Intel Insider Looks to Asia

Craig Barrett stands on one of the global economy's most unstable fault lines.

The silicon chip business, long a symbol of national pride for countries with technological ambitions, has been through huge upheavals since the beginning of the last decade. And the next 10 years, the Intel chief executive says, will bring "major, major dislocation."

Asia, he adds, will be at the centre of this convulsion.

Looking back, the recent history of the chip industry has been about two things: the rise of Intel and the emergence of a new guard in Asia. At the start of the 1990s Intel was less than a 10th of its current size and trailed three Japanese rivals: NEC, Toshiba and Hitachi. Now, having risen on the personal computer microprocessor boom, the US company has become a towering presence in what may be the world's most capital-intensive and technologically advanced industry. At $24bn (£14.7bn), Intel's revenues last year equalled its four nearest competitors' combined and accounted for 17 per cent of global chip sales.

But the PC boom has run its course and a new wave of Asian competition is emerging. Samsung, the South Korean electronics group, is now the second biggest chipmaker while TSMC of Taiwan leads a new generation of specialist contract manufacturers, known as foundries.

Several things guarantee that this will be only the beginning of the upheaval, says Mr Barrett. One is what he calls "probably the biggest change in the history of mankind": the opening up of China, India and Russia to the global economy, creating massive new markets - and competitors - for Intel. Taiwan, with a population of about 25m, has already had a big impact on the chip industry: add three countries with many times that population, Mr Barrett says, and the results will be dramatic.

Another is the rest of the world's fascination with the model for doing business that was created in Silicon Valley. Others are now copying the things that helped to turn Intel into a giant. "The world has discovered entrepreneurship in the form of start-up companies and stock options, and all the things that made Silicon Valley the hub of innovation," the Intel boss says.

It is ironic, he adds, that the US and Europe seem bent on forcing companies to deduct the cost of employee stock options from their profits - something that will make options less attractive - and suggests countries in the west are "absolutely moving back to the dark ages". This, he warns, will ultimately harm competitiveness - though Intel looks increasingly isolated in its vociferous public stance over the "expensing" of stock options, which many believe will become mandatory.

A third big force at work is the wave of investment that will ensure the world's chipmaking capacity continues to escalate, despite the industry's wrenching booms and busts. Here, Taiwan provides the example, says Mr Barrett. "You had pig farmers investing in wafer fabs [fabrication plants] because there was better money in Silicon than there was in pigs," he says.

How this global game will play out is not something that the Intel chief executive is willing to predict. But he provides some pointers. For a start, chip companies such as Intel will rebalance their global operations as the new markets open up. That means shifting brain-power in the form of research and development centres overseas, not just manufacturing muscle. Already, much of Intel's core product development is carried out in Taiwan. "Essentially all PC and handheld design work is done in Taipei: so, I put my engineers where the action is," says Mr Barrett.

With electronics manufacturers in low-cost Asian centres growing fast, the swing towards the region has accelerated over the past three years - even as the chip business has suffered the worst collapse in its history. Last year, 45 per cent of Intel's sales were to the region, up from 35 per cent two years before and only 7 per cent a decade ago. And as Japan's significance has faded - sales there have fallen by more than a third in the past two years - other Asian markets have continued to grow.

It is, Mr Barrett suggests, just the beginning. But while Intel's sales have swung towards Asia, the company's operations have been slower to follow. Despite generating less than 30 per cent of its revenues in the US, Intel still has more than 80 per cent of its fixed assets there. US export restrictions that prevent it from setting up advanced facilities overseas to produce the silicon wafers from which individual chips are carved have much to do with this, Mr Barrett says. He refuses to say whether the company would shift more cutting-edge production offshore if it could. d4 The flow of jobs out of the US, however, is already under way and is something that causes the Intel boss considerable concern. More than a third of Intel's employees are now offshore. "We are going to go after the best international resources wherever they are," he says. "There are great engineers in China and they also happen to cost less than the US. China happens to be our fastest growing marketplace and having your presence there is important."

However, while he says he will go wherever the world's engineering talent is to be found, he is concerned about the impact this will have on the US. "We all have patriotic feelings about our home countries and wanting them to be successful."

In Mr Barrett's case, that has translated into a personal involvement in promoting better education in the US, along with heavy lobbying in Washington to try to keep more of the foreign nationals coming out of US universities in the country. "The US should staple a green card to every engineering diploma," he says. "That is the single most effective way to ensure we have the talent pool we need."

The failure to build a stronger base of engineers is just part of a wider failure that could seriously damage western economies as they try to come to terms with the challenge from Asia, Mr Barrett adds. "The established economies ought to worry like hell about their education, infrastructure and R&D. Why in the world is all of Europe and the US lagging Korea in terms of broadband infrastructure?"

As Intel reassesses its own global position, meanwhile, Mr Barrett and other Intel executives are adamant about one thing: the company will make no concessions over a business strategy that remains one of the most ambitious, high-risk propositions in global manufacturing.

Despite the chip industry's slump, Intel has continued to pour money into new plants. Part of that reflects the company's belief that staying ahead in the increasingly expensive race to adopt the most up-to-date chipmaking technology will continue to be the key to success. "It takes a $2bn fab to do what we do and our products change every six months, so there is a substantial barrier to entry," says Mr Barrett.

Intel's $19bn of capital spending over the past three years also reflects total faith in an eventual cyclical rebound - a belief that has been severely tested as the industry's usual cycle has stretched out. "We put billions of dollars of bets on the table on the basis that the industry will continue to grow: that's all we bet on."

With Asian investors pouring their own money into giant new chip plants, this is a strategy guaranteed to test the nerves of the most resolute executive.

Mr Barrett, who expects to retire in 18 months, falls back on a long career in the chip business to justify his decision not to change course. Though little more than 30 years old, the industry is already mid-way through its 10th cycle of expansion and contraction. And it has seen several waves of new competition before. "That's something I've thought about for the last 30 years," he says. "It was US competitors, Japanese competitors, Taiwanese competitors, European competitors: now it's Chinese competitors."