A Conversation with Paul Otellini

Intel CEO Otellini expresses optimism for economic growth contingent upon the adoption of specific U.S. regulatory policies.

This session was part of the Corporate Program's CEO Speaker series.

KEN AULETTA: (In progress) -- and I'm here to welcome you to the Council on Foreign Relations meeting. It's part of our CEO Speakers Series. Please turn off your cell phones or mobile devices, if you would. A reminder -- this is a on-the-record session and members from around the nation will be teleconferencing in on this -- on this day.

Let me just briefly introduce our guest speaker today and then he'll come up and say a few words and then we'll engage in a conversation and then turn out to the members for questions. Instead of becoming a priest, as his father wished, Paul Otellini left that mission to his brother. He chose to be -- devote his career to another calling, Intel, which he joined in 1974.

In that span of 36 years, he's held a dizzying succession of jobs in Intel, finally rising to become president and COO and board member in 2002. In 2005, he became the CEO. He serves on one corporate board, Google. Under his leadership as before, Intel continues to thrive. The company now generates revenues of about $40 billion. Paul Otellini.

(Applause.)

PAUL OTELLINI: Thank you, Ken, and thank you, Richard, for inviting me and thank you all for coming. I thought I would make about five minutes worth of comments today to sort of frame the discussion and I wanted to share some thoughts with you I had on the topic of competitiveness. So if you bear with me for a couple of minutes and I'll make some comments here. I wanted to share, most importantly, some of my perspectives on innovation and what I believe it takes to spur economic growth in our country, and then I want to also look forward to the questions that hopefully we'll have in the audience here.

If you read the media today it seems like we are constantly being bombarded with negative economic messages. Prevailing mood in the media, in D.C., and in our home communities is that the economy is headed in the wrong direction. Indeed, we remain in poor economic shape. Too many people are out of work or under employed. We are technically out of recession but growth is anemic.

As a business man, I like to focus on solving problems. We do not face insurmountable issues. We've been here before and we've demonstrated that we can persevere. I'd like today to outline two ideas that I believe should give us cause to approach the future with a word that has not been used too often recently -- optimism. The first is the tidal wave of creativity and new invention happening today that is reshaping how we interact with machines and with each other.

Who could have predicted just a few short years ago that the revolution in phones to transform them into tiny smart information machines would come not from a traditional handset manufacturer but from an iconoclastic computer company called Apple? Who could have predicted that the fastest growing mobile operating system in the world would be designed by a search engine company, Google?

Who would have predicted that consumers would get their Netbooks and Notebooks and now Tablet PCs from their phone company? Who would have predicted that the television is about to change more in the next 12 months than it has in the last 50 years through the seamless integration of the microprocessor and the Internet into our viewing experience?

And for my own company, who would have predicted that Intel would become the fifth largest software company in the world in terms of employees? All this is happening around us and here is my takeaway on it. The surest sign that we are in the middle of a burst of cutting-edge innovation is to look at how much the traditional market and industry boundaries are shape shifting around us. The hard lines of (six ?) categories are blurring. What we may once have thought of as a computer company is now a digital entertainment company or a consumer electronics company.

I see a pattern of disruptive innovation behind this corporate morphing. As grim as the economy may still appear, we are generating the cutting-edge innovation today that can drive tomorrow's vitality. Economists have described these conditions as creative destruction because of the temporary economic duress that results from the process of transformation that accompanies radical innovation.

And as much as business leaders must cope with the fallout of creative destruction, no one wins more from disruptive innovation than the average consumer. The consumer has more choice than ever before, prices go down as new technology (ramps the volume ?), and people have new ways to communicate and enrich their lives.

Oh, and incredible new value accrues to those companies and countries that generate this change. Whenever this has happened, job and economic growth have followed. History has shown us that technology breakthroughs and innovation can and do reshape our destiny. The second reason that we should be optimistic about the future is that America is in the best position to create it and thus continue to control our own destiny. To accomplish this, we must create the conditions where new ideas flourish and innovation is unleashed.

I believe there are two simple ways to make this possible. The first step, I believe, is to adopt a long-term view and a culture of investment. So what do I mean by culture of investment? It begins with a common understanding that good investments lead to ideas and then to discovery, which spawn new businesses that in turn create new jobs and ultimately lead to wealth creation and higher standards of living.

The start of this cycle is, of course, investment, and while the government can help here, the primary responsibility for taking action and making investments falls upon private enterprises both large and small. And perhaps the most important of these investments are investments in things that make innovation possible, even if they won't -- (inaudible) -- meaningful business results for five or 10 years. I've seen first hand how leading countries have benefited from taking such long-term views.

If you know, for example, that it costs about $1 billion more to build, equip, and operate a semiconductor manufacturing facility in the United States -- that's on a basis of about four -- and contrary to public opinion this is not because of labor cost differences. Ninety percent of the cost differences are the result of tax and incentive policies. So I propose that we take a page from others' playbooks and provide attractive incentives for companies to build factories here that will employ our workers.

