Site Selection of Intel Essay Example

silicon wafer. Afterward, the wafers are cut into individual chips, each containing one microprocessor. These chips undergo further testing, packaging, and then get sent to customers for installation in various automated devices.

Copyright 1999 Thunderbird, The American Graduate School of International Management. All rights reserved.

This case study was prepared by Professor Roy Nelson based on interviews and field research conducted in Fall 1998 across Costa Rica, Brazil, Chile, and Mexico. It is intended solely for classroom discussion purposes and does not indicate effective or ineffective management.

The microprocessors (referred to as chips) use computer software to perform specific functions with stored data. Microprocessors are now found in not only computers but also inanimate objects capable of programming or "thinking" to perform various tasks. These objects include traffic lights, cars, cellular telephones, and airplanes.The semiconductor industry has experienced significant growth, exceeding $120 billion in sales in 1995 and projecting an annual growth rate of over 20%. Intel, the leading company in microprocessors since 1971, maintained a global sales dominance of over 85% by 1996. Despite facing competition, Intel heavily invested in Research and Development (R&D) to ensure innovation and chip design leadership. By consistently introducing faster and more powerful microprocessors, they stayed ahead of the game. Former CEO Andy Grove emphasized the need for constant vigilance, stating "only the paranoid survive" in this high-tech industry. This sentiment was evident when comparing their first microprocessor with just 2,300 transistors to their upcoming assembly and testing of the Pentium II with over 7.5 million transistors at a proposed Latin American plant—a clear demonstration of rapid computing power progress over time. Gordon Moore, one of Intel's founders, highlighted the fast-paced competition

and innovation through "Moore's Law," which states that microprocessor power doubles every 18 months due to market competition. Since its inception, Intel has remained at the forefront of this trend. However, keeping up with advancements and industry growth necessitated frequent costly openings of new plants for Intel.Competitors could replicate the product designs of Intel and offer similar products at lower prices. Intel, unable to pass on these costs to consumers through higher prices, made the decision to construct plants in countries with lower overall costs, particularly labor costs. The first overseas plant was established in Malaysia in 1972, followed by plants in Israel, the Philippines, Ireland, and mainland China. By 1996, management recognized the need for diversifying plant locations as a risk mitigation strategy and determined that Latin America should be the next location for a plant. This decision was influenced by challenges faced by the Malaysian plant such as a shortage of qualified labor resulting in high turnover rates, costly training programs, and increasing salaries. While Intel already had established plants in Asia, they did not have any presence in Latin America. Investing in Latin America appeared appealing due to its low labor costs and logistical advantages for exporting products. Grove later wrote a book on this topic. Intel planned to establish an assembly and testing facility specifically within Latin America which would require expertise, clean rooms, and substantial expenses. Initially employing 2,000 technicians and engineers with plans to eventually increase this number to 3,500; expatriate personnel would be necessary during the startup phase. The market size of the selected country held no significance as Intel intended to export all assembled and tested products

directly back to the United States.
The site selection process involved desk research, gathering information on various Latin American countries. This included their political and economic stability, labor unions and regulations, infrastructure, and availability of skilled workforce. Initially, Venezuela was ruled out due to financial instability while Mexico, Chile, and Brazil were identified as potential candidates. Later on, Costa Rica was added as a potential candidate.

In late 1995, officials from Calico¶n Costarring De Inactivates Para el Decontrols (CINDER), Costa Rica's Investment Promotion Agency presented Silicon Valley executives with information about Costa Rica's potential for high technology investment. Based on this information, Intel executives in California considered the possibility of investing in Costa Rica as a technology center.

CINDER was established in 1982 with financial support from the United States Agency for International Development (SAID). It functioned as a private nonprofit export promotion center and had a board of directors consisting mainly of businessmen from the Costa Rican private sector. CINDER aimed at driving nontraditional exports and fostering economic development in the country. Its creation aligned with the Reagan administration's efforts to strengthen the private sector in Central America and the Caribbean to prevent political instability.During the sass, the Administration's Caribbean Basin Initiative granted special access to the U.S. market for manufactured goods from these regions. Nonetheless, SAID decreased its funding to Costa Rica and closed its offices there in 1996. However, CINDER managed to continue its work with new funding from the World Bank and its own trust fund, albeit with a different focus. Acting upon advice from an Irish Development Authority (IDA) consultant and the World Bank, CINDER aimed at attracting investment from specific firms in

