The Intel Corporation belongs to a handful of enterprises whose names are synonymous with the rise of information technology. The company was founded in 1968 on something of a shoestring by Robert Noyce and Gordon Moore, who left Fairfield Semiconductor to establish the business. In 2006, Intel posted sales of over $35 billion, and employed nearly 100,000 persons worldwide.

Two circumstances help frame the logistics task for Intel. First, the company is truly international—nearly 80 percent of its sales come from outside the United States. Second, its sales are, in consumer terms, indirect, to such computer giants as Hewlett-Packard and Dell, rather than directly to the end-using consumer.

Intel’s international role was underscored in March 2007, when the Chinese government extended to Intel permission to build a $2.5 billion chip fabrication plant in Dalian, China, a port city in that country’s northeast.

While China remains the first focus of Asian economic development, increasing attention is being directed to India. In the following interview, two Intel supply chain officials, Kang Kok Hua and James R. Kellso, gives their assessment of supply chain activities in India.   

Kang Kok Hua was in 2004 appointed Strategic Development Manager in Intel’s Greater Asia Logistics region; as such, he oversees strategy development, change implementation, logistics customer service and business continuity. In 1997, he joined Intel as Asia Transport Manager, and was subsequently placed in charge of logistics strategy development for emerging markets worldwide. Kang holds bachelors and master’s degrees from the National University of Singapore, where he specialized in monetary economics and strategic management.

James R. Kellso currently holds the title, Manager, Supply Network Research and Supply Chain Master for Intel, a company he joined after completing 16 years as a consultant in the field. In his nearly two decades with Intel, he has managed all aspect of the company’s World Wide Logistics, including systems development and deployment, network construction, transportation management, engineering and business process development.



WT: Where does Intel stand with operations in India?

Kellso: From an Intel-overall perspective, we’re strong and committed to India in the area of software development. We are also seeing India as a greater area of consumption of our products; accordingly, we see more and more things being shipped into India. We have not yet come to the view of India as a point of manufacturing. 

Kang: As you yourselves reported in the December 2006 issue of World Trade, each emerging market is different. Even if you consider just the four main ones—Brazil, , Russia, India, China—each is unique. Let me contrast China and India. In China, some 300 million people out of 1.3 billion live along the coast; they are economically much richer than those one billion or so living on farms. So, in China there is some degree of concentration of purchasing power. As a consumption market, India allegedly has the same number of people—250 to 300 million—in the middle class, but they are spread all across India. India is a relatively large country; this dispersion of consumers causes manufacturers to think about distributing consumer goods in India differently than in China.

WT: What is the status of distribution in India? 

Kang: Distribution in India is hampered by three major factors. One is obviously the transportation infrastructure itself, whether it is roads, rail or air. The second is the punitive taxation policies of the individual Indian states. Third—and here India is closer to Brazil than to China—India is arguably the largest democracy in the world. All of the Indian states are run somewhat independently, though there is a federal system. But, with that independence there is a lack of a national political consensus; that makes it difficult for any enterprise to operate nationally, especially a foreign enterprise. Culture and history have made India xenophobic in terms of foreign ownership and foreign distribution of product. These things, added up, make doing enterprise in India difficult; not insurmountable, but far more challenging than in China.

WT: In America, business activities crosses state lines, but the rules and regulations are broader similar; how much variance is there from one Indian state to another?

Kang: In India, even though there is a set of national or federal regulations, there are also a lot of local and state level differences, either as add-ons or as variants to the federal regulation. This makes it difficult for a manufacturer.

WT: These three—infrastructure issues; local government variability; lack of a national political consensus—how are they changing?

Kang: The lack of a political consensus is the one changing the slowest. There’s nothing good or bad about this; it’s just the way things are done in India.

WT: How is transportation infrastructure developing?

Kang: In India, the question is the affordability of improvements. China has, over many years, financed its infrastructure development from its accumulated financial reserves; they are now probably sitting on something like $1 trillion in cash, so there’s a lot of money for the central government to spend. In India, the government doesn’t have the money. The rate of infrastructure investment depends primarily on private investors providing the initial capital, building the highway and collecting the toll for some years, before turning it back to the government for permanent ownership.

I think, with highways, that the momentum India had over the past four or five years is slowing down. With road infrastructure, India is about at the 60 percent mark of projects completed, but the remaining 40 percent are waiting to be bid. And, that’s not happening.

At the same time, you do not have nationwide distribution. Especially for the airports, which appear not to be keeping up with the huge domestic growth in passenger traffic, let alone air cargo. Imagine it this way: You have a country that is relatively large, where air transportation infrastructure is not exactly working out. You have two other spokes: surface, which we’ve discussed, or else you literally have to transport cargoes from east to west by putting them on a boat and sailing the ships around to the other side. Frankly, this is a concern for us. Our business growth in India could potentially be hampered by the lack of transportation infrastructure. It is what it is; we are not likely to change the rate of infrastructure development over the next five to ten years.

