In a declining PC market, Intel (NASDAQ:INTC) needs to increase its tablet processor market share, and it's looking at China to make it happen. That's why the company hosted its Developer Forum in Shenzhen, China, this year, and is spending $100 million on an innovation fund in the country.
But despite Intel's efforts to do business with Chinese tablet vendors, it is facing fierce competition from both small chipmakers in China that use ARM Holdings' (NASDAQ:ARMH)chip designs.
Why court Chinese vendors?
The company is trying to strategically position itself in the low-end tablet market as the PC market declines and cheap tablets continue to grow.
Worldwide PC shipments, the bread and butter of Intel's chip businesses for decades, declined by 4.4% in the first quarter, year over year. While other quarters have seen double-digit declines, the PC market is still expected to shrink as tablets grow. IHS estimates that tablet processors shipments will increase by 23% from last year, hitting about 300 million shipments worldwide this year. And by 2016, that number is expected to be more than 400 million units.
IHS estimates that entry-level tablets will make up about one-third of tablet shipments this year, which Intel wants to further tap.
To do that, it'll have to increase its relationships with Chinese vendors and expand the number of models Intel chips run. According to PCWorld, Intel had 13 original tablet chip designs in 30 models in 2013, and by the end of this year, it aims to have 20 designs in 80 models.
That's why Intel announced earlier this month that it would establish a Smart Innovation Center in Shenzhen to "to accelerate the delivery of Intel technology-based devices to the China market and beyond." The company also announced it would spend $100 million developing everything from tablets to wearables with Chinese vendors.
But getting those vendors on board with Intel chips won't be easy.
Intel faces a handful of hurdles in expanding its processors in cheaper Chinese tablets. The first is pricing. Intel's chips can be almost half the cost of some of the cheapest tablets. That's obviously not a sustainable strategy, so the company will either need to lower its prices to better compete with Chinese chipmakers, or try to expand more into the mid-range market.
The second drawback is that the vast majority of tablets sold under $200 are run on chips designs licensed by ARM Holdings. Intel not only has to find a way to make its chips cheaper, but also has to convince Chinese vendors that they should move away from the ARM designs they use now. That won't be an easy sell considering that ARM's designs are found in about 95% of the world's smartphones and tablets .
While Intel has a significant amount of clout in the PC industry, its influence in the mobile market is much smaller. The company is essentially playing a game of catch-up to ARM's designs and Qualcomm chips.
I think Intel's latest efforts to expand its relationship with Chinese vendors will pay off for its tablet business, but I don't think it's going to be a game changer for the company. ARM designs already dominate the market and I can't see Intel convincing enough companies to switch or dropping prices low enough to compete with the extremely low prices some tablet chipmakers have. The end result will be that Intel will have to find some other major source of revenue to replace what it makes form PC processors. That may be in wearables or the Internet of Things, but it's not going to come solely from tablet processors.
Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Intel. It also owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.