1 | I n t e l C a s e A n a l y s i s S a h i l A v i K a p o o r

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 Acceptable

Economic Stability Acceptable

Labour Union Policies Acceptable

Labour Wages Acceptable

Road and Air Transport Infrastructure Acceptable

4 | I n t e l C a s e A n a l y s i s S a h i l A v i K a p o o r

Electric Power Supply Acceptable

Security and Living Acceptable

Educated Workforce Acceptable

Taxation and other Government Incentives Acceptable

Feasibility of Export Acceptable

Brazil Political Stability Acceptable

Economic Stability Acceptable

Labour Union Policies Not Acceptable

Labour Wages Not Acceptable

Road and Air Transport Infrastructure Acceptable

Electric Power Supply Acceptable

Security and Living Not Acceptable

Educated Workforce Acceptable

Taxation and other Government Incentives Not Acceptable

Feasibility of Export Acceptable

Chile Political Stability Acceptable

Economic Stability Acceptable

Labour Union Policies Acceptable

Labour Wages Not Acceptable

Road and Air Transport Infrastructure Not Acceptable

Electric Power Supply Acceptable

Security and Living Acceptable

Educated Workforce Acceptable

Taxation and other Government Incentives Not Acceptable

Feasibility of Export Not Acceptable

Mexico Political Stability Not Acceptable

Economic Stability Acceptable

Labour Union Policies Acceptable

Labour Wages Not Acceptable

Road and Air Transport Infrastructure Acceptable

Electric Power Supply Acceptable

Security and Living Acceptable

Educated Workforce Acceptable

Taxation and other Government Incentives Not Acceptable

Feasibility of Export 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

5 | I n t e l C a s e A n a l y s i s S a h i l A v i K a p o o r

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.