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Intel plans chip packaging center in China

The chipmaker will invest $200 million in creating a center for testing and assembling microprocessors in a relatively undeveloped region near the center of the country.

Intel will invest $200 million in creating a center for testing and assembling microprocessors in China's new frontier: the Great West.

The center, which will be located in the western Sichuan city of Chengdu, will perform some final steps that are required in preparing semiconductors--such as flash memory chips--for sale. Chips originally made in Europe or North America will be tested, inserted into packages and then ultimately shipped to device manufacturers or distributors.

Intel will initially invest $200 million and employ about 675 persons at the facility, but the company added that it will likely invest $175 million more in a second wave of capital expansion and employ more at the facility over time.

Construction is expected to begin during the first half of 2004. Intel predicts that the site will become operational in 2005.

The Chengdu facility will be the second test-and-assembly plant for Intel in China. The Santa Clara, Calif.-based chipmaker has operated a similar facility in the Shanghai area for years. Intel also maintains laboratories in various Chinese cities.

Typically, Intel builds fabrication facilities, or fabs, for making chips in developed nations such as Ireland, Israel and the United States, along with test-and-assembly plants in developing nations such as Costa Rica and Malaysia. Why the dichotomy? The most expensive element of a fab is the equipment; labor costs are almost immaterial.

By contrast, labor is a larger percentage of the costs in a testing facility. Some chip executives have also indicated that controlling intellectual property is not as big a problem in testing facilities.

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Chengdu, in the center of the country, is part of China's so-called Great West, the relatively undeveloped hinterland away from the coast. This region of the country is generally poorer, and the government has been building educational facilities and offering economic incentives for international and domestic companies to move there.

"We look forward to cooperating with the People?s Municipal Government of Chengdu to build a state-of-the-art assembly and testing facility in their city," Intel CEO Craig Barrett said in a statement. "The Chengdu facility will join Intel?s already existing worldwide network of semiconductor factories and represents our support of China's 'Go West' initiative."

Intel is currently enmeshed in a conflict with the IRS over tax credits that are related to overseas testing centers. Intel gets tax credits for manufacturing chips domestically. The IRS alleges that the testing phase should be included as part of the manufacturing process. As a result, the agency says Intel should have to pay $600 million in back taxes, plus interest, for 1999 and 2000.

Intel says that precedent allows it to count the testing procedure as a separate phase.