Intel's choice in global recession

by: tonywtsh
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When global recession hits the world, more and more enterprises feel pressure. Intel, the world's largest chip manufacturer, saw its net profit dropped by 90% in the fourth quarter of 2008 year on year. It is forecasted that in the first quarter of 2009, Intel will face its first loss in consecutive 21 years.

As a react, Intel declared to close five factories in January, including three encapsulating and testing facilities in Malaysia and the Philippines, and two chip manufacturing facilities in the U.S.. In February, it decided to close the encapsulating and testing facility in Shanghai of China, and to shift the business into the factory in Chengdu, a centre city in Southwest China.

This step of Intel is somewhat surprising, since Chengdu is a city which was hit by a magnitude-7.9 earthquake last year. In fact, less investment is expected in this city after the quake. However, Chengdu has winning edges such as low investment cost, rich highly-qualified talent pool, as well as good environment. These winning edges make Chengdu as a best safe harbor for Intel to overcome the global crisis.

Just like the saying from Craig Barrett, Chairman of the Board of Intel, "Let me just reiterate that the earthquake does not dampen our desire to expand in Chengdu." Intel is planning to increase the investment in Chengdu, and to enlarge its production capability there. The number of its employees in Chengdu will be increased from 1,600 to 2,500.

In fact, when there is no global crisis, Chengdu is also the choice for Intel. In 2003, Intel chose Chengdu to launch its second encapsulating and testing facility in China after Shanghai. The factory involves an investment of US$375 million. In 2006, Intel further increased its investment in Chengdu to US$525 million.

Furthermore, Intel is not the only semiconductor manufacturers who are partial to Chengdu. There are other big players who have chosen Chengdu as their strategic points in China, such as AMD, SMIC, Unisem, Nokia, Ericsson, Motorola, Alcatel, Flextronics, etc. A comprehensive electronic industrial chain has been formed in this southwestern city.

In the background of global economic crisis, the cost factor is the dominant one which is considered most frequently by the enterprises. Therefore, China's eastern coastal area is no longer the best location for overseas investment because of high cost in those cities. The vast hinterland of China, especially the city like Chengdu, becomes an option for companies in the difficult time, due to its low cost for land and labor, just like a safe harbor.

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Tony Wang Analyst

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