intel capital.jpgIntel has made its largest and most significant Chinese investment date, plumping down $40m for a stake in Neusoft, China's biggest software outsourcing firm.

Intel
Capital, the chip giant's corporate venturing arm, has been cautious
about investing in China to date. Last year, it announced with much
fanfare the creation of a China-focussed fund — its first such
regional fund — but it only earmarked a relatively modest $200m to
spend on Chinese start-ups.

The initial focus was cellular
communications, broadband applications for consumers and semiconductor
design, and the fund's first few investments hardly sparkled with
originality — a HK-based fabless chip designer, an ASIC design foundry
and so on. Granted, Intel knows the semiconductor industry better than
anyone and so I suppose makes sense to start on familiar ground.

But
unless the companies in Intel's China portfolio are hiding some novel
technology or process that we haven't been told about, I cant really
see them doing much to further Intel's ambitions in China or elsewhere.

The
investment in Neusoft takes Intel out of its comfort zone and
represents more of a leap of faith of the US chip giant. That's because
Neusoft makes software not chips. Intel justifies the purchase saying
that boosting China's software industry will increase demand for Intel
chips.

Nevertheless, to me a much more obvious partner for
Neusoft would be a big software house. Indeed, it already has one —
Germany's SAP.

In May, the two companies extended an existing relationship
by announcing a “broadened, enhanced strategic partnership” under which
the Chinese company will more than triple its staff trained on SAP's
software. Neusoft also expanded its reseller agreement with SAP, in a
move designed to get the German company better know with China's
smaller businesses.

SAP has long sought to extend its leadership
of the enterprise software market in the west down to smaller
businesses, but the moves have had only modest success. Clearly it is
hoping that things will be different in China, where the enterprise
software market is virtually untapped.

Quite what Intel hopes to
get from investing in Neusoft is unclear. True, the software that
Neusoft develops probably runs on Intel-based computers but Intel could
use the same reasoning to justify investing in almost any software
house or PC company on the planet.

Nor is Intel the first multinational to invest in Neusoft as Philips Electronics and Toshiba already own stakes.

I
suspect Intel sees Neusoft as a financial rather than strategic
investment. Once China's fledgling software industry matures, western
software houses will be queueing up to make Intel an offer it cannot
refuse for its stake in Neusoft. Or perhaps Intel sees the exit in a
future IPO of Neusoft.

Intel made its first China investment in
1998, and has invested in roughly 50 businesses in the country.
However, the competition for Chinese start-ups from western VC firms is
increasing — see this BusinessWeek article — which could explain why Intel has decided to spend more on a large and well-established business like Neusoft.

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