TELECOMS: Intel Ramps Up China Wireless Chip Play
Bottom line: Intel’s new Chengdu investment is the latest step in its bid to find a market for its mobile chips, by working with China to create a major domestic designer of mobile device chips.
Global tech leader Intel (Nasdaq: INTC) is showing growing signs of placing its bets on China, with word that it’s planning a major upgrade at one of its 2 Chinese chip plants in the interior city of Chengdu. This latest move comes just 2 months after Intel announced another similar-sized investment aimed at consolidating China’s wireless chip sector, leading me to suspect that these 2 moves could be related. When the final picture becomes clearer, I expect we could see similar upgrades also occur at Intel’s newer plant in the northeast city of Dalian, with China poised to become a major center for the company’s belated push into wireless chips.
We’ll return to the bigger picture shortly, but first let’s review the latest headlines that have Intel announcing it will spend a massive $1.6 billion to upgrade its chip-making plant in Chengdu. (English article) I remember when Intel first built this plant about a decade ago, and at the time it represented its biggest investment in China. It initially invested $300 million and later doubled that amount, and the plant has mostly been focused on lower-tech back-end test and assembly work in the decade since it began production.
More recently, Intel opened a more cutting-edge front-end manufacturing facility about 4 years ago in Dalian, with an investment of $2.5 billion. There’s not much additional detail in the new reports on the Chengdu plant upgrade, but it does look like that facility will remain focused on back-end work. I wouldn’t be surprised if we see a similar announcement of upgrades for the Dalian plant soon, though the amount could be smaller since that facility is newer.
At the end of the day, Intel could be positioning both of these plants to manufacture smartphone chips, as it makes a belated push into the fast-growing sector that is rapidly overtaking the traditional PC chips that are Intel’s biggest money earner. Intel failed to recognized the importance of mobile devices earlier, with the result that most of the market is now dominated by companies like sector leader Qualcomm (Nasdaq: QCOM), and mid-sized players like MediaTek (Taipei: 2454), which mostly use chips based on an architecture supplied by European chip giant ARM.
In a bid to play catch-up in mobile chips, Intel appears to be placing its bets on China. That looks like a relatively smart move, since it plays to Beijing’s desire to create a homegrown player with the scale to compete on the global stage with companies like Qualcomm. Right now China’s domestic chip sector consists of mostly small design houses that lack the resources to become major global players.
In a bid to consolidate the sector, Unigroup, a company based out of the prestigious Tsinghua University, recently consolidated 2 of the biggest domestic players, Spreadtrum and RDA Microelectronics, into a single company. Intel joined that initiative in September, when it purchased 20 percent of the new company for $1.5 billion — valuing the company at a relatively large $7.5 billion. By comparison, SMIC (HKEx: 981; NYSE: SMI), usually considered China’s largest chip maker, has a current market value of about $3.5 billion.
So, what should we expect next of this growing wireless love affair between Intel and China? As I’ve said above, I don’t think this new $1.6 billion Chengdu upgrade will be the last major announcement we see from Intel. The next major announcement could be an upgrade of the Dalian plant, perhaps involving investment of another $1 billion, and we could also see Intel boost its stake in the Tsinghua company.
As that happens, we could see the Tsinghua company start designing mobile chips based on Intel’s architecture, with Intel manufacturing those chips in Chengdu and Dalian. Whether or not those chips will find a market is another matter, as Intel will need to convince smartphone and other mobile device makers to give its products a try. But there’s a fair chance it could succeed if it can make a good product, since many device makers are looking for ways to diversify beyond ARM- and Qualcomm-based products.
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