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Sweet and Sour Outlook for U.S. Chip Industry
Subject Immigration
Topic Capital Markets
Key Words Slump, revenue, sales, market, World Trade Organization, tariffs, production, financing, technology, investments
News Story

The U.S. chipmaker is experiencing its worst slump. Revenue is falling by 20 to 40 percent in Europe, Asia, Latin America, and at home. The one bright spot is China, where sales are rising by 18 percent this year.

By 2010, China will be the No. 1 computer chip market. Even by 2005, the number of PC users will have grown from 19 million to 70 million, and the number of cell-phone users from 99 million to 246 million. Membership of the World Trade Organization will necessitate lower tariffs on chips and other goods, which will help sales. High-tech production has been made a strategic priority by the Chinese - one of the so-called "Four Pillars" driving its economy. Computer engineers abound, as do factory workers; what is missing is financing and state-of-the-art technology.

Therefore, chip firms are increasing their investments in China. Intel will pour another $300 million into its assembly-and-test plant in Shanghai to produce Pentium 4 chips. Applied Materials, the top chip equipment maker, will ship $200 million of equipment to Grace Semiconductor Manufacturing in Shanghai. Motorola has just completed a plant and intends to expand an existing plant in Tianjin for $1.9 billion.

The main concerns are that China will not open its markets as much as expected and that intellectual-property laws will continue to be weakly enforced.

(Updated December 1, 2001)

Questions
1. a) When firms are considering whether to invest money in a capital project, what factors do they consider?
b) How are these factors combined in a calculation?
2. In the case of investment in China, explain how the following considerations figure in the investment
decision and calculation:
a) the increasing number of Chinese users of PCs and cell-phones
b) the abundance of computer engineers
c) the long term growth of consumer demand
d) lower tariffs
e) uncertainty regarding the openness of Chinese markets in the future
f) the weak enforcement of intellectual-property laws
Source Edward Iwata, "China's tech boom proves boon to U.S. chipmakers," USA Today, October 31, 2001.

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