particular industries. This recommendation was also endorsed by professors at INCASE, which is Costa Rica's leading business school established by Harvard University under the guidance of Harvard professor Michael Porter. INCASE proposed that CINDER should implement Porter's concept of promoting clusters of firms within specific industries as a means of achieving national economic development. The World Bank conducted a study supporting this approach, specifically targeting the electronics industry due to Costa Rica's high level of technical education and existing presence of electronics companies.CINDER, a non-government organization, received support from high-ranking government officials, including President Jose Maria Figures of Costa Rica. Figures aimed to transform Costa Rica into a hub for high-tech investment to diversify the economy beyond low-value-added industries like bananas, coffee, and textiles. The country's increasing GDP per capita, education levels, living standards, and resolution of political unrest in neighboring countries led to investments shifting away from Costa Rica's textile sector. This change prompted the need for Costa Rica to adjust its strategy. According to Figures' explanation, the government had already devised a plan for this transition. Interviews with CINDER officials in San Jose during October-November 1998 provided additional insights on these developments as well as Thomas T. Vogel's article titled "Costa Rica's Sales Pitch Lures High-Tech Giants Like Intel and Microsoft" published in the Wall Street Journal on April 2nd, 1998.The World Bank's publication from 1996 titled "Costa Rica: A Strategy for Foreign Investment in Costa Rica's Electronics Industry" was referenced, as well as the interview with Roding Capita, former Vice President of CINDER and current General Manager for GE-Costa Rica in October 1998. The influence of The World Bank's Foreign Investment Advisory

Service study on CINDER's decisions predates its official release in 1996. Jose Maria Figueres, son of Jose (Epee) Figueres Ferrer, who led a civil war in 1948 when the Costa Rican legislature invalidated the results of a presidential election won by a legitimate candidate. Epee Figueres successfully wrote a new constitution after assuming interim presidency following the war and completely abolished Costa Rica's military, an unprecedented accomplishment in Latin America and beyond. He later became president of Costa Rica from 1953-57. His goal was to incorporate Costa Rica into the global economy intelligently by developing a national strategy that did not rely on cheap labor or resource exploitation but allowed for competition based on productivity, efficiency, and technology. However, some textile companies had left the country and there were criticisms about the government's lack of effort to sustain manufacturing industries.However, there had been a change in their approach to attracting foreign investment. The new objective was to attract industries with higher value-added that would improve the living standards of Costa Ricans. In 1995, CINDER became interested in approaching Intel after learning about the company's plans to establish a plant in Latin America. The strong support from the Figures administration played a role in their decision. To convince Intel's management, CINDER officials visited the company's Santa Clara headquarters and proposed considering Costa Rica. As part of their country visits, the site selection team decided to include Costa Rica before going to Brazil. These visits were crucial for assessing if a country would be a suitable investment location for a plant, taking into account factors such as transportation infrastructure, security risks, and silicon wafer value. Countries with

inadequate transportation facilities or posing security risks were eliminated as potential sites.

Intel had specific questions that could not be found in written reports.These questions included whether Intel executives could effectively negotiate with government officials, establish good working relationships, and be content living in each country.Ted was responsible for initially contacting government officials in the countries planned for visit by the site selection team.He wrote detailed letters explaining what the team hoped to learn during their visit.Ted emphasized several key concerns in his discussions. These included the availability of technical personnel and engineers to staff the proposed plant, labor unions and regulations, transportation infrastructure and costs (particularly roads and airports for product exportation by air), the reliability of electrical power supply, and the government's corporate taxation rates. Ted was confident in asking about incentives as he knew that these requests would be well received by government officials.

In the past, governments in Latin America followed protectionist and economically nationalistic ideas. However, these ideas became outdated by the late 1900s. The investment proposal from Intel was appealing to any government in Latin America because it promised to create numerous jobs for skilled workers and engineers while exclusively exporting its products, benefiting the country's balance of payments. Additionally, there was potential for Intel to use locally produced components, contributing to local economic development.

Ted understood that countries would compete against each other to attract a project like Intel's proposed plant. The site selection team initially visited Costa Rica before exploring options in Brazil, Chile, and Mexico. Upon reviewing his visits' findings, Ted initially considered Costa Rica an unlikely choice for investment due to its small size and economy consisting

of only 3 million people.The Intel executives expressed concerns about the potential impact on a small nation, likening it to "putting a whale in a fish bowl." However, despite these worries, Cinder officials persisted and convinced the site selection team to further consider Costa Rica. One advantage that attracted foreign investors was Costa Rica's reputation for political stability and democratic governance. In contrast to other countries in the region marked by political turmoil and war, Costa Rica had abolished its military in 1948 and maintained stability, peace, and democracy ever since. President Oscar Arias even received the Nobel Peace Prize for his efforts in brokering peace among Central American nations during his term from 1986 to 1990. These factors made Costa Rica renowned as a hub of peace and stability amidst regional chaos.

