LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

APRIL 14, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 4180 words

HEADLINE: PREPARED TESTIMONY OF
JAMES W. JARRETT
PRESIDENT OF INTEL-CHINA
BEFORE THE SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE
INTERNATIONAL TRADE AND FINANCE SUBCOMMITTEE

BODY:

I am James W. Jarrett, President of Intel-China. I am pleased today to provide IntelCorporation's views on the impact of export controls from the standpoint of global business, technology trends, and corresponding national interests.
My experience with Intel stretches over a long period. I joined Intel in 1979 and have served in various positions, including Vice President of Corporate Communications and Vice President of Investor Relations. In my current position, I am responsible for development and implementation of Intel's strategy in the Peoples' Republic of China.
My testimony will focus on the mainstream of information technology - that which can be characterized as "mass market." This segment spans a range of products across control categories in the Commerce Control List. It includes microprocessors (aka "processors"), the basic building blocks of the information technology industry and the principal product of Intel. In my testimony, I will:
- Explain what makes mass market information products like microprocessors different and deserving of special treatment in an export control regime; - Make the case that export controls on mass market information products have become futile, unwarranted, and detrimental to our nation and increasingly to the world as a whole. In particular, I believe that performance-based export controls applied at national borders on an individual transaction basis are no longer effective for mass marketed microprocessors, motherboards, and other information products; - Explain that any conceivable benefits from controlling such commonplace, globally dispersed products are far outweighed by a multitude of costs and offsetting benefits; and - Conclude that mass market information products should be exempt from export licensing in today's world. In doing so, I will offer a recommendation applicable to the renewal of the Export Administration Act.
I. Intel's Business
Intel is a major supplier of information technology building blocks to the global computer and communications industries. We provide our customers with chips, printed circuit board assemblies and software that are the "ingredients" of personal computers ("PCs"), servers and workstations. Our flagship business involves the mass production and sale of the Pentium family of processors and other microprocessors, which are frequently described as the "brains" of a computer because they control the central processing of data in computers. In 1998, our sales exceeded $26 billion.
Like most information technology companies, Intel's business model is global in scope, The bulk of our production takes place in the United States, but substantial manufacturing facilities exist in Ireland, Israel, Costa P/ca, the Philippines, Malaysia and China. Our products are sold worldwide to original equipment manufacturers of computer systems and peripherals, PC users who make purchases through various distribution channels including the internet, and other manufacturers who produce a wide range of industrial and telecommunications equipment.
Upwards of 60% of Intel's revenues are generated by sales outside the United States. Roughly 20% of our total revenues are derived from Asian sales alone (excluding Japan). Big emerging foreign markets are particularly important to continued revenue growth. For example, it is estimated that within two years China will be the second largest market for computers in the world.
II. Distinguishing Features
Today's information technology industry presents new and fundamentally distinct challenges for the export control system. The decentralized nature of this industry characterized by mass production and wide distribution of products - is at odds with the centralized nature of the United States export control system. This is especially true in the components sector of the industry, where Intel's microprocessors provide a compelling example of mass market products. Yet, the same attributes apply to other electronic components, such as memory and digital signal processors. They also apply to products at higher levels of integration, including motherboards, PCs, and cellular telephones.
Several key features of mass market information products that have emerged in recent years are worthy of attention.
Greatly Accelerating Product Performance. Semiconductor technology development and innovation move at an incredibly rapid pace. The semiconductor industry has achieved a 25-30 percent annual cost reduction since its inception. The continual shrinking and multiplication of features on the face of the chip result in ever more powerful and faster microprocessor products. Transistors are the basic element of the microprocessor serving as the electronic pumps and valves that govern electricity's flow through the maze of circuitry on the chip. As the number of transistors per chip grows, greater amounts of data can be processed at greater speeds. It is anticipated that by 2000, a single microprocessor will contain 50 million transistors - with the number jumping to perhaps 1 billion by 2012 - this would be up from just 275,000 fifteen years ago.
Higher performance at lower cost means that technology advances are occurring at an even faster pace. The MTOPS (millions of theoretical operations per second) level for the Pentium III, introduced in February 1999, is twice that of the Pentium II,introduced less than two years earlier. By the second half of this year, the Pentium III will have nearly tripled the MTOPS level of the top of the line Pentium II.
Commoditization. Over the last twenty years, the information technology industry has migrated to a horizontal model in which many companies throughout the world produce the building blocks (e.g., semiconductors, printed circuit board assemblies, interconnects, power supplies, etc.) that are used by systems integrators to make finished products. This model encourages innovation, is driven by cost reduction, and rides on global standards. It is also dependent upon multinational manufacturing and the easy flow of products across borders. The effect of this model has been to diffuse technological and manufacturing capabilities widely throughout the world.
This has come to mean that practically any semiconductor or other building block of information technology systems is capable of being produced on a worldwide basis. Differences in the success or global market share for individual microprocessors have come to be dictated by product features, price, and marketing dimensions, rather than sheer technological capability. Thus, just because the United States leads the market in microprocessors does not mean that it alone has the ability to build these products.
Indeed, new investment in semiconductor production is expanding on a global basis to countries like China. The United States, while leading in some areas of semiconductor manufacturing technology, faces stiff competition from abroad.

