Taipei-based think tank Topology Research Institute (拓墣產業研究所).

"China has become the world's factory for electronic products like cellphones, monitors and computers, and so its demand for semiconductors has risen at a fast pace," Chang said.

"Despite China's fast development in semiconductor industry, locally manufactured chips can meet only up to 30 percent of its domestic demand," Chang said.

Just as importantly, Chinese policy makers know very well from watching the rapid rise in wages that they cannot rely on the labor-intensive assembly of imported components forever and must move up the technological ladder.

Even if China's move into relatively advanced chip manufacturing was to be expected, companies across the region would now be scrambling to respond.

"It will mean more competitive pressure for Malaysian companies," said Lee Heng Guie, head of economics at Malaysia's CIMB Investment Bank. "Those who are in this line will continue to upgrade themselves and move into higher-value products."

It also reinforces semiconductors as increasingly commodified products, leading to an industry where profit margins are often wafer-thin.

"Everyone will be upgrading. It's an industry which is tough to be in and in which you have to spend even more money while chip prices continue to fall," said Song Seng Wun, a Singapore-based economist with CIMB-GK brokerage.

also see story:
Intel to build US$2.5bn Chinese factory

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