We should offer tax credits in the five- to 10-year range -- or tax holidays -- to companies both domestic and foreign that want to set up or expand a factory in the United States.

This will bring more manufacturing back to the U.S.; it will employ our workers; it will stimulate the economy -- all at no cost to us. It's time to show the world that America is open for business.

This brings me to the second step for creating conditions where new ideas flourish and innovation is unleashed, and that's something I believe goes hand in hand with creating a culture of investment. The second step involves reducing uncertainty for business leaders. What we need is a set of policies that let businesses invest confidently in the future -- take risks and feel assured that we're training talent to lead the next generation of innovation. We've taken a positive first step by making the R&D tax credit semi permanent. Business leaders can now make long-range decisions when the rules are known and more fixed.

Secondly, the U.S. corporate tax rate is the second highest among developed economies in the world. I would propose that we adjust our tax rate to a level approximately equal to our global competitors for investment, and reverse the flow of capital and jobs out of this country. The U.S. is still the largest market for many products. Our workforce is smart and conscientious, with an outstanding work ethic. We need to unleash them and rebuild our manufacturing base.

Thirdly, we need to remove regulations that needlessly deter investment. Regulations can be extremely helpful and effective, but often, instead, steer investment to other places in the world. Given the urgency of our situation, we should create a fast-track permitting process for companies that want to build new factories here. Someone who wants to invest and employ Americans shouldn't have to wait for years to get a permit to do so.

And we need to increase our investments in infrastructure so that we can efficiently get resources, materials and people into factories and finish goods out. Power and water distribution, highways, railways and bridges all are in deep need of investment. These investments, both public and private, are job creators and are lasting. And while if it was up to me I wouldn't spend the second half of the stimulus package, if we are going to spend it, I would like to see all and any remaining funds be spent on these enduring infrastructure kinds of projects.

In short, what we need is a clear, forward-looking strategy that promotes innovation and investment. You know, after 36 years of working in Silicon Valley, I've learned that you can't solve the problems of today or tomorrow with yesterday's solutions. The world has changed. Tom Friedman is right. The world is flattening out faster than anyone imagined. The best way forward for us is to unleash our unmatched creative energies for the people -- of the people of this country and to rebuild our manufacturing base for the 21st century. In this century software trumps steel and microprocessors will make everything from cars to TVs smarter. Our policies need to help the engine of American business do its job and reignite the creative spirit in our country.

Thank you. (Applause.)

AULETTA: So, Paul, you're a -- you're an optimist, contingent upon the U.S. adopting the policies you spoke of.

OTELLINI: I'm an unabashed optimist, period, or you couldn't do this for a living. (Laughter.)

You know, I believe in technology and what technology will bring people for the -- that part of the comments were independent of government. And I do think that, at the end of the day, computers or the variants of computers are tools of productivity and they make our lives better and easier.

On the other hand, I'm quite sure that that technology will develop, and will be deployed, and invested and invented in some place on earth. It's the job of a government to ensure that the opportunity is here for that to happen in this country and not somewhere else.

AULETTA: I'm a little confused in squaring this speech today with, say, the speech you made in Aspen in August in which you said that the U.S. tech industry was losing its competitive edge. How do you square that pessimism with today's optimism --

OTELLINI: I didn't say that. What I said was that it's in danger of losing its competitive edge from the lack of the ability to build factories, the lack of the ability to get trained talent here, which has to do a lot with the visa program and ultimately with our K through 12 programs.

And it was a very similar theme. It said that we need to focus on things that are necessary, in terms of infrastructure or investment climate, to get people to start building factories in this country again, or to inventing products in this country by deploying R&D.

AULETTA: You've criticized, in some previous speeches, the lapse into Keynesian economics of the current administration --

OTELLINI: Yeah.

AULETTA: -- and yet you've also, on various platforms, talked about the need for the government to, say, invest more in education. How do you square those two?

OTELLINI: (Laughs.) Well, I don't think that -- Keynesian economics is applying unbelievably large amounts of money with the hopes that that will stimulate economic growth as part of a cycle. That has not worked in the past. It is not working now.

Investing in education is something that we do routinely. In fact, I don't think we need to spend any more money in education in this country; we just need to spend it more wisely. And it's a whole different topic -- for not to go into today. But, in general, we spend -- I read the story about Trenton, New Jersey where Zuckerberg just gave $100 million --

MR. : (Inaudible.)

OTELLINI: Sorry? Newark. Thank you, Newark.

$100 million. That's on top of $26,000 a pupil that they already spend. For $26,000, I don't know what it's like here, but in California you can send your kid to the best private school. So it's not a matter of money. It's a matter of focus, and a matter of, you know, focusing on meritocracy and the right kinds of teaching methodologies.