For example, Japan has a 57% market share (vs.. 9% for the United States) in supplying the worldwide market with lithography equipment, a core semiconductor manufacturing tool.
Mass Volumes. The evolving information age has resulted in a global embedded infrastructure of semiconductor devices. Chips are found in a vast range of products, including computers, consumer electronics (televisions and VCRs), home appliances (microwave ovens and washing machines), computer peripherals (printers and disk drives), automobile engines, and other "smart products". Intel's microprocessors are aimed at the worldwide PC market.
Intel ships worldwide roughly 2 million microprocessors every week and is increasing capacity to support worldwide demand for its products. This represents a small portion of total worldwide semiconductor sales, which amounted to 58.7 billion units in 1998 alone. This volume translates to an average of over 1 billion semiconductors sold worldwide each week. Volumes will increase significantly in the years ahead, given projections of world semiconductor market growth of over 10 percent annually for at least the next 5 years.
Broad/Global Distribution. The global distribution of components for computers is massive. It has been estimated that there are up to 100,000 distributors and dealers worldwide who buy components and assemble and sell computers. Even though small dealers in less developed countries may only build 10 computers a month, the total volume for such outlets is at least 1/4 million systems a week and well over 10 million per year. Exact numbers are not available because the network of distributors and dealers is large and diffuse. For example, a major computer builder in Europe could sell excess inventory of microprocessors to a broker in Asia who then resells the parts in smaller quantities to dealers in other countries in Asia. Tracking the volume flowing in the network has become so difficult that true volume forecasts are difficult.
Intel microprocessors and the Intel Insider brand are popular with computer buyers. A large number of dealers (perhaps half of the 100,000 total mentioned above) buy Intel microprocessors from distributors and brokers on a regular basis so they can quickly build computers without keeping a large inventory. Dealers are a popular source of Intel based PCs throughout Asia, including China. It is known that dealers in China regularly buy Intel processors from this worldwide distribution network. Connectivity and Ubiquitous Computing. Computing power, residing primarily in the microprocessor, is becoming increasingly distributed, dispersed, and accessible. Unlike the past, the global networking of computer systems enables far-flung use of previously captive computing and communications capabilities. The character of technology development has been to push the power of the system directly into the hands of the user.
The rapid growth of the internet is generating huge global demand for high-volume, commodity-level components and computer platforms. Indeed, the number one reason for buying a PC today is the drawing power of the internet, which is empowering individuals and increasing productivity in areas ranging from commerce to education to health. Dataquest statistics reveal that the number of worldwide connected business and home PCs is expected to reach about 200 million in 1999 and roughly 300 million in 2001. Internet usage, moreover, is fueling demand for commercial, multi-processor workstations and servers to expand the worldwide information infrastructure. As Intel chairman Andy Grove points out, we are headed toward "a world of one billion connected computers."
General Purpose. The benefits and value that mass market information products provide are inherently general in nature and are not specific to any one use or any one sector. Microprocessors therefore are not a unique differentiator of military performance. Intel's products are designed and marketed for commercial consumption; they are not designed nor adapted for use by the military. This is consistent with the pattern found in the United States semiconductor industry at large, where non-military sales are approximately 99% of the total market.
III. Implications for the Export Control System