Since 1948, the government has prioritized social welfare by focusing on improving education and healthcare for its citizens. Additionally, they have designated over 25% of their national territory as national parks to protect their diverse wildlife and attract visitors. During the mid-sass period, Intel highly valued CINDER's role as a separate entity managed by private individuals. Known for its efficiency and flexibility, CINDER could offer higher salaries compared to government positions. This allowed them to attract skilled employees who were dedicated to pursuing Intel's interests.During the site visit to Costa Rica, the site selection team was impressed with CINDER's prompt response to their inquiries and thorough research of necessary information. This positive impression influenced the overwhelmed team, as they needed quick information for decision-making and expedited plant construction. In an interview with Bob Perlman, Intel's Vice President for Tax, Customs, and Licensing in

August 1998, he mentioned that CINDER recognized the importance of providing prompt responses based on advice from Michael Porter and the World Bank's Foreign Investment Advisory Service. As a result, Unripe Golf, CINDER's General Director assigned three specialists solely focused on addressing Intel's upcoming visit. These officials proactively researched potential questions and anticipated Intel's needs instead of waiting for the site selection team. They were well-prepared with facts and figures when asked and also arranged visits for Intel executives to meet with key government officials. By the time Ted and his colleagues arrived in Costa Rica, CINDER had already planned an extensive agenda.The Intel team had in-depth discussions with various authorities, including the head of ICE, the Minister of Transport and Public Works, the Minister of Education, the Minister of Science and Technology, and the Dean of ITCH in Costa Rica. There are already two accounting and consulting firms as well as high-technology companies like Motorola, DISC Communications, and Baxter Healthcare established in Costa Rica. Despite having no connection to microprocessors, Intel found it beneficial to consult with Baxter during their site selection process due to their global operations and adherence to high production standards which included clean rooms. During their visit to Costa Rica, the team was impressed by President Figures' personal interest in their company's involvement in negotiations. To their surprise, Figures offered them a helicopter tour of Costa Rica's central valley the following day. Although there was willingness from the government to work with Intel, concerns about a shortage of mid-level technicians for the assembly and testing plant remained within the site selection team. While there were enough engineers available for plant

operations, finding trained individuals for thousands of mid-level technician positions would be difficult in Costa Rica.After discussing the matter with Figures, the Minister of Education, and the Dean of ITCH, it became clear that Costa Rica's small size had its advantages. These officials confirmed that they could address Intel's needs by modifying the ITCH curriculum and establishing a special certification program. Adapting the education system to meet Intel's requirements posed potential challenges as Intel preferred not to receive any preferential treatment from Costa Rica. They were concerned that undisclosed agreements or incentives offered by the government could cause problems if future support was withdrawn under a new president. However, Intel explicitly requested that similar offers not be extended by the government. Nevertheless, within these boundaries, modifying the ITCH curriculum was considered acceptable by the Costa Rican government. Aligning the curriculum with Intel's standards would result in better-trained graduates who are prepared for employment at any high-tech company. Ted and his colleagues evaluated Costa Rica's technical readiness and noticed a higher level of English proficiency compared to other Latin American nations. Even taxi drivers in Costa Rica displayed good command of English. The general population in Costa Rica was well-educated, evident from their requirement of English proficiency in public schools. This would prove advantageous when expatriates arrived to train local workers, particularly since technical manuals were predominantly written in English.
Intel had reservations about labor unions and preferred to avoid them at all of its plants globally, even if they were weak or only symbolic unions. This concern stemmed from the intricate and technical nature of Intel's production processes, which could be disrupted by work stoppages associated

with unions. However, this concern did not apply to Costa Rica as only approximately 7% of private-sector workers were unionized there. Since the late sass civil war, labor unions in Costa Rica had limited influence and the largest confederation was prohibited due to its affiliation with the Communist Party.

To address these issues, the PLAN government introduced Solidarity, a movement supported by the government that established voluntary associations as an alternative to confrontational industry-wide unions. Workers who joined these associations received various benefits such as participation in savings plans (with contributions from both employers and employees), low-interest loans, and profit-sharing; although the profit-sharing was directed towards the association rather than the company. Unlike labor unions, Solidarity associations allowed both management and workers to participate but did not possess any negotiating power. The intention behind this system was to encourage workplace "labor peace". Around 19% of multinational companies operating in Costa Rica, including Firestone, McDonald's, and Colgate-Palmolive, had solidarity associations. Additionally, several factors hindered combative labor union growth in Costa Rica.The government implemented a national collective bargaining system through wage boards, eliminating the need for unions to determine wages. Additionally, a law mandated that strikes could only occur if 60% of affected members signed a petition and a Judge confirmed its validity. Furthermore, employers had the power to dismiss workers involved in this decision-making process. Consequently, labor unions were not considered a major concern for Intel in Costa Rica. This was also true for other countries on Intel's shortlist, except Chile, despite lower wages compared to the United States. Regarding transportation, although there may be difficulties with road conditions leading to potential destinations, various options are available.