Intel to build $2.5 billion chip plant in China

Intel hopes the Dalian plant, which will be used to initially produce chipsets, and not the company's flagship microprocessors, will help drive down manufacturing costs.

"One of the things we want to learn in China is how to do very low-cost manufacturing," Otellini said during a press conference in Beijing, which was carried live over the Internet by Chinese media.

While China has lower labor costs than the U.S. or other developed countries, this is only a fraction of the cost involved in building a chip plant. Most of the costs involved with building such a plant come with the expensive machinery and equipment required to manufacture chips.

These capital expenditure costs are generally the same around the world, Otellini said, indicating that financial incentives and support from the Chinese government played a major role in the company's decision.

Intel's goal is to take advantage of these incentives and then run the plant at maximum efficiency to get the lowest manufacturing costs, said company spokesman Chuck Mulloy.

Construction on the new Dalian plant, called Fab 68, will begin later this year and is billed as the largest single investment by a foreign company in northeastern China, an area hit hard by the decline of the country's state-owned heavy industries over the last decade. The impact of this decline has been less severe in Dalian, which is home to a thriving software and outsourcing industry.

The widely anticipated announcement of the Dalian plant is a coup for the Chinese government, which spent years pushing Intel's top executives to set up a manufacturing plant in China as part of wider plans to make the country a semiconductor manufacturing center.

Despite the fanfare, Intel's planned Dalian plant will not be among the company's most advanced when it enters production.

Intel now has an export license from the U.S. government to use 90-nanometer process technology at the plant in 2009. As process technology advances, Intel will have a strong case to obtain a license to use 65-nanometer process technology at the Dalian plant when it enters production in 2010.

The U.S. government carefully regulates the transfer of semiconductor technology to China and other countries because of concerns the technology can be used for military purposes.

The 90-nanometer technology is currently one generation behind the most advanced 65-nanometer technology used by Intel. Under pressure from Advanced Micro Devices Inc., which is planning for a shift to a 65-nanometer process later this year, Intel plans to step up the rate at which new process technologies are brought online, hoping to build an insurmountable technology lead over its rival.

Process technologies are described by the size of the average feature -- measured in nanometers, or billionths of a meter -- that can be created and help determine several key attributes of a chip.

Advances in process technology generally allow chip makers to manufacture semiconductors that run faster and consume less power. They can also allow chip makers to shrink the size of a chip, reducing unit production costs and improving profit margins. When chip makers opt to keep the size of a chip the same, the more advanced process technology can free up valuable real estate on the chip for additional capabilities, such as a larger memory cache to improve performance.

Later this year, Intel will begin production of chips using a 45-nanometer process and plans to make chips using a 32-nanometer process in 2009, with a 23-nanometer process planned for 2011. The aim is to introduce a more advanced process technology every other year from now on, according to Intel executives familiar with the company's process roadmap.

That means the planned Dalian plant will likely be two to three generations behind Intel's most advanced plants when it enters commercial production.

Even so, older production technologies have a role to play. While most of Intel's factories use cutting-edge process technology, a couple of them still use older technologies, which are measured in microns, or millionths of a meter, instead of nanometers.

For example, one Intel plant in Leixlip, Ireland, continues to produce a mix of logic chips and flash memory using older 0.13-micron, 0.18-micron, 0.25-micron and 0.35-micron technologies. And the company's factory in Jerusalem produces logic and MEMS (micro-electrical mechanical systems) chips using 0.35-micron, 0.5-micron, 0.7-micron and 1-micron processes.

The 1-micron process has been used by Intel since 1989, when it was first used to produce the 33MHz 386 DX processor. Today, Intel uses the 1-micron process to manufacture chips like the 25MHz 186 embedded processor, an enhanced version of a chip that was first introduced in 1982 and is still used in controller applications.