Microprocessors. Intel's microprocessor products are controlled on the Commerce Control List according to various performance parameters, most notably MTOPS. The threshold MTOPS level for export licensing purposes has been adjusted upward over the years to accommodate new generations of mass produced commercial microprocessor products. In recent years, this process has turned into a constant struggle to reset the MTOPS level for chips so as to stay just ahead of the latest mass marketed product.Intel watches this MTOPS adjustment with much interest and anxiety. For many years, while riding close to the threshold, export license requirements have stayed beyond massive export shipments of the latest generation of microprocessors. But the timing is becoming increasingly precarious as the MTOPS threshold level has begun to collide with mass market shipments.
This phenomenon began to pose a major challenge to Intel in 1998, when the performance of Pentium processors started to exceed the 500 MTOPS licensing level then in effect for civil end-use exports to primarily China and the former Soviet Union. Beginning in June of that year, Intel proceeded to file numerous license applications for Pentium processor exports to these two regions. The exports were intended for the usual mix of customers - that is, a category of distributors and users to whom Intel could export on a license-free basis before the 500 MTOPS level was exceeded. Despite Intel's responses to four sets of detailed questions about the proposed exports, the license applications were never approved (save one). Intel could export the processors as intended only when the government decided in late December of last year to raise the MTOPS level from 500 to 1,200.
The problem is repeating itself in 1999. Already, Intel's recently introduced Pentium III processor is rapidly overtaking the recently adopted level of 1,200 MTOPS. Many Intel license applications for these products have been pending before the government since January. In the case of some of these applications, the government has proposed end-use and other licensing conditions that are unworkable in the context of a mass market distribution system. Even so, all of the applications remain unapproved and are migrating to a higher level of review within the interagency process.
Computers. The 2,000 MTOPS threshold that triggers high-performance computer controls is also being outrun by the performance of commodity computer systems as well as the motherboards contained in such systems. Motherboards and PCs containing just two 500MHz Pentium III processors are exceeding this trigger level today. This trend will compel Intel to satisfy high-performance computer export controls - including export approvals and end-use reporting requirements - on what are commodity-level products. In fact, recent requests by Intel to export lower-end servers to China under the standard 1 O-day prior notification procedure have been declined. Intel must now apply for export licenses for these systems, which are rated at just 2,100 MTOPS.
Rapidly Growing Impact.. As indicated, Intel has been unable over the last nine months to obtain favorable government action on a large number of license applications. These applications collectively cover unit volumes in the low hundreds of thousands. If current trends continue, we would expect millions of units to become subject to highly disruptive licensing requirements by the first of next year.
In the next 18 months, the performance of individual microprocessors will continue to increase rapidly, overtaking the 2,000 MTOPS level for high-performance computers. During the second half of the year 2000, Intel processors for PCs should exceed 2,600 MTOPS and processors aimed at commodity servers and workstations should exceed 5,600 MTOPS. Many of these processors will be used in commodity systems that contain 2, 4 or 8 of these components. The prospect of inadequate MTOPS adjustments in the future is cause for tremendous concern.
What we face is nothing less than a major collision between mass market products and the dual-use export licensing system. A whole class of commodity products not subject to government export approvals in recent years is now entering the realm of export restriction. The result: Exports of commodity processors, motherboards and computers are perversely falling victim to the very technological advances that have helped bring prosperity to the United States.
The adverse impact of this collision would resonate far beyond Intel and its export operations. It would derail the incredible technological advances of the information technology sector and affect a vast group of end-users, from business to education.