AULETTA: So would you judge that the -- you said you didn't want them to spend the second half of the stimulus money.

OTELLINI: If I were king, yeah.

AULETTA: Right. But if you were king, the first half, was that effective?

OTELLINI: I don't -- I don't believe so.

I mean, the -- you know, you look at where we are; everything that was proposed to have happened didn't happen. They could always -- you can always make the argument that "it would have been worse had it not been." And I think we were all, in the dark days of -- early days of 2009, everyone was nervous. But in the hindsight of having spent 3 or 400 billion (dollars) of the 700 million (sic) (dollars), I don't see how spending the next 3 or 400 million (sic) (dollars) will help us anymore.

AULETTA: There was a lead story in yesterday's New York Times and it said that U.S. corporations are borrowing vast sums of money at low interest rates and had stockpiled $1.6 trillion, and yet they are not investing and creating jobs and plants. Why?

OTELLINI: I saw the story and I -- my first reaction when I read it was that the reporter didn't understand the difference between cash and P&L. (Laughter.) Businesses -- (laughs) -- businesses have to understand -- you know, have to make a profit. Your shareholders demand a return on investment.

People are not adding jobs or adding capacity because of their view of demand, or their view of the environment -- the uncertainties I mentioned before. Having cash on hand, when -- particularly when you can borrow ultra cheaply, is just good, prudent treasury management for that point in time when things do reverse and you want to make those investments.

AULETTA: You talk to many business people and they have -- they express some real reservations about the current administration in Washington. And you have said publicly that you didn't believe that Obama was anti-business, but you said you didn't think he had basically a clue about job creation.

What is it they don't understand, in your judgment?

OTELLINI: Well, I think it gets back to this belief that everything stems from the government versus private sector.

And I think it's telling that there's not a former C.E.O. or a current C.E.O. sitting on the Cabinet, or any senior advisers. I think it's telling that you don't have a view that the private sector is the engine of the economy currently. Now, they may come to that position at some point, but that's not -- that's not been the first two years.

AULETTA: But do you really think if they replaced Larry Summers with a former C.E.O. or a current C.E.O. that it would --

OTELLINI: Well, it's a start.

By the way, I don't know that a C.E.O. should be in charge of the economy. (Laughs.) But, you know, when you look at people and commerce or labor, I mean, they're not -- they didn't -- they were governors. They weren't people that ran businesses.

So, somewhere around you, you need to surround yourself with people of diverse opinions. And that's what diversity means. In its essence, it's diversity of thought, and I don't think we have a sufficient diversity of thought there today to arrive at the right answers.

AULETTA: But am I wrong to assume that you're all -- that implicit in your answer, is the belief that he should have people around him who understand that job creation comes out of the private sector? Is that the heart of your --

OTELLINI: Yeah, or at least someone to voice that opinion. And the -- you know, I don't know about where you've worked, but where I work, we have --

AULETTA: I worked in a place where I had no responsibility for anything. (Laughter.)

OTELLINI: I was being more polite to you than -- but, you know, what we like is, particularly around points of policy or technology, you want a spirited argument. You want both sides out there. You want someone to have that devil's advocate position. I don't think both sides are being heard in the inner councils.

AULETTA: You've said that Intel's main competitors are in Asia. What advantages do Asian companies have over a company like Intel? You mentioned, obviously, taxes, and --

OTELLINI: There's no -- I mean there is no one set of things. I think they differ by company and by country. In the case of someone like Samsung, who is a large competitor of ours, you have Korea with basically zero taxes and free money and you have people that would not -- that work in standards that would not be acceptable to American workers. So they have a different level of productivity. I mean, it's not something I aspire to, I just say that's a difference. They can get more out per nickel. So you have to watch that.

And the way you solve that, the way we compete against someone like that is to use our intellectual capital to build better products. In the case of China, it's just a matter of resources coming against you. In general, though, semiconductors as an industry are not for the faint of heart. Factories cost 4 (billion dollars) or $5 billion now. They have a shelf life of a few years.

And you're always betting on -- you know, I like to say you dig a really deep hole. You spend $4 billion to manufacture products on a process that doesn't exist yet for markets that don't -- that haven't been invented on -- with products that you haven't designed. And you do it every year. And so, unless you're an optimist, going back to your initial statement, you'd be nuts to have a job like this. (Laughter.)

AULETTA Seventy five percent of your factories are in the U.S., even though roughly the same amount of your business is overseas.

OTELLINI: Yeah.

AULETTA: And yet, you said in your talk that it cost $1 billion more to build plants here than in the -- elsewhere. So why are 80 percent of your factories here?

OTELLINI: Well, we historically have been here. We have factories overseas. But as I said earlier, the workforce here is really wonderful. The security and safety that you get by operating in the United States is exceptional, and we shouldn't discount that. It is still the largest market for computers, we shouldn't discount that, et cetera.

