On November 1, 2005, SPRIE invited Jimmy Lee, Vice President and General Manager, Timing Solutions, Integrated Device Technology (IDT) to speak at SPRIE's seminar series on the rise of China in innovation. Lee shared his experience in running a full-blown integrated circuit (IC) product development center in China together with an informative account of China's rise in the IC industry.

The globalization of the IC industry and the rise of China

The commoditization of semiconductor technology is marked by the encapsulation of previously proprietary technologies into commercially available equipment and software design tools. This has substantially lowered the entry barrier for IC design. It has enabled the emergence of a new generation of companies in the Far East in backend assembly and testing as well as IC design. The process is further helped by advances in communication technology that eases access to and sharing of information across geographies. Meanwhile, the IC industry is shifting from being technology-driven to application/market driven. The integration of product development and market has become an important differentiator in global competition. These industry changes are coupled with changes in the worldwide market, mostly noticeably the rise of Asia as a significant market.

China is rising quickly as a significant player in IC. It has a huge pool of talent and many "returnees" - those who grew up in China, were educated in the West and have returned to China to work; they are essential in transferring competence from the West to China. China also enjoys substantial cost advantage while having fairly decent productivity. Starting from the 1990s, the government has invested heavily, and issued extensive regulatory incentives, to promote the semiconductor industry. As a result, according to Lee, in 2004, there were 102 IC test and assembly companies, 50 foundries and 457 IC design companies operating in China. They generated a total revenue of $4.4 billion.

IDT's product development venture in China

IDT is a major IC design company. Its workforce of 3,700 (1,500 in U.S.) has designed 1,300 IC products in 15,000 configurations. In fiscal year 2005, the company garnered a revenue of $645 million, 25% of which went into R&D. In the late-1990s, frustrated by the high turnover and the shortage of talent in Silicon Valley, it opened up an operation in

China. China's abundant and low-cost talent pool provided an opportunity. The company was also attracted to its budding telecommunication market, an area IDT had wanted to get into.

Luckily for IDT, "it just so happened that Newave Technology Corporation was available." Newave was the first IC design start-up in China. Founded by several Chinese returnees in 1996, the company had 100 some engineers developing telecommunication IC for the China market. In 2001, IDT acquired Newave for $85 million. At the time of acquisition, Newave was working on two products but its revenue was very small. Since then, Lee built it into a successful product development center.

Challenges for setting up a product development center in China

Setting up and operating a product development center in China is full of challenges. Lee grouped them into two areas.

The first is organizational challenges, from defining the mission of the organization to every aspect of human resource management: recruiting, training, retention, etc. From the beginning, the mission was to be a self-sufficient, whole product development center. "They basically have the responsibility to develop the entire product from the specification to the manufacturing transfer and they also have the entire infrastructure such as HR, finance and legal to be self-sufficient to support the local needs." Such positioning is crucial in China because the competition for talent is extremely intense and this generation of young engineers is very ambitious, many wanting to start their own business sometime in their life. They are often impatient with long-term strategy. Therefore, "if you want to have top-notch talent working for you, you have to challenge them constantly in technical areas." Picking the right leader is also a key. IDT decided that this person had to be born in China, grew up in China, be western trained and have worked in western companies. Such a combination is ideal because there are a lot of subtleties that are culture specific and one has to be born and grow up in China to get it. In the technical area, IDT hired a few long-term expatriates from headquarters. They are the real masters in their respective fields in IC design. This is where the leverage comes from: "You use one super high power master technical guy to leverage the intellectual labors of the local engineers," said Lee.

The second challenge stems from social-cultural differences. A few examples: communications is a big issue, not so much because of language barriers but because of differences in culture and the level of professionalism. As Lee stated, "...it's more of the mindset. It's very difficult at the beginning to teach them how to communicate, when to communicate and what to communicate." Secondly, social-culture norms shape a different level of standard in decision-making and judgment call. Lee needs to put a lot of effort into teaching the local engineers how to think from the customer's perspective. Thirdly, employees are loyal to individuals rather than the corporation. These social-cultural differences are an area where there is no shortcut. They have to be overcome with training. Training means taking every opportunity to educate the local workforce: formal training programs, informal one-on-one coaching, ongoing training-by-doing, training over hundreds of conference calls over the past 4-5 years, you name it. "To some extent, this is sort of the brainwashing process," commented Lee. "There is no shortcut. You just have to put in a lot of TLC - tender, loving care. This is very challenging."

IDT's positive experience in China

While IDT "did run into many, many of those challenges," its overall effort in China has been extremely positive. The local team now manages a dozen of products, which involves some original work. The headquarter team is using some of the intellectual property generated by the folks in China. The local team even presented a paper in this year's IEEE ISSC Conference. It is the first paper coming out of China presented at such a prestigious conference. Productivity and cost advantage are also evident. Lee estimated that "for the team here in the United States to develop the same number of products will probably take them twice as long in time and probably cost 4-5 times more. This is really a good deal for the company."

Future outlook

Looking ahead, Lee highlighted a few issues that will shape China's IC industry. Overall, it will be a fertile ground for IC product development because of the talent pool. The job market will remain red hot with rapid increase of wages and high turnover rates. There will be hundreds of start-ups because of the low entry barrier. However, many will lack management experience and business acumen. Duplication of investment and engineering effort for the same market will result in the industry consolidating into dozens of medium size companies. In ten years time, these survivors will become significant suppliers to domestic IC demand in emerging applications such as wireless communication and digital TV. All in all, as Lee pointed out, "one needs to marry the best of the East and the West to create a world-class company."

What is the state of China-Taiwan relations?

