Is Intel Fumbling the Chinese Market?

After nearly a decade of allegedly using its market heft to squelch business opportunities for chief rival Advanced Micro Devices (NYSE: AMD), Intel got mangled, starched, and hung out to dry by courts and government agencies in Europe, Japan, and America. These claims have largely been settled, and Intel has promised not to be bad anymore.

But now there's potential trouble brewing in the Chinese market, where Intel has steered clear of legal battles over its business practices.

Local PC and smartphone manufacturer Hedy Holding has dropped Intel chips from its entire product catalog, replacing them with AMD products. The move comes after Hedy executives blasted Intel in Chinese media for some interesting business practices:

• Hedy says Intel often ships many more processors than a small manufacturer like Hedy can use. Hedy then turns around and sells the excess chips in Hong Kong for a tidy profit, which makes up for the losses generated by the computer division.
• The company also says Intel evaluates its Chinese system builders on the basis of how many AMD-based systems it sells. Lift the proportion too high, and you're not getting that lucrative excess supply thrown your way.
• System builders are also forced to buy high-end Intel chips they don't want and can't sell, according to Hedy officials. This alleged practice turns Intel's excess processors into someone else's problem: There is little demand for these speedy but expensive chips in China.

The computer market in China is a tough place in which to make a living; Hedy's gross margin last year was 1.6% (yeah, gross margin) and the company made an $11.3 million loss on sales of $87.1 million. It shouldn't be surprising to see Chinese computer vendors turning to lower-priced components from AMD when there's no demand for top-end processors and the profit margins are nonexistent.

Hedy is hardly Lenovo, nor a Chinese Hewlett-Packard (NYSE: HPQ) or Dell (Nasdaq:DELL) impersonator. Those companies have strong services and enterprise segments to make up for weak consumer margins. One small PC maker doesn't make or break the Chinese market for Intel, but the company is very vocal about the Intel issue; I don't know how well word spreads in China, but let's just say that things could turn ugly for the chip giant if lots of small system builders suddenly turn away. The aggregate business opportunity here for AMD, on the other hand, could turn out to be rather large.