But I'm just -- I look at these things as a first derivative. And the first derivative says that if I look at the rest of the semiconductor industry, leave Intel out, we're the last one standing in the United States. Everyone -- no one else has built a new factory in five or 10 years. Everyone is building it either offshore or through joint ventures somewhere else.

And if this is the most important technology of the 21st century -- semiconductors -- and the first derivative is negative relative to building new factories here, it ain't good.

AULETTA: Let me ask you what essentially is both a business and foreign policy question. There's a lot of debate in the U.S. about what America's policy should be towards China. And if you listen to many in the business community, they say that, you know, this is a giant market and you want to be there for obvious reasons. If you had the ear of President Obama, and he's going through a tough patch with the Congress on this issue, what would you advise him about how to --

OTELLINI: I mentioned this to Jim before this. I think I'd tell him not to start a trade war with your banker. (Laughter.)

AULETTA: What else would you tell him?

OTELLINI: Well, if that isn't enough. (Laughter.) You know, I'm sort of a free trade guy. So I don't know. I probably would try to talk to him about that. But in general, I think that we should spend all of our energies right now trying to fix issues in this country and not lecture others.

AULETTA: You -- Intel has had a long and profitable relationship with Microsoft. You're also a member of Google's board. Google and Microsoft are often at war. Does that make it awkward for you?

OTELLINI: No. You know, I -- at the end of the day, I work for Intel shareholders. And both Intel -- both Microsoft and Google are huge customers and ecosystem partners. A lot of the work on -- you know, Android is running on Intel now. So to the extent that Android is successful out of Google, or Chrome, their operating system is successful out of Google, I want it to be on an Intel chip. And on the other hand, you know Microsoft is our biggest partner, and I don't see that changing.

AULETTA: Do you -- are you disappointed that Intel has not done better with its chips and mobile devices comparable to what you've done with say --

OTELLINI: I wish we had started earlier. And so, where we are is a function of when we started. We started working in this area at least around the -- in the current forum less than four years ago. And we'll have phones out with our products next year.

That's about the design cycle before modern semiconductors. And for coming down the curve on performance and power. I wish I was -- had been smart enough to start that seven years ago, we'd be in a different position today, but I wasn't.

AULETTA: But when you think about mobile phones, there have been some estimates that there will be 5 billion mobile devices by the end of this year in the world.

OTELLINI: Mm-hmm. (In agreement.)

AULETTA: How do you see them changing the world?

OTELLINI: Well, ultimately they'll all be smart, and they'll all be connected to the Internet. And it's just a matter of how much time. So today, out of the 1.2 billion phones that are shipped this year, something in the range of 250 million are what we would call smart phones. And as a percent of the market, that's going to grow every year from, you know, 20 percent to 100 percent.

So if you plot that curve over the next 10 years, the market converts. And so from my perspective, that's a classic inflection. What that market will need is our chips that are very, very high performance and ultra low power. And that's what we're the best in the world at.

AULETTA: So what -- I know you said you're an optimist, but what's your nightmare? What do you worry about for your company in the future?

OTELLINI: I worry that -- like anyone in technology, that you miss a technical zig zag, you miss a market. I mean, like I said earlier on smart phones, I wish I was smarter earlier. I don't think we're going to miss the base technology. I don't think anyone's going to keep up with us on semiconductor manufacturing or processes in the world.

We're two years ahead of anyone else and probably will extend that lead as this stuff gets harder and harder and more expensive. The issue is what do you build with it and what do you have your engineers design.

And then, which gets back into the problem of -- it takes a number of years to design a modern, microprocessor. Perhaps the most complicated machines that humans have ever built. And given that that is -- that process takes four or five years, you have to define what the market's like four or five years from now pretty well.

Now you can argue in some case you're inventing the market, so it's self-fulfilling. But, you know, until Apple did the iPhone, no one knew what a smart phone could be. There was a category, but they didn't know what it could be. The same thing with Hablets.

So you want to -- I think it's important that -- for companies like ours, you have enough risk taking out there to capture a mistake or a zig if you miss it.

AULETTA: There was a wonderful book written about 10 years ago by a gentleman at Harvard by the name of Clayton Christensen, the Innovator's Dilemma.

OTELLINI: Yeah, I know.

AULETTA: And he made the argument in that book that often what happens in companies is that they stick to what they're good at, and what generates much of their revenue and profitability and they miss that upstart, that new technology that's going to supplant them. Do you worry about tha and what's -- what are you betting on?

OTELLINI: I do, but you have to understand. We are I think unique perhaps in anything other than the -- in any industry except for music or entertainment where the next song is always the best song, right? If I don't invent a better microprocessor tomorrow, you'll never buy a new machine. Ninety percent of the revenue that I get in the month of December is typically from products that I wasn't shipping in January -- the preceding January.

