Intel plans chip packaging center in China
By Michael Kanellos
Staff Writer, CNET News.com
http://news.com.com/2100-1006-5068389.html

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 Chips originally
made in Europe or North America will be tested, inserted into packages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.