Intel Site Selection

Case to be discussed in DBEME class

Microprocessors are an integral part of any device that can be programmed to perform
certain tasks. Intel introduced them in 1971 and by 1996 had 85% share in worldwide
microprocessor sales. It invested a lot in R&D to keep ahead of its competitors and for that it
was estimated that it would need to open a new plant almost every 9 months. Since passing
on costs to consumers wasn’t an option, Intel decided to build a plant in countries where
costs would be lower than in the US. Since Intel already had a few plants in Asia and nearby,
it made sense to look towards Latin America.

Initially,the shortlist had only Chile, Mexico, and Brazil. Costa Rica was added later largely
thanks to the efforts of CINDE (Costa Rica’s investment promotion agency), whose job was
to promote non-traditional exports from the country (which meant anything other than
bananas or coffee). World bank advised CINDE to target electronics due to the high number
of technology grads in the country plus the number of firms already present there. Hence
they approached intel in 1995 when they heard they were considering opening a plant in
Latin America.

The main concerns for Intel were:

● Availability of technical personnel and engineers
● Labor unions and labor regulations
● Transport infrastructure (roads and airports only)
● Availability of reliable power supply
● Tax cuts or incentives for investments the kind Intel intended to make

Country Visits

Costa Rica
● Small population (3.5m), it was feared that such a large investment would overwhelm
the nation
● Politically stable and democratic govt
● CINDE’s lobbying and preparedness to handle all queries from Intel management
● Meetings with top Ministers, top officials of MNCs, Deanof ITCR (Costa Rica
Technical Institute), central site visit arranged by the PM himself
● Education was a concern, there were not enough mid-level technicians required to
staff the plant
● ITCR dean, and education minister proposed changing the curriculum and also
introducing a certificate course to cater to that need
● Intel did not want any special treatment but the officials assured them that such
training would make theor graduates qualified enough to work for any tech firm and
not just Intel
● English speaking level among the population was more than satisfactory
 ● Labor unions were not a major problems; the country instead had the Solidarista
associations which were voluntary and less confrontational
● Wages overall were lower than in the US
● Costa Rica;s central airport did not offer sufficient daily flights. The transport minister
assured to launch the open skies program which would benefit other industries as
well
● Electricity rates were $0.07-0.09 per kilowatt, govt offered Intel $0.05/kW
● Companies in the 8 industrial parks got 100% tax exemption for 8 years and 50%
exemption for 4 years after that. Intel negotiated and got 75% exemption after 8
years. Again, this would be extended to all firms in the industrial parks.

Brazil

● Population of 160m, and a federal govt meant Intel could pick and choose the region
it wanted to invest in as states and municipalities had some control ovr tax incentives
● Through PPB (Basic Productive Process), companies could avail 50% reduction in
corporate tax and some reduction in other taxes)
● Intel had chosen Sao Paulo but their governor wasn’t interested in any special
incentives since it didn’t need to do much to lure investment
● In Sao Jose and Campinas (close to Sao Paulo megacity), a number of tech firms
such as HP, IBM, Compaq had already established themselves.
● Availability of highly qualified wasn’t a problem. Infrastructure was adequate and
electricity was available at reasonable costs
● Security was a concern as hijacking of trucks in Sao Paulo area was on the riise;
moreover labor unions in Brazil were more powerful and intimidating than in Costa
Rica
● Base wages were low but the overall perks and other employee costs were higher
due to mandatory benefits which added 50-80% to the costs
● Govt Officials were indifferent towards Intel as a lot of companies were lining up to
invest in Brazil
● Numerous costs such as tax on financial transactions and other taxes added to the
cost

Chile

● It was far away from the US - flights from US to Santiago, Chile took 12 hours
● The labor code inhibited the development of powerful labor unions and hence wages
for unskilled workers were low. However, salaries for technically trained personnel
were almost as high as the US.
● Capital Control policy to prevent capital flight during times of economic volatility was
implemented in Chile, where companies would be restricted to disinvest for one full
year and would be required to make a deposit as well. Although this did not affect
Intel, it surely spooked them.
● Chilean govt made it clear that they could not extend any special incentives for Intel
Mexico

● Intel had its eyes set on Guadalajara, touted as Mexico’s Silicon Valley. A number of
tech firms already had set up their offices in the city such as Motorola and Lucent
● The infrastructure was more than adequate
● Electricity was available at $0.02/kW.
● Labor costs were low and the number of highly skilled technicians was more than
enough
● The state’s economic development agency (SEPROE) was eager to work with Intel,
inlike the indifference shown by Sao Paulo
● SEPROE also offered free land to Intel for the plant and also offered to sponsor
training for the employees
● However, there were no tax incentives at the federal level, and since the budget
process was extremely centralised, the states couldn’t offer any fiscal incentives if
their own
● Labor unions were another problem and about 40% of the country’s workforce was
unionised
● Although some unions, called white unions existed only to comply with the law and
were barely functional, Intel didn’t want any of its employees to be a part of union,
even if for namesake
● IBM circumvented this by contracting out majority of its workforce
● SEPROE told Intel that they could make an exception for them but Intel didn’t want
any special treatment