So I have a huge turnover of product types built in by design because people want new products, otherwise why bother. So because of that -- and we call it cannibalization factor -- because of the cannibalization that's implicit in the business model -- I don't want to say we're immune, but we're more immune to companies that are on a static course of building in Clayton's example, you know steel beams forever. And then you get the mini-mills that came up and took them apart.

AULETTA: Well, you said in your speech software is the new steel.

OTELLINI: Software is the new steel.

AULETTA: I'd like now to invite members to ask questions. And wait, just raise your hand. I'll call on you. And if you would just identify yourself, and we'll get a microphone to you.

Right up front.

QUESTIONER: Clive Lipshitz, Credit Suisse. Thank you very much.

My question relates to the culture of Intel. On the one hand, you have a company with really complex manufacturing processes, the exactitude of the fad. And on the other hand you mention a lot about innovation and creativity.

As the CEO, how do you really engender both of -- both of those cultures? And then really, to the extent of which M&A is really a part of this, how do you maintain the creativity, the entrepreneurial nature of the management business, of the target companies you might acquire?

OTELLINI: Great question.

I want to just correct your premise. It's not like manufacturing is on autopilot. In the latest generation of silicon technology we had to reinvent, from scratch the transistor, after 40 years. And we invented it -- I won't bother you with the details but we ended up using a metal called Hafnium and invented a high-K/metal gate which allowed us to shrink the process.

Eight months before we were scheduled to go into production with all the factories and all the products, we didn't know how to do that. We didn't know how to manufacture it in volume. There were inventions still happening. And, in fact, I would argue that much of the -- the majority of our inventions today are happening on the semiconductor device side of the house. On the other side of the house, the way that we've tried to keep the culture vigorous is to have organizations sort of competing with themselves.

So, I've got a team now building handsets. And their charter is to make the handsets so good and so smart that it makes the PC obsolete. I don't think it's going to happen but if you don't try to eat your own business somebody else will. And so we do a lot of that.

In terms of M&A, well we're just getting revved up on that again, you know, we hadn't done a lot with M&A for almost a decade. Current thinking, at least for the companies -- two of the three companies we purchased is we leave them along. The Wind River and MacAfee, we'll leave them alone as standalone subsidiaries for the most part, their own brands for a while. At least for the foreseeable future, own sales forces, their own products, but we're deeply integrating their products into ours. At that level, the product integration level. So they have their own culture.

For a company like Infinion that we just purchased where we purchased the modem assets, it's a semiconductor company. So that will look much more like mother Intel a year from now than it did like mother Siemens where they came from.

AULETTA: Yes? That table. That gentleman.

QUESTIONER: This is the other -- turn the coin to the other side, back to politics. We have a pretty good sense of your view of the administration, but let me ask you about the other side of the aisle. What's happening with the Republican Party now?

Can you give us your reflections on this and in particular, certainly the movement of a quote-unquote "high-powered executives" get into politics and for example, in Connecticut, in New York, and in California? Is this good? Are you pleased with what's happening? How do you reflect on all of this?

OTELLINI: Gosh. I really don't like going into politics here. (Laughter.) But, since you asked, I'll give you a straight answer.

AULETTA: It's only on the record. It's okay.

OTELLINI: I know. But it's -- you know, it's just not what I want to do, but I'll do it.

QUESTIONER: You did talk about Obama.

OTELLINI: Well, did I -- I didn't start out that way, I was asked a question. (Laughter.)

AULETTA: So, continue.

OTELLINI: The -- I'm sorry, I lost my train of thought.

AULETTA: Republican --

OTELLINI: Republican on the other side of the aisle and the high-power execs.

I don't know how it's going to shape up. But what I can say is that living on the other coast, there's a lot more interest, agitation, frustration and anger at both sides than I've ever seen. And this is not an R vs D kind of thing. My wife's two sisters are the two most apolitical people I've ever known in my life, are now coming to Washington to do marches. And --

AULETTA: Tea Party or Jon Stewart's? (Laughter.)

OTELLINI: Tea Party. And you know, it's just indicative of -- the fact that Meg and Carley (sp) are both neck-in-neck against political insiders is stunning, you know?

So, there's something going on out there, and I think, I think it's more that people are just -- have had it with both sides and want a return to normalcy, whatever normalcy is defined.

And I don't -- and I think that certainly an elections changeover, which may happen in November, will give one side that message. I'm not sure that the winning side will have internalized the reality of what's going on. That's what I worry about is that we switch leaders and have the same thing.

AULETTA: Yes?

QUESTIONER: Hi. I'm KT McFarland of Fox News. And when you -- what you talked about today was very similar to Norm Augustine did in a report that he recently did making all the same points that you did, that if we could absolutely regain the technology edge, but in order to do so we have to do all the things you've talked about.