WT: So these factors combine to complicate doing anything systematic about infrastructure.

Kang: There is an irony here. Because India has a much greater dispersion of consumption ‘hotspots,’ the problems caused by a poor distribution infrastructure become less obvious. You don’t have to funnel large quantities of products through key points, so the problems are less of a life or death situation. The consequence is that instead of coping with a few big problems, you are coping with many small brush fires. These are challenges of a different scale, of a different type, very much driven by the greater dispersion of purchasing power. 

WT: How does that contrast with China? 

Kang: In China, distribution infrastructure development in the last ten years has really been concentrated on connecting the approximately 2,000 miles of coastline from top to bottom; all the money has connected the 300 million potential consumers. Now, part two of the connection, China is expending infrastructure money to connect the coast to the western provinces.

Kellso: In China, a concentrated central government—well-funded by import imbalance—is doing what the U.S. did in the 1950s with highways. But in China, it’s also in rail and air infrastructure, and port facilities. So, they have taken this big piece of money they’ve got and are deploying it in a way that will drive that round two of growth into the center part of the country.

WT: So far as manufacturing in India is concerned, is Intel therefore in a ‘wait and see’ mode? And, if it is, what is it that you are waiting for?

Kellso: Intel’s general position is to deploy manufacturing facilities where we can achieve both the best distribution and the best government incentive packages. Those two things drive our choices of locations. Distribution is total landed cost—manufacture the cheapest; distribute the cheapest, et cetera. And then, second, achieve an operational benefit in taxation and regulation and in ease of construction. We tend to be very good for developing countries in terms of bringing a positive influence as a result of our investment. We try to get a compensatory good environment for us to operate in. So with manufacturing facilities, we look for those elements.

We don’t sell finished products. We sell a part of a finished product. We try to make sure we can distribute well to our manufacturers, and they are actually penetrating into the markets. From a market penetration standpoint, our number one thing is to design the right products, products that will penetrate into different regions. But we do not necessarily put the logistics infrastructure into place to deliver those products. 

WT: About how many people does Intel have in India working on software?

Kellso: I’m not sure the exact figure, but it is more than a thousand. It’s between one and five. In software, the issues are all about skills and capabilities, and the people we hire in India are very good. In manufacturing, the issues are all about cost of manufacturing, of which logistics infrastructure and taxation are the two biggest elements. There, India is not so good.

WT: You mentioned the variety of regulations that relate to distribution; is there a similar variety relating to manufacturing?

Kang: Not too many that we are aware of. On one hand, the regulations that apply to Free Trade Zones in China are definitely a better setup than in India, where trade zones are a more recent event. The Chinese have had five economic zones since 1991; they have something like fifteen years of experience ahead of India. India is not as far along on the learning curve.

WT: You mentioned xenophobia—how welcoming is India to foreign capital investment?

Kang: That depends on who you ask. There was an outburst of negative reaction last year to the privatization of two major Indian airports, in New Delhi and Bombay. The government was hoping to rapidly upgrade air infrastructure by bringing in foreign operators, and, frankly, the local folks freaked out. Yet if you look at other sectors, like the media, India is making a very concerted effort to increase foreign capital participation. It is a unique situation: on the one hand, they recognize the need to do things differently, but there are also historical and cultural factors that prevent the country from moving as fast as it potentially could.

WT: Not long ago, we in the U.S. had the Dubai World Ports controversy. Do you think the reaction you mention was because these were major airports?

Kang: It was probably more about xenophobia than that it was airports. But, coincidentally, those two airports are the two out of five airports in India that have the best international connections.

WT: Any advice or thoughts that you would pass along?

Kang: The number one thing we have learned is that you should invest and operate where your worst-case scenario still yields an acceptable rate of return. Because that is what you are likely to get. Anything above that is fine. I think when China first opened many companies went in with unrealistic expectations and, arguably, euphoria—everyone looked at the best-case scenario rather than the worst-case scenario. 

Kellso: We do extensive homework on every market Intel goes into. We put people in on the ground, not just to do paper studies, but to really look and examine. Do due diligence. And, that diligence is from a variety of perspectives. We take our building people and our logistics people and our human resources people and our government negotiations people and our environmental people—all the elements a manufacturing facility requires—and we let them check it out. You don’t believe what you read; you don’t make decisions based on conversation, hype or supposition. You go touch and feel and see what’s real. Once you’ve done that, then you can put real numbers alongside elements and put probabilities next to those, and look at your downside and your upside and actually make a rational decision. Non-euphoric. wt