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."

This week President Bush will seek to focus the nation's attention on border security and immigration reform. But the president's proposals won't protect Americans from our gravest cross-border threat: the possibility that a ship, truck or train will one day import a 40-foot cargo container in which terrorists have hidden a dirty bomb or nuclear weapon.

The Bush administration maintains that it has a smart strategy to reduce this risk. A new 24-Hour Rule requires that importers report the contents of their containers to customs inspectors one day before the boxes are loaded on ships bound for the United States. The Department of Homeland Security's National Targeting Center then reviews the data, checking against other intelligence to determine which boxes may pose a threat. Although the containers deemed high risk are inspected at cooperating foreign ports or when they enter the United States, the rest--more than 90 percent--land here without any perusal.

We have two concerns about this strategy. First, it presumes that the United States government has good enough intelligence about Al Qaeda to reliably discern which containers are suspicious and which are not. But our inability to thwart the attacks in Iraq demonstrates that we lack such specific tactical intelligence. And supporting customs inspectors, who must make the first assessment of risk, is not a priority for the intelligence agencies. Inspectors must rely on their experience in spotting anomalies--a company that claims to be exporting pineapples from Iceland, for example.

Second, determined terrorists can easily take advantage of the knowledge that customs inspectors routinely designate certain shipments as low risk. A container frequently makes 10 or more stops between its factory of origin and the vessel carrying it to American shores. Many of the way stations are in poorly policed parts of the world. Because name-brand companies like Wal-Mart and General Motors are widely known to be considered low-risk, terrorists need only to stake out their shipment routes and exploit the weakest points to introduce a weapon of mass destruction. A terrorist cell posing as a legal shipping company for more than two years, or a terrorist truck driver hauling goods from a well-known shipper, can also be confident of being perceived as low risk.

So what needs to be done? A pilot project under way in Hong Kong, the world's largest container port along with Singapore, offers one piece of a potential solution. At an estimated cost of $7 per container, new technology can photograph the box's exterior, screen for radioactive material, and collect a gamma-ray image of a box's contents while the truck on which it is carried moves at 10 miles per hour.

Terrorists can defeat radiation sensors by shielding a dirty bomb with dense materials like lead. But by combining those sensors with gamma ray images, the Hong Kong system allows inspectors to sound the alarm on suspiciously dense objects. Inspectors would need to analyze enough of the scans--perhaps 20 percent to 30 percent--to convince terrorists that there is a good chance that an indistinct image will lead a container's contents to be sent for more reliable X-ray or manual examinations. Images of container contents would then be reviewed remotely by inspectors inside the United States who are trained to spot possible nuclear weapons.

If terrorists were to succeed in shipping a dirty bomb, for example, the database of these images could serve as a kind of black box--an invaluable forensic tool in the effort to identify how and where security was breached. That information could help prevent politicians from reacting spasmodically and freezing the entire container system after an attack.

Such a program could significantly reduce the likelihood that terrorists will smuggle plutonium or a dirty bomb through American ports. But it still would not stop a terrorist from importing highly enriched uranium, which can be used to construct a nuclear weapon. Lengthening the time that a container is screened for radiation would help, and this could be done without increasing waiting times if additional monitors were added to the Hong Kong system near the gate where the trucks must already stop for driver identification checks. Better still would be for the Department of Homeland Security to make the development of new technology that can recognize the unique signature of highly enriched uranium an urgent priority.

Finally, we must find ways to ensure that terrorists do not breach containers before shipments arrive at loading ports. Sensors should be installed inside containers in order to track their movements, detect any infiltration and discern the presence of radioactive material. Where boxes are loaded, certified independent inspectors should verify that companies have followed adequate protocols to ensure that legitimate and authorized