But you've also talked about the fact the political environment -- and you've just said more or less the same thing, that both parties don't get it. If you look at what happened after World Word II, GE was the Intel of its day. GE looked around and saw a very similar political environment and so they became very proactive in trying to form and frame the political debate in the country, the technology was good, blah, blah, blah. What are you and people like you doing to frame the political debate today? Particularly --

OTELLINI: GE (Laughter.)

QUESTIONER: Well but particularly in this environment where it's a rich-target environment.

OTELLINI: Well, you know, Intel has always had relatively activist CEOs going back to Bob Noice when he took over Semitech -- you know, rallying against saving the industry against the Japanese 35 years ago. And, of course, Andy Grove was legendary. But in general, our pulpit has been focused on education.

If you look at the one thing that's common out of the CEOs of Intel for 40 some odd years now is that we focus on getting education right, particularly math and science. And we've put over $1 billion of our money into that as a company. It is the singular financial -- philanthropic thrust of the company.

But from my perspective, this is an outlier, having to get up on a pulpit and talk about competitiveness. I would rather not do, but I do it because, quite frankly, until I did it in Aspen nobody was doing it. And, and now we've got a dialogue. And I don't pat myself on the back for that, but it got people saying, you know what, there may be something there. And that's how change happens. Change doesn't happen wholesaly. It happens a little -- this kind of change takes one or two things at a time. You stop -- you stop doing bad things and you start practicing some good things.

I see us stopping some of the bad things. I see the brakes being hit in Washington on some of these things. Hopefully over the next few years we can get some of the good things enacted and get the competitive juices unleashed again.

AULETTA: The mike is coming.

QUESTIONER: Moira McLean with the African American Institute.

I'd like to continue this theme of education and observe that apparently hearing your few that governmnt leaders should have business advisors. Prime Minister, David Cameron, has James Dyson, the inventor of the --

OTELLINI: -- the vacuum cleaner.

QUESTIONER: -- vacuum cleaner involved in a major overhaul of their education system, focusing especially on engineering and getting that into the curriculum at a very early age to rival perhaps what the Chinese are doing.

You have a similar prescription that you would make if given the opportunity with this administration.

OTELLINI: Do I have one? Is that what the question was? Do I have a similar -- well, yeah, it's -- you know, math -- get qualified -- most Math teachers in this country, math and science teachers, were not trained as qualified math and science teachers. They'd back into it. And you kind of get what you pay for. These are good people, but they just didn't have the background.

So, let's start by making some priority choices. Why shouldn't we pay Math and Science teachers three times as much as P.E. teachers? Let's put our money where our mouth is in some of these things and start that process going.

You know, we sponsor --

AULETTA: We should have Randy Weingarten here.

OTELLINI: -- we took over the old Westinghouse Science Talent Search and then we sponsored an international one.

The Westinghouse one is wonderful. You see the -- you see these, the top 5 percent of America's high-school grads come through and the projects are wonderful.

On the international one, China has 6 million kids participating down to find a few handfuls that get scholarships -- 6 million kids. And as a percent of their population, that's three or four times what we have here in the United States in the comparable of things.

So they have said that there's an interest in math and science that we need to, you know, get going here. And I do think the administration has done a good job on the STEM stuff in terms of highlighting that. But then you're into the thing of "So where are the teachers?"

So until you solve that problem -- and it's terribly critical for girls. Girls get turned off to math and science in the fourth grade. And if they haven't found a teacher that pushes them forward at that point, they never come back. So we lose half the population early -- way too early to even give them a chance to become the future scientists at Intel.

AULETTA: Yes, the gentleman in the middle there.

QUESTIONER: Charles Pollack.

Two issues. On the question of China, you expressed yourself as a free trader. Now, American corporations have been very successful in siting their plants in China, which is estimated to have a currency advantage of 20 (percent) to 25 percent, an undervalued currency to that extent.

Corporations have not suffered, but American workers have lost hundreds of thousands of jobs. How do you reconcile that view with your view of the situation of the United States economy with over 9 percent unemployment?

Second issue: You argued convincingly that the U.S. corporate tax rate exceeds that of almost all other nations, and also that the United States would benefit from having tax incentives for the creation of new factories. However, we now currently have a federal deficit of a billion -- of a trillion, 300 billion (dollars) or a trillion, 400 billion (dollars). And the question is how we can correct that problem.

In the broader context, do you have a view of how we can give tax incentives, reduce the corporate tax rate, and at the same time make progress toward a better balance in our federal bill?

OTELLINI: I mean, you're assuming that spending is fixed, which I have a problem with in any of these conversations. Spending is not fixed, nor is revenue. So I think that we need to have serious discussions on how much government people really want or how much waste there might be in government or that whole thread on spending.

My proposal on tax holidays or new jobs basically -- right -- doesn't cost anything. It's not like it's taking away from existing revenue or spending. In fact, immediately those workers will pay taxes on day one, and you have new jobs. And at some point in time the enterprise will pay taxes once it gets up and running. So to me that's almost a no-brainer in terms of funding. It self-funds itself.

