At long last, a phone with Intel inside

Intel (INTC) CEO Paul Otellini unveiled a smartphone that runs on the company’s Medfield processor in a keynote speech at the Consumer Electronics Show on Tuesday afternoon. The device, made by Lenovo, will be available in the Chinese market in the first half of this year. Intel also announced a partnership with Motorola Mobility (MMI) to develop phones and tablets, although their first product — a smartphone — won’t be available until the second half of 2012. “We’ve only just begun to apply our technology to smartphones,” Otellini said. “We’ve built an incredible platform for our partners to innovate on.”

Intel commands the PC market but has struggled to get its processors into smartphones and tablets. In 2010 Intel unveiled an LG device running on its processors, but the phone never made it to market. Its efforts to promote Meego (a Linux-based operating system) were a massive failure, especially after former partner Nokia (NOK) dumped the OS in favor of Microsoft’s (MSFT) Windows Phone.

But Intel has finally taken some steps in the right direction. Last September it switched gears and announced it would partner with Google (GOOG) to optimize the Android platform for Intel architecture. And in an effort to speed up development for smartphones the company recently combined four existing divisions into one mobile group.

It’s clear Intel needs to make it in mobile. The company does make money from mobile devices powered by rival chipmakers because it sells server processors. Intel has said one server is needed for every 600 smartphones in use. It’s also trying to reinvigorate demand in the PC market by pushing ultrabooks or thin, instant-on laptops. But that won’t be enough in a computing industry that’s increasingly shifting towards mobile.

The Lenovo phone is a start, but it will only be available in China. And whether or not Intel’s partnership with Motorola will yield any successful products remains to be seen. “It’s the coming out party for Medfield,” Mike Bell, general manager of Intel’s newly formed mobile and communications group, told Fortune. “People kept asking us if Intel can play in this space and our message was yes, but until we show something it doesn’t get driven home for people.”

While Intel has been talking about moving into mobile, competing chipmakers like Qualcomm (QCOM) and Nvidia (NVDA), which license technology from ARM Holdings (ARMH), have flooded the market with their products. Proving it can finally give phone manufacturers an alternative to these products won’t be easy.

But that doesn’t mean Intel doesn’t think it can crack into the market. “To say that Intel has no opportunity is lunacy,” Jen-Hsun Huang, CEO of Nvidia, told Fortune. “But this marketplace doesn’t need x86 [Intel architecture] as much and that’s why their capabilities and strengths aren’t as important in this market.” Huang is a long-time Intel rival and the two companies settled a bruising lawsuit early last year.

Intel execs say a lead in manufacturing and unique technology built into its new Medfield processors will help give it an edge. To that end, the company has been showing off a prototype device that can capture 15 pictures with 8-megapixel quality in less than a second. “We’re not using process as a crutch,” Intel’s Bell said on Tuesday. “I think we have a fundamental technology advantage that others don’t have. We have really smart people and a history of doing this over and over again. The process technology is gravy. It’s fantastic gravy.”