This past weekend Craig Barrett was in China for the ceremonial groundbreaking on the brand spanking new site for Intel’s latest US$2.5B factory or “fab”. Scheduled to start production in 2010, the fab is the largest investment by Intel in China to date and represents Intel’s “continued commitment to China."

Although it’s a bit unclear what the actual products coming out of fab# 68 (a lucky number in Chinese culture) will be when it opens in 3 years, according to Intel officials, it will most likely be chipsets and graphic chips, both of which will be made with either a 65- or a 90-nanometer process, which are actually considered to be about one to two generations behind Intel's most advanced processes, which are at 45 nanometers right now.

What won’t be made in China are the actually CPUs themselves (e.g. Core2Duo, Xeon, Itanium). This really isn’t surprising in the current IP environment in China. The rationale that Intel gives is that the US restrictions on high-tech exports would’ve prohibited it, but the real issue is the problem behind the restrictions: less than stellar IP protection and piracy in China.

For those of you who have never been to China, it can be a little bit surprising at first how rampant piracy really is. Within 100 meters of my office, there are at least 10 people selling pirated DVDs right now. These all sell from about $1 a piece and vary in quality from either a guy holding handheld camera in the theatre for brand new US releases, to full quality DVDs for slightly older (usually 1 month) films. Often these vendors also sell software and this is where it gets truly mindboggling: you can pick up a perfectly working Adobe CS3 DVD packed with about $2400 worth of software for about $3; a discount of nearly 99.9%.

While China has made great strides in IP protection and stamping out piracy in the past few years, it still has a way to go. According to a study earlier this year by IDC for the Business Software Alliance, 82% of software used in China was pirated in 2006, down from 86% in 2005 and 92% in 2003. While this is still quite high compared to the global average of 35%, that reduction of 10% avoided $864M in piracy losses for legitimate software houses. With that in mind, it’s no surprise that Intel is hesitant.

Now, what will likely work in Intel’s favour is that the market for semiconductors is much smaller and easier to control than say, DVD or consumer software sales. As well, copying a DVD or a CD is a bit less complicated than laying out silicon 2,500 smaller than the width of a human hair; however, Intel isn’t taking chances at this point though and will continue “upgrading its facility as U.S. regulations change.”  

Further, more Chinese businesses are starting to take software licensing seriously and software companies are starting to adjust prices to the local market (see MS’s shift on Vista pricing: http://www.pcworld.com/article/id,135463-c,vistalonghorn/article.html). In addition, the government recognises the need for better IP protection and is making a huge effort to get things up to international standards (http://english.ipr.gov.cn/en/index.shtml).