On the China question, I can't speak for everybody's -- every industry that's there. I can tell you what we do in China. We're opening up a brand new semiconductor factory in Dalian in three weeks. It is -- it'll be two generations off the leading edge versus the United States.

It'll be our lowest-cost manufacturing site, not because of labor. It has nothing to do with labor. It has to do with the capital grants, the equipment grants, the tax holidays that they gave us there.

But, you know -- and those aren't jobs -- you know, or you could argue they could have put those jobs here, but I wouldn't have put that factory up. It's a factory that is meant to satisfy the Chinese market, for the most part.

And at the end of the day, Americans have to compete in a global market. This is my Friedman comment. You know, we may not be able to outcheap China and India, but we can outsmart them and out-productivity them and outthink them in the way we construct the jobs. And that's what I'm really looking for is that kind of job environment versus, let me say, menial assembly work.

AULETTA: Paul, if I can follow up on the first part of that question, I don't understand, since I don't know any human being alive who believes that you can cut your way out of the deficit in the U.S. And since the incentives you're talking -- the tax incentives you want will take time before they kick in and generate tax revenue, how do you address the problem of --

OTELLINI: You put people back to work. You get them off public -- off unemployment and get them working again. That starts generating -- people start paying taxes when they have jobs. They aren't paying taxes when they're on unemployment.

AULETTA: But you're saying you do that by creating the incentives, and over time you will create jobs.

OTELLINI: No. If somebody commits to put a factory up -- you know, we do this offshore all the time. You know, we're building factories in Ireland or Israel or China or Malaysia. And you get, as part of the package, an incentive package that you get an end-year tax holiday or equipment credit or something like that worth several hundreds of millions of dollars, because people want companies like ours to invest there and to hire their folks.

What's different about Mississippi versus Malaysia? You're not taking anything away from the tax rolls that is there on the day you give that grant. You're just deferring when that company pays something on the corporate side, knowing that you create jobs for people that create taxes on day one.

AULETTA: I don't want to dominate. Let's go back -- way in the back there, the gentleman with his hand up.

QUESTIONER: Hi. My name's -- (inaudible.)

Can you comment on quantum computing? Is that something that's realistic or on your radar screen?

OTELLINI: It's -- there's -- we have research on that. It's way out, 25 years plus, in terms of our view. You know, we're not even close to knowing how we would architect such a machine. The research is on it, but nothing -- you know, nothing that I'll see in my career.

AULETTA: We have a question from one of our members, and it's from Edwin Smith, University of Southern California Gould School of Law. And he asks the following question; I'll read it.

"There has been some speculation that the Stuxnet malware occurrence in Iran is someone else's application of an enhanced cyber-warfare capability. What is the likelihood of the truth of this speculation? And, if true, what are the larger implications for national and global economics and security? Simple question.

OTELLINI: Richard and I were talking about this before the lunch today. You guys have a fleet of black helicopters, right, with CFR? (Laughter.) You ought to be able to answer that better than I can. (Laughs.)

QUESTIONER: That one will come back to haunt you.

OTELLINI: Yeah. No, we're just kidding.

I have no idea. It is -- is it technically possible to interrupt the grid remotely and to change the voltage on the centrifuge to overrev it and blow them up? Absolutely. Absolutely. And, in fact, this particular one is tied to a Siemens motor controller that is all around the world.

Now, who did it and why, I have no idea.

AULETTA: Yes, the gentleman whose hand is still raised.

QUESTIONER: (Inaudible.)

How serious a challenge are China's indigenous-innovation rules to Intel? What's Intel doing about it? And what should the United States government be doing about it?

OTELLINI: They aren't rubbing up against us yet. And one of the reasons I put that factory in Dalian was exactly for this. As I said, it's two generations off the leading edge of what we would build here.

Our plan would be to put -- to license technologies to Chinese designers to be able to create products that can go into that plant for their own local, you know, building consumer electronics or automobiles, whatever they want to do. So we would essentially allow them to take advantage of their own creativity, using our intellectual property, where we would build it in a very controlled environment. And I think that will keep some of this at bay for some time.

Now, having said that, the Chinese have had microprocessor projects for a number of years. And they're currently at the state of the art -- if you remember the 486, which some of us in the room are old enough to remember, a microprocessor we built -- gosh, Michael -- 15 years ago, something like that, the current indigenous capacity is around the 486. But they're doubling every two years.

So that says, all things being equal, they're going to get to the level of sophistication that we have in a decade-plus kind of time frame. But there are other barriers at that point in time, like manufacturing facilities. So my view is that if I offer them these kinds of incentives, that gives us free running room in China for quite some time.

AULETTA: Yes, the -- (audio break) -- woman.

