Intel's Eastward Expansion

Nothing is official yet, but reports are circulating today that the government of China has given Intel (Nasdaq: INTC  ) the go-ahead to build a $2.5 billion, 90-nanometer chip-manufacturing facility in the city of Dalian.

The bigger question is whether the U.S. government will approve the plan. The U.S. Department of Commerce will have legitimate concerns over whether the equipment used to make the chips, as well as the chips themselves, can be used for military purposes. If the answer's yes, the department could put the kibosh on the plant.

A secondary threat comes from pressure from politicians who have begun to express alarm over China's growing economic clout. Recall this past year that Intel slashed its workforce by 10%. Coming on the heels of such an announcement, plans to build such a large facility could expose the company to arguments that it is "shipping jobs over to China."

Both concerns, I believe, will be addressed in time. As to the military threat, it is important to understand that the 90-nanometer technology the plant would use is already two generations behind today's start-of-the-art chip technology (45nm). The government usually approves older technologies to be shipped abroad, and I expect that to happen in this case.

As for the protectionist sentiments, assessing the political climate is always more difficult, but the fact that the majority of Intel's plants will remain in the United States -- where its workers will be manufacturing more advanced chips -- should assuage most critics. Furthermore, the other reality is that if Intel doesn't produce the chips, either STMicroelectronics (NYSE: STM  ) or Taiwan Semiconductor (NYSE: TSM  ) -- both of whom already have facilities in China -- would seek to fill the gap.

The deal is sure to have military alarmists and protectionists seeing red, but it'll most likely be approved all the same. If so, it'll be a big positive for Intel investors, because those chips -- installed in the millions of cellphones and computers Chinese consumers will be buying in the years ahead -- should help keep Intel rolling in the dough.

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Fool contributor Jack Uldrich owns stock in Intel. The Fool has a strict disclosure policy.


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