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Intel | Site Selection

A Macro Economic Analysis


Sahil Avi Kapoor | PGP 1 (B) | 20140121136

Case Background
The case is based in fall 1998, when Intel was faced with the decision to select the location for its first
manufacturing plant in Latin America.

Research Methodology: Analysis following both desk research as well as field trips to potential
locations.

Countries Shortlisted: Brazil, Chile, Costa Rica and Mexico


Investment Value: $300 500 million
Reasons for building the next plant in Latin America:

Lower costs for labour


Transportation advantages for export to Europe and North America

Characteristics of the proposed Latin America unit:

Assembly, testing facility


Technical, engineering expertise
Clean rooms
Advanced knowledge of chemistry
200 engineers initially; 3500 eventually
Considerable number of expats during startup
100% export; local market not targeted

Main Requirements:

Political and economic stability


Favourable labour regulations and union policies
Infrastructure (Roads and airport facilities for export)
Availability of reliable power supply
Security for expats
Educated workforce
Taxation and incentive policies for FDI

Costa Rica | Suitability Analysis


PROS

Reasonably healthy economy


Politically stable, democratic and peaceful government
Large interest in public welfare, education and health
Proactive, responsive and professional preparation of CINDE supported with facts and figures
Personal interest taken by high ranking government officials
Sufficient number of engineers

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Readiness of authority to modify technical curriculum to match needs (Doesnt count as special
treatment; better training would benefit overall technical employability)
High proficiency in English
Favourable labour union regulations
Low wages as compared to USA
Excellent roadways
Acceptable airport
Willingness of authority to create an open skies initiative to increase connectivity (Doesnt count
as special treatment; would benefit other industries as well as tourism)
Incentives to companies in Free Trade Zones; No duty on imports, exempt from income tax for 8
years, 50% exempt for following 4 years; Government willing to negotiate further (Doesnt count
as special treatment; would benefit other companies as well)

CONS

Small size
Small population (3.5 million)
Small economy
Large investment might overwhelm the government
Lack of mid-level technicians (Need for training and development)
Number of flights insufficient for export
Higher electrical power rates ($0.05 per KW) compared to Mexico ($0.02 per KW)

Brazil | Suitability Analysis


PROS

Large size
Large population (160 million)
Owing to federal structure, plenty of competitive choices for location; States were ready to offer
attractive incentives
Special tax incentive for computer industry (50% reduction of corporate tax) on 5% investment in
Research & Development
High Tech hub in Sao Paulo hosted a large number of computer companies
Municipal government provided tax exemptions
Adequate number of prospective technical employees
Adequate infrastructure for power supply and airways

CONS

Complex, federal structure of government


Incentives were irrelevant at state level; Sao Paulo governor refused to offer special tax
incentives
o Sao Paulo didnt really need Intels investment
o Large inflow of FDI, especially into Sao Paulo
o Already a hub of high tech firms
Security concerns; Hijacking of trucks was an issue
Labour unions were more militant than Costa Rica
High labour costs due to multiple employment benefits
Government officials were indifferent, as foreign firms were anyway dying to work in Brazil
High taxation rates
No interest in the large Brazilian domestic market

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The infamous Brazil cost


Export was difficult due to high CAD

Chile | Suitability Analysis


PROS

Modern infrastructure
Good technical training programme
Laws inhibited union formation
Low costs for unskilled labour

CONS

Large travel distance and time between USA and Chile (12 hours compared to 3 hours for Costa
Rica)
High costs for technical employees (Double that of Mexico, Costa Rica; Almost equal to USA)
Stiff and outdated capital control policies
No significant exemptions from the government; Government didnt interfere with market forces
Incentivized areas farther away from Santiago

Mexico | Suitability Analysis


PROS

Centre for high technology electronics firms


Well prepared and professional preparation by SEPROE; Detailed, eye catching information,
Multiple opportunities to advertise
Infrastructure was exceptional (Roadways as well as air connectivity)
Low labour costs
Easy availability of technical personnel
Inexpensive energy costs
Government officials looked eager for collaboration
Business and reform friendly government
Incentives such as free land and employee training for fixed period

CONS

Federal government averse to offer any tax exemption


Centralized finances gave majority control to federal government
High union affiliations; Diametrically opposite to Intels global policy on trade
The government was willing to make an exception for Intel as regards to labour unions (Noted to
be a special deal that could lead to inconsistencies in dealing with successive governments)

Final Countrywise Analysis


Costa Rica
Political Stability
Economic Stability
Labour Union Policies
Labour Wages
Road and Air Transport Infrastructure
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Acceptable
Acceptable
Acceptable
Acceptable
Acceptable
Sahil Avi Kapoor

Electric Power Supply


Security and Living
Educated Workforce
Taxation and other Government Incentives
Feasibility of Export

Acceptable
Acceptable
Acceptable
Acceptable
Acceptable

Brazil
Political Stability
Economic Stability
Labour Union Policies
Labour Wages
Road and Air Transport Infrastructure
Electric Power Supply
Security and Living
Educated Workforce
Taxation and other Government Incentives
Feasibility of Export

Acceptable
Acceptable
Not Acceptable
Not Acceptable
Acceptable
Acceptable
Not Acceptable
Acceptable
Not Acceptable
Acceptable

Chile
Political Stability
Economic Stability
Labour Union Policies
Labour Wages
Road and Air Transport Infrastructure
Electric Power Supply
Security and Living
Educated Workforce
Taxation and other Government Incentives
Feasibility of Export

Acceptable
Acceptable
Acceptable
Not Acceptable
Not Acceptable
Acceptable
Acceptable
Acceptable
Not Acceptable
Not Acceptable

Mexico
Political Stability
Economic Stability
Labour Union Policies
Labour Wages
Road and Air Transport Infrastructure
Electric Power Supply
Security and Living
Educated Workforce
Taxation and other Government Incentives
Feasibility of Export

Not Acceptable
Acceptable
Acceptable
Not Acceptable
Acceptable
Acceptable
Acceptable
Acceptable
Not Acceptable
Acceptable

Final Choice | Costa Rica


An obvious best choice of location for their Latin American plant would be Costa Rica. The country shows
acceptable or above average standards with respect to all the major requirements as cited by Intel.
Apart from the standards already aforementioned, Costa Rica has plenty of other varied advantages for
Intel, such as:
1. The extremely proactive and high interest shown by the government for Intels project

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2. Numerous special provisions readily accepted by the government especially suited for Intel,
including curriculum improvements, the Open Skies initiative and special tax exemptions for
all large investors.
3. A healthy and fast growing economy
4. A robust and efficient government
5. Highly effective business initiatives taken up by CINDE
6. High quality of English medium technical education
7. Favourable labour union regulations
Most of all, the authoritys ready attitude to undermine and overcome any obstacle(s) posed to business
investment proposals was highly commendable and impressive.

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Sahil Avi Kapoor