QUESTIONER: Hello. Kathy Taylor (sp), BAF.

I'd like to take the conversation from America being the best place to do business and ask you about how we make it the best place to start a business. We don't usually think of small business as a foreign policy issue, but with 30 million small businesses creating the most jobs every year in our country, how do we make sure that this is the best place to start a company?

OTELLINI: I don't know that I'm qualified to answer that. I haven't been in a small business for 36 years.

I haven't been in a small business for 36 years and it's not something I spend time on. Well, but they'd already -- I mean, yeah, the startup with $100 million of seed capital. It's not like -- (laughter) -- you know, my son tried to start up a business in San Francisco a while back and he gave up because of the permitting process and the state wanted, I don't know, a $900 fee just to register his business and -- (inaudible) -- and he just -- he just said to heck with it. So some of the stuff I mentioned in terms of permitting probably is there but I have no expertise here.

QUESTIONER: Jim Hogue (ph) from the Council. There seems to be general consensus that our infrastructure is in increasing need of modernization. You said that if we were going to spend what's left of the stimulus money you would spend it on infrastructure but you'd rather not spend it at all. How serious is our infrastructure problem? How should we go about financing the modernization of it to keep up with what's going on elsewhere in the world?

OTELLINI: Well, I haven't visited all 50 states recently but the ones I go to a lot and the one I live in, California, is like going to the Third World. In fact -- in fact, if -- I have a house at Lake Tahoe and when I drive from California into Nevada you think you've gone to a different country. The roads are paved. Everything kind of works. Then you get back to California and there's potholes in the interstate highways, and I live in San Francisco which, you know, is budget challenged to the max.

Everything I've seen says that there is an infrastructure problem. There has not been a new electrical-generating facility built in California in 25 years and population has more than doubled. So you get down to where bridges fall apart -- water delivery systems are under funded -- there's no electricity for growth right now. That's why you see so many companies moving from California to Texas or Utah or Nevada. And it may not be a broad problem. You go to Texas, you don't see this problem. But in the old industrialized states, and I'll put California in that because of the World War II stuff, it's pretty -- it's pretty bad.

AULETTA: So what do you do? What's the answer to Jim's question?

OTELLINI: Well, you prioritize fixing some of this stuff. You know, the San Francisco earthquake happened in 1989 during the World Series. The Bay Bridge is not yet repaired. You think China would let that go for 11 years? And it's something like, I don't know -- it started out at $300 million and it's $1.7 billion to fix it now. You know, we just don't prioritize these things.

AULETTA: Gentleman.

QUESTIONER: I'm Bruce Schearer from Apollo Philanthropy Partners. You mentioned your corporate social responsibility program and education and you've gotten a lot of awards for it. It's a fantastic program. Last night in this room we had representatives from the U.N. and the U.S. government talking about the Millennium Development Goals which include education and you're partly involved with those.

There's going to be a huge shortfall in education goals in five years. When you look at your work, you've got all these wonderful internal goals like giving away 100,000 computers but they're not strategic and they're not really tied to making the space of a coordinated effort between business, government, and the nonprofits to bring education levels higher globally. What is your plan to take that corporate social responsibility and bring it into this century?

OTELLINI: The place we lag is actually the United States where we started some of these programs. We have a program that is very strategic called Intel Teach, right, where we have developed -- it started out teaching teachers to use computers because the kids knew how to use them and teachers didn't, and it eventually morphed into curriculum development, integrating technology into the classroom into the learning process and ultimately into learning tools that can be loaded into machines and so forth.

We have trained 6 million teachers worldwide. We've trained 25 percent of the teachers in China. This is all on our nickel. We have trained 250,000 teachers in the United States, which is a paltry penetration because the school districts and the unions don't want to do it.

So you have a -- where we are successful and where we are integrating the technology and change into the classrooms is where it starts tops down, typically at, like, minister of education level. He says -- he or she says, we're going to do this for all of our teachers and we start marching through country -- city by city in a country. And, you know, I expect this to be at 10 million (dollars) within two or three years.

So part of it is that somebody in charge has to say I'm going work with private -- (audio break) -- you know, stretching from someone like QualComm to someone like Erickson and Nokia. I mean, they all have -- it's different than what you see in the -- in the computer industry and it tends to be -- it tends to use IP as a -- as a club to try to keep people out of your pockets. I'm worried that as phones and computers morph into the same devices that increased litigiousness and the IP costs that are passed on to consumers are going to be hard to avoid, and you have two industries colliding.

So on one hand, the technological process to solve these two things is very simple. We're going to employ a lot of lawyers as two industries for the next 20 years sorting out who's going to pay what to whom. And in my -- what I fear most out of that is two things -- that A, the progress will be retarded, and B, the consumers will not benefit from the historic value of Moore's Law driving costs down.

AULETTA: On that note, I want to thank Paul and thank you. (Applause.)

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