A significant portion of the efficiency, productivity, economic growth, and overall openness that our sector engenders around the world would be put at risk.
This imminent breakdown of the export control system leads to several fundamental conclusions:
- Performance-Based Controls. Mass market products are not susceptible to performance-based controls. What has developed is an unfortunate and burdensome race to constantly keep controls a step ahead of the latest microprocessor or computer technology, rather than establishing thresholds according to United States security needs. Mass market products are increasingly bumping up against these threshold levels, and there is a real risk that before long the deployment of mass market technology will be retarded by export controls. Minor and incremental adjustments to the existing export control system will fail to solve this problem.
- Individual Transaction Licensing. The export licensing system will no longer be able to contend with mass market microprocessors and computers when these products begin triggering individual license requirements on a large scale. For example, the export licensing of millions of microprocessors each year would have a devastating effect on technology deployment around the world, while failing to serve any meaningful purpose.
- Border Controls. The ubiquity and ease of access to microprocessors and related technology on a global scale effectively negates the purpose and effectiveness of trying to control these devices at national borders. Many thousands of distribution channels around the world feed a constantly expanding demand for computer chips
- for everything from computers to phones to automobiles. Traditional export controls do not fit this model.
- Information Protection. The protection of electronic information and data worldwide is vital to the growth and success of electronic commerce and the internet. As economies and societies move ever closer to seamless interconnections driven by internet technology, vast benefits accrue in areas such as economic efficiency, education, and free expression. The protection of electronic information and data worldwide is vital to the growth and success of electronic commerce and the internet. Strong encryption is the solution for ensuring security in this digital world.
Intel, for example, increasingly needs the capability to deploy strong encryption in its internal operations and product development. This need plays into a number of company requirements, including the ability to ship products on a global basis, properly secure internal networks, conduct secure e-commerce, and manufacture products on a multinational basis. The Congress should remove barriers to encryption deployment by enacting measures that facilitate the export and use of strong encryption products in both hardware and software.
IV. The Benefits of Information Technology Dissemination
Dispensing with controls on mass market information devices such as microprocessors would be in the best interests of the United States and of the world. United States leadership in the development of semiconductors and their dissemination throughout the world will provide major political, economic, and ultimately security benefits.
Political Benefits: The United States greatly benefits politically from the dissemination of information technology worldwide. The expanded access to information and knowledge facilitated by various forms of information technology promotes democracy and free markets. Information technology was critical to the demise of the Soviet Union and is now playing a pivotal role in changes within China.
The internet began spreading beyond the academic and scientific realms in China in the mid-1990s and is expected to encompass 7 million users by 2000 -- up from a mere 60,000 in 1996. Despite attempts by Chinese authorities to restrict the use of and content on the internet, electronic communications is having a significant impact on free expression and thought within China. One study points out that a recent graduating class from Beijing University - the first class to have had broad access to e-mail and the internet - has a markedly different outlook on freedom and expression than did its predecessors. Under Secretary for Commerce William Reinsch recently explained: "Our goal should be to bring not only our products but our ideas and values to China, but we cannot do that if they do not have the technological tools to receive them."
Information technology can be a liberating, self-empowering and democratizing force. Restricting access to critical informational tools, such as computers and semiconductors, is counterproductive and not in the interests of the United States.
Economic Benefits: America would accrue major economic benefits from a streamlining of export restrictions on information technology, which has come to contribute over one-third of all real economic growth in the United States. The United States is a leading global supplier of many key information technology products, including semiconductors. Opportunities will be very promising for many years to come if United States exporters of these and other products are free to compete abroad and market their products without disruptive and unnecessary export restrictions.
Some of the most promising markets are those for which the United States maintains the strictest export controls. China, for instance, will present enormous opportunities in many areas, including electronic commerce. Despite the Chinese government's concerns over the internet, it is rapidly expanding its internet infrastructure, including a massive restructuring of its internet backbone using high access servers and routers. It has been noted that the pace of electronic commerce development in China will be measured not in years, but in months and weeks.
The ability of the United States to meet the future global demand for information technology products and set the standard in many evolving new product markets will be critical to the competitiveness of Intel and many other United States companies, and to the nation's overall economic health.
National Security Benefits: Unlike the past, the United States military sector today accounts for a minute portion of total consumption of information technology products. For semiconductors, United States military consumption has fallen below one percent. Information technology has come to be dominated by the civilian sector. This has resulted in a growing reliance by the United States military on commercial suppliers of information technology.
United States industry's ability to keep pace with innovation and therefore remain a reliable source of critical technology to the United States military is directly correlated to its ability to produce and market its products on a global scale. Removing costly and unnecessary export controls on information technology is crucial to achieving this end.
The balance has shifted so that together, the political, economic, and national security benefits of diffusing information technology worldwide outweigh any potential risks. In sum, the national interest is advanced by promoting information technology exports, rather than by restricting them.
V. Summary and Recommendations for Renewal of the Export Administration Act
The Export Administration Act (EAA), the primary statute underlying dual-use export controls, is rooted in the necessities and priorities of the Cold War. It is designed to address the military threat of the now defunct Soviet Bloc. Intel strongly supports an updated EAA designed to usher in an export control regime based on today's technology and information-based world.
A major step in achieving a refocusing of export controls is the removal of restrictions on mass market products. Mass market products, by their very nature, are not susceptible to effective control and can contribute to strategic military capability in only the most generalized way. They are sold in very high volumes through a multitude of distribution channels and are not uniquely designed for individual applications.
A provision in the EAA providing a license exemption for commodity information products would be a significant and valuable improvement. Eligibility for the exemption could be based on the following broad indices: high volume; general purpose application; wide availability; and commodity-like characteristics (e.g., no particular installation or maintenance required). Intel understands that the American Electronics Association, the Semiconductor Industry Association, and the Computer Coalition for Responsible Exports all support this general concept.
Such an exemption would remove burdensome and unnecessary controls on products that are uncontrollable and not worthy of export restrictions. A thoughtfully crafted and properly implemented exemption should result in no significant national security risk and would bring tangible benefits to the United States and the world.
END

LOAD-DATE: April 15, 1999