Intel CEO Quietly Warns Of China’s ‘Greater Bay Area’ Project
Intel INTC CEO Bob Swan didn’t single out China’s Greater Bay Area project, a development zone that seeks to replace Silicon Valley as semiconductor and microchip manufacturing and design hot spot, but he should have. China is the future competition. Beijing policy makers intend to become the leader in semiconductor chip making within a decade. At the very least, China is looking to decouple from U.S. chip makers and rely on indigenous developers instead.
That means that without a national strategy to protect America’s fairly powerful semiconductor industry, China is set to eat our lunch. Intel’s CEO Swan knows it, though he is just playing nice. Intel has a huge factory in Dalian and wants to sell to China. Calling out Beijing would be bad form.
But on November 23, Swan wrote a letter to President-Elect Joe Biden calling for that very thing: a national strategy to protect the semiconductor industry. There is only place to protect it from — China’s Greater Bay Area. They play by different rules.
According to the Semiconductor Industry Association, the U.S. accounts for just 12% of global semiconductor production capacity, with more than 80% of that capacity in Asia. Rising costs and foreign government subsidies to national champions (as in China) are a significant disadvantage for U.S. semiconductor companies that still make substantial capital investments domestically.
If one wants to be skeptical, Swan may be warning that the domestic multinationals are just going to make the stuff in China unless they get thrown a very meaty bone.
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Here is what Swan wrote:
“A national manufacturing strategy, including investment by the U.S. government in the domestic semiconductor industry, is critical to ensure American companies compete on a level playing field and lead the next generation of innovative technology,” he said. “Upgrades to our (digital) infrastructure must not only handle the technology of today but spur domestic development of the technologies of tomorrow.”
China’s Greater Bay Area is a relatively new phenomenon. It coincided with the launch of the STAR Board in Shenzhen, a Nasdaq NDAQ -like exchange that lists new tech companies, some of them in the chip making space.
China has infinite amounts of cash. Government banks quite literally throw money at companies, hoping they find a “unicorn”. The money they lose poses less a risk to the big state lenders than it does the U.S. venture capitalists who are doing the same thing and risk losing their shirt.
In theory, the Greater Bay Area will eventually attract Chinese students who studied in elite U.S. institutions like MIT or CalTech, or have spent a couple years at Silicon Valley incubators, VC firms, and cut their teeth inside companies like Intel and Apple AAPL . Ideally, these Chinese nationals will be ready to come home to raise China to a whole other level. And why not? It’s their home. It’s their culture. Their market is booming, whereas a decade ago it was non-existent.
“It is extremely important to protect semiconductors from China,” says Shalabh Kumar, Chairman of Chicago-based manufacturer of printed circuit boards and electronic components, AVG Group. “These are the brains of all electronic products today.”
China has moved up the food chain in tech relatively quickly. They helped wipe out the printed circuit board industry in the U.S. in the 1980s, which had hundreds of manufacturers who all went to Asia.
Integrated circuit boards is one of the most important export items in the world, along with oil, automobiles, and pharmaceuticals.
China took a chunk of that business from the U.S., as well as Japan, by state’s subsidizing production costs to the extent that a $10 printed circuit board that cost $3 to make in Asia, China could do for even less. Integrated circuit board makers in the U.S. folded one by one, billions of dollars went into Asia and Chinese manufacturing, and for a capital equipment intensive industry, the equipment was all sold to China for a song.
The Intel chief’s note to Biden was laden with Democratic Party talking points related to identity politics. But what is more relevant here, beyond whether the staff at Apple is sufficiently representative of every walk of life, is Biden’s Build Back Better campaign promise. Like Trump, Biden wants to focus on U.S. manufacturing, including high technology products.
“To rebuild semiconductor manufacturing we need a bold industrial strategy along the lines of the CHIPS for America Act that will provide tax incentives for U.S. chip companies to invest here,” says Jeff Ferry, chief economist for the Coalition for a Prosperous America in Washington. “We need to back that up with genuine incentives—carrots and sticks—to get fabless chip companies to give business to the U.S. fabs.”
A fab is short for ‘fabrication plant’, or foundry.
The semiconductor industry is at a crossroads: chips for personal computers are becoming commoditized, while chips with artificial intelligence and machine learning capabilities are the next step of development.
Moreover, an entire industry is being build as the world gets more serious about lowering carbon emissions to protect the environment. The growth of battery powered electric cars means new automobiles will be equipped with even more computer components than they already are.
Chips inside automobiles will lead to new market segments and product requirements. China is the world’s leading automotive market. It sells more EVs than BMW and Volkswagen. See where this is going?
Chip making is like the next space race.
Intel’s rocket engines aren’t what they used to be. A couple of weeks ago, Apple announced that all of its new laptops will run on Apple-designed processors made in Taiwan, instead of the Intel Core chips they have been using for years. Microsoft MSFT is supposedly considering replacing the Intel processors in its Surface tablets with Taiwan-made chips, Ferry wrote in a November 30 op-ed published by Industry Week magazine.
Moreover, Intel’s position as a data center market leader is under threat from Nvidia NVDA . Intel’s efforts to move to smaller, denser processors are behind schedule, Ferry wrote.
But Intel should be very important to Washington. They are the only U.S.-based manufacturer of micro processors. If it decides to outsource those chips to another manufacturer, it will surely be in Asia, maybe at their own factory in Dalian.
“I’m glad to hear Swan is talking about a national strategy for semiconductors,” says Kumar. “You have had unrestricted warfare waged on U.S. manufacturing aided by companies like Intel, and Fortune 500 companies. If they are realizing it now, and want a national strategy, I’m all for it. This industry has to survive. Pretty soon China will lead,” he says. “They will be the ones making the next best microprocessor.”