Please ensure Javascript is enabled for purposes of website accessibility

Intel’s Data Center Business Faces a New Trade War Threat

By Leo Sun – Jul 8, 2020 at 10:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Pentagon doesn’t want Intel to sell chips to China’s top server company.

Intel (INTC -0.30%) was recently caught in the trade war crossfire as the U.S. Department of Defense added Chinese tech giant Inspur to its "entity list" of companies with close ties to the Chinese government.

Inspur controlled nearly 37.6% of China's server market in the first quarter of 2020, according to Gartner, and spent 17.9 billion yuan ($2.5 billion) on Intel's components last year. That equals about 12.5% of Intel's revenue from China (including Hong Kong), and 3.5% of its total revenue last year.

Intel suspended its shipments to Inspur, and it seemed like another big setback for the chipmaker -- which is still struggling with an ongoing chip shortage, intense competition from AMD (AMD 1.31%), and the loss of Apple (AAPL 0.66%) as a top customer.

Two IT professionals walk through a data center.

Image source: Getty Images.

However, Intel resumed its shipments to Inspur just a few days later, claiming it resolved the issues with adjustments to its supply chain. Intel didn't disclose the exact nature of those changes, but a spokesperson told the South China Morning Post the adjustments were made in "compliance with U.S. laws."

It's unclear if the DOD will strike back against Intel's decision, but it highlights a major weakness in the chipmaker's business: its exposure to China, a soft spot as the trade war evolves into a full-blown tech war.

This isn't Intel's first rodeo in China

Intel is the world's largest manufacturer of x86 CPUs for PCs and servers. It controlled over 80% of the PC market and more than 95% of the server market at the end of 2019, according to Mercury Research. Its only meaningful competitor in both markets is AMD.

A Chinese flag superimposed on a circuit board.

Image source: Getty Images.

Intel dominates the server market because its Xeon CPUs are widely regarded as the "best in breed" chips for data centers. None of China's homegrown server chips -- many of which were built on ARM, MIPS, and RISC-V architectures -- come close to matching Intel's performance yet.

That's why Inspur still sources all of its chips from Intel, instead of AMD or China's domestic chipmakers. The Chinese government's supercomputers also previously ran on Intel's Xeon processors.

But back in 2015, the U.S. government blocked Intel from selling any new Xeon chips for Chinese supercomputers, citing concerns about their role in nuclear research and simulations. Intel complied with the order and was seemingly compensated with new contracts for government supercomputers in the U.S.

However, that divorce forced the Chinese government to develop supercomputers powered by top-tier homegrown chips. It also pushed China to aggressively reduce its dependence on American technologies, which paved the way for the current clashes over American chips in Chinese hardware.

Challenges looming on the horizon

Intel generated 28% of its revenue from China last year, and nearly 10% of its net properties, plants, and equipment -- including one foundry and two assembly and test sites -- are located in China.

The Chinese government clearly wants the country to reduce its dependence on Intel and other American chipmakers. It briefly secured the ability to manufacture "clones" of AMD's Epyc server chips via several joint ventures in 2018, but those JVs were all added to the dreaded entity list last year.

Meanwhile, Chinese chipmakers, many of them backed by the government, continue to develop more advanced chips. Zhaoxin, a joint venture between VIA Technologies and the Shanghai Municipal Government, launched chips that offered performance comparable to that of Intel's older Core i5 CPUs last year. Alibaba (BABA -1.32%) also launched powerful RISC-V chips, which targeted the 5G, AI, and Internet of Things markets, last year. These developments all indicate Intel's days in China could be numbered. 

The key takeaways

Intel's quick resumption of its shipments to Inspur indicates it can pivot the production of its chips to its facilities in China and other countries to bypass the DOD's demands. However, the DOD could still pass additional restrictions against Intel, and the chipmaker could lose significant revenue from its single largest market.


Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. and Apple. The Motley Fool recommends Gartner and Intel. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
$26.89 (-0.30%) $0.08
Apple Inc. Stock Quote
Apple Inc.
$151.76 (0.66%) $0.99
Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
$67.17 (1.31%) $0.87
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
$77.87 (-1.32%) $-1.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.