TELECOMS: Intel Cozies Closer to China with Chip Plant Conversion

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Bottom line: Intel’s massive spending plan to convert its Dalian CPU plant to memory chip production looks like part of its growing alliance with Tsinghua Unigroup, which is probably helping to finance the conversion.

Intel overhauls Dalian chip plant

Just days after struggling US chip maker AMD (NYSE: AMD) announced plans to largely sell off its Asia manufacturing operations, larger rival Intel (Nasdaq: INTC) is doing the opposite with plans to invest up to $5.5 billion in one of its main Chinese fabs. But in an interesting twist to the story, Intel is spending the big money to convert the fab, which was originally designed to make integrated circuits for PCs, to memory chip production.

This unusual twist is just the latest move that shows Intel is placing its bets on China, as it plays catch up to other chipmakers like Qualcomm (Nasdaq: QCOM) that have discovered the future of computing lies in the mobile telecoms space. As part of its catch-up attempts, Intel has formed a major and growing alliance with Beijing-based Tsinghua Unigroup that is squarely focused on chips used in telecoms and IT services. Memory chips would fit nicely into that equation, since such chips are also a critical part of most IT products, ranging from smartphones to complex networks.

AMD made headlines last week when it announced it would sell most of its 2 Asia-based chip making plants, including one in China, to a Chinese partner. (previous posts) That prompted me to say that China was losing its attraction as a manufacturing base for high-tech chips, after the country failed to realize its potential for technical and other bureaucratic reasons.

But perhaps I spoke too soon, since Intel appears to be moving in the opposite direction with its latest announcement of a mega investment in China. According to a company statement, Intel will invest up to $3.5 billion over the next 3-5 years to convert its chip plant in the northeastern city of Dalian from making its core central processing units (CPUs) to NAND-type memory. (company announcement; English article; Chinese article) The first memory chips will be produced in the second half of next year, and Intel could raise the investment to as much as $5.5 billion later.

Intel already has a NAND-producing joint venture with leading US memory chip maker Micron (NYSE: MU), so at first glance this China move may seem a bit puzzling. But China watchers will know that Intel’s main China partner, Tsinghua Unigroup, also wants to get into the NAND manufacturing business. Unigroup tried to do just that by exploring a bid for Micron earlier this year, but later dropped its attempts due to political opposition from Washington. (previous post)

Catering to Unigroup

Thus this latest shift by Intel looks aimed at satisfying Unigroup’s appetite for memory chip technology. Accordingly, I wouldn’t be at all surprised if Unigroup is helping to pay for this massive new conversion of the Dalian plant. Unigroup has previously demonstrated that it has access to big amounts of cash through its connections with China’s leading science university, Tsinghua, and was reportedly set to pay around $23 billion for Micron.

As to Intel itself, I’m honestly not sure what the company will gain from this major new investment. In some ways, the move looks like a similar retreat to AMD’s, since Intel will presumably stop making its own CPUs at the Dalian plant after the conversion. That means that perhaps this big investment could be followed soon by announcement of a sale of the plant to Unigroup, or the formation of a joint venture to jointly own and operate the facility.

At the end of the day, Intel appears to be tying itself ever more closely to China and Unigroup, with hopes of using the country’s massive resources and market to catch the other telecoms chip makers. Intel already has a telecoms chip-making joint venture with Unigroup formed last year, even though the venture hasn’t advanced much since then. But China is a very political place where spending and product development decisions are often based as much on politics as commercial factors. Accordingly, Intel may be betting on that fact to propel it back to relevance in the global mobile chip marketplace.

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