Intel to produce chips in China

The chipmaker has labs and testing facilities in China. In a few years, it will make chips there too.

Intel has announced that it will open a wafer fabrication facility in China, a significant milestone in the chip giant's manufacturing history.

As reported earlier, the plant will be located in an industrial rust-belt hub in northeast China called Dalian in the Liaoning Province and will cost around $2.5 billion to build. The Chinese government is providing financial incentives to Intel, according to company spokesman Chuck Mulloy, and has built up the infrastructure around the city.

Chips will start coming out of the factory in the first half of 2010. Initially, Intel will make chipsets--which shuttle data back and forth across the processor to the microprocessor of the computer--and possibly communications chips.

The decision to concentrate on chipsets, rather than flash memory or processors, derives from U.S. regulations that prevent domestic companies from bringing cutting-edge chipmaking equipment to China. Generally, U.S. companies can only bring in so-called N-2 equipment, or equipment that's two generations behind the most advanced contemporary standard. The restrictions exist to prevent China (among others) from using the machinery for chips for advanced weapons.

"They will have this older process technology over there, and it is much better suited for making chipsets," said Dean McCarron, principal analyst at Mercury Research.

The definition of chipsets is broad, Mulloy said, and can include WiMax and Wi-Fi chips, cellular chips or traditional chipsets. Many of Intel's communication chips now get made by Taiwan Semiconductor Manufacturing Co. (TSMC)

Although Intel has been in China for more than two decades and operates laboratories and testing and packaging facilities, the Dalian factory will be Intel's first facility in China--or in any developing nation for that matter--to actually produce chips. The plant will be the main topic of discussion at the Intel Developer Forum taking place in Beijing in mid-April.

To date, Intel has concentrated its chip manufacturing facilities in the U.S., Israel and Ireland while putting testing facilities in emerging nations like Malaysia, Costa Rica and China. Labor costs are a significant factor in testing facilities, but not in plants. The vast majority of the budget in building and operating a plant revolves around the equipment for "drawing" circuits on wafers or sputtering metallic vapors onto silicon.

Instead, when it comes to erecting fabrication facilities, companies look at the available local engineering talent, the tax breaks and other incentives offered by the host nation, as well as the state of the local intellectual property laws. China has become much more competitive on the first two factors in the last several years, but intellectual property has been a persistent problem.

Nonetheless, government crackdowns on piracy, along with chipmakers' desire to gain a larger part of the Chinese market, are prompting chipmakers to move more manufacturing to China. TSMC, which is the largest contract manufacturer for chips in the world, makes some chips in China. TSMC also fought, but ultimately settled, an intellectual property lawsuit with SMIC, one of China's premier chipmakers.

The Dalian plant will process wafers with 300-millimeter diameters. That means that the chips produced at the factory will be made on the 90-nanometer process or a more refined process such as the 65-nanometer process. (The 90 and 65 nanometer numbers refer to the average size of the features on the chips produced. A nanometer is a billionth of a meter. A human hair is about 60,000 nanometers wide.)

More advanced processes generally lead to faster, more energy-efficient chips.

Intel already has a license from the U.S. government to make 90-nanometer chips in Dalian in 2009, Mulloy said, but there is a strong chance that it will kick off Dalian with 65-nanometer chips. The license enables Intel to put in more advanced equipment as new generations of manufacturing equipment crop up in the West.

Intel will start to make chips on the 32-nanometer process in late 2009. As a result, 65 nanometers will already be reigning the N-2 generation by the time Dalian opens in 2010.

The regulations that govern exports of chip equipment derive from the

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