Intel President and CEO Paul Otellini Monday confirmed the company plans to build a $2.5 billion chip plant in China. The plant, to be built in Dalian, on China's northeastern coast, will enter production during the first half of 2010.

Intel hopes the Dalian plant, which will be used to initially produce chipsets, and not the company's flagship microprocessors, will help drive down manufacturing costs.

"One of the things we want to learn in China is how to do very low-cost manufacturing," Otellini said during a press conference in Beijing, which was carried live over the Internet by Chinese media.

Incentives from China

While China has lower labor costs than the U.S. or other developed countries, this is only a fraction of the cost involved in building a chip plant. Most of the costs involved with building such a plant come with the expensive machinery and equipment required to manufacture chips.

These capital expenditure costs are generally the same around the world, Otellini said, indicating that financial incentives and support from the Chinese government played a major role in the company's decision.

Intel's goal is to take advantage of these incentives and then run the plant at maximum efficiency to get the lowest manufacturing costs, said company spokesman Chuck Mulloy.

Construction in 2007

Construction on the new Dalian plant, called Fab 68, will begin later this year and is billed as the largest single investment by a foreign company in northeastern China, an area hit hard by the decline of the country's state-owned heavy industries over the last decade. The impact of this decline has been less severe in Dalian, which is home to a thriving software and outsourcing industry.

The widely anticipated announcement of the Dalian plant is a coup for the Chinese government, which spent years pushing Intel's top executives to set up a manufacturing plant in China as part of wider plans to make the country a semiconductor manufacturing center.

Despite the fanfare, Intel's planned Dalian plant will not be among the company's most advanced when it enters production.

Intel now has an export license from the U.S. government to use 90-nanometer process technology at the plant in 2009. As process technology advances, Intel will have a strong case to obtain a license to use 65-nanometer process technology at the Dalian plant when it enters production in 2010.

The U.S. government carefully regulates the transfer of semiconductor technology to China and other countries because of concerns the technology can be used for military purposes.