President George Bush fanned the flames of the longstanding conflict between China and Taiwan during his November 16 speech in Kyoto, at the start of a week-long state visit to Asia. In urging China to expand openness and allow its people more freedoms, the president used Taiwan as a model, saying Taiwan had brought prosperity to its people by embracing freedom and creating a democratic Chinese society. China rejected Bush's comments. "Taiwan is an inseparable part ofChina, and China does not brook any interference in its internal affairs," Foreign Minister Li Zhaoxing told reporters at the Asia-Pacific Economic Cooperation (APEC) summit in South Korea. Bush meets Chinese President Hu Jintao and other Asian leaders at the summit November 19.

What is the history of the conflict?

Taiwan, an island of 23 million off China's southern coast, was occupied by Japan for fifty years, from 1895 to 1945. In 1949, after Chiang Kai-shek's Nationalist Party lost its power struggle with the Communist Party in China, Chiang and his followers fled to Taiwan. Their Kuomintang (KMT) government-in-exile in Taipei defined itself as the alternative to Communist rule and hoped one day to return to power in Beijing. The KMT governed Taiwan from 1949 to 2000; its often harsh rule included discriminatory laws against ethnic Taiwanese and nearly forty years of martial law, which was finally lifted in 1987. The KMT has historically seen Taiwan as a part of "one China" that would eventually be reunited under Nationalist rule.

Taiwan's current ruling party, the predominantly ethnic Taiwanese Democratic Progressive Party (DPP) was founded in 1986 to counter the KMT, and only became legal in 1989 after a longtime ban on opposition parties was dropped. Taiwanese President Chen Shui-Bian is a member of the DPP, which envisions Taiwan as an independent nation, separate from China. In 2000, Chen was the first DPP candidate to be elected president. Taiwanese sovereignty is the first and most prominent issue on the party's platform. This position has put the DPP severely at odds with China's leadership, which views Taiwan as a renegade province that will one day be reunited with Communist China--by force, if necessary.

What is the U.S. position?

The United States officially recognizes only one China -- including Taiwan -- and urges a peaceful resolution to the Taiwan question. However, Washington is also bound by the 1979 Taiwan Relations Act to aid in Taiwan 's defense, including selling the island the weapons it needs to defend itself against China. Experts say the United States is walking a fine line between China 's growing influence and the historical U.S. relationship with Taiwan. "Bush had to stand up for freedom and democracy and all the other values he constantly talks about, without picking a fight with China that nobody really wants," says David Kang, an Asia expert and visiting professor at Stanford University's Shorenstein APARC. Bush stressed in his speech that "there should be no unilateral attempts to change the status quo by either side."

What is the impetus behind independence for Taiwan?

After the long KMT reign, many Taiwanese are now pushing for self-determination. Independence advocates say Taiwan is a free and democratic nation with multiparty elections and a very successful economy, with a gross national product (GNP) of $328 billion in 2004, of which $174 billion was due to exports including electronics, computer parts, textiles, metals, plastic, and rubber. They say the Taiwan people should have the right to decide for themselves if they want to join China or become an independent nation. Since Chen was elected to his first term in 2000, he has steadily pushed the idea of Taiwanese independence. He provoked Beijing August 3 by supporting the idea of a referendum to ask Taiwanese citizens if the island should declare formal independence from China. China is very hostile to such talk: On August 7, the official China Daily newspaper quoted a Chinese military official saying, "Taiwan choosing independence is tantamount to choosing war."

What has China been doing?

Making both incendiary statements and conciliatory moves. In July, General Zhu Chenghu, the dean of China's National Defense University, warned that China would attack the United States with nuclear weapons if it intervened in a military dispute over Taiwan. Although he later claimed the comments were his own and did not reflect the views of the state, Zhu's words generated international concern. However, China's actions toward some Taiwanese officials have been friendlier. James Soong, head of the Taiwanese opposition party People First, has visited China several times in the last year at the invitation of Beijing. Experts say Beijing is reaching out to opposition leaders in Taiwan in an attempt to sidestep the DPP and build new bases of support on the island. Soong is taking advantage of the opening to play for domestic political support and attempt to show up the DPP, they say. His actions infuriate the ruling party in Taiwan because, despite his unofficial status, Soong is building friendly relations with China in direct contrast to DPP policy.

What are the next steps?

Bush alluded to peace talks in his November 16 speech, but experts say such talks between China and Taiwan are unlikely in the near future. "There are elements moving towards peace talks, and other elements, especially in Taiwan, that are pushing toward independence and want to stick China in the eye," David Kang says. But "it's hard to say what Taiwan wants," he adds, noting the Taiwan electorate is almost evenly split between those who favor independence and those who want to improve relations with Beijing for historical, cultural, and especially economic reasons. David Kang says that, in the last several years, as many as one million Taiwanese have moved to China to do business.

What are Taiwan's security concerns?

China, located just 100 miles away across the Taiwan Strait, has hundreds of ballistic missiles aimed at Taiwan, and is targeting much of its recent militarization campaign specifically at the island, including building amphibious tanks that can be used to storm Taiwan's shores. China's military buildup has put Taiwan at a strategic disadvantage: Taiwan's military spending has dropped 25 percent over the last five years, to only 2.4 percent of gross domestic product (GDP). The United States has been pressuring the island to buy a specially designed $18 billion package of U.S. arms to improve its military capabilities. But some Taiwanese politicians are reluctant to devote resources to military buildup given the presumed U.S. protection, and opposition leaders have blocked the sale over what experts call domestic political squabbling. But, David Kang points out, a military invasion of Taiwan by China is highly improbable. "That's the least likely scenario," he says. "You can have a military dispute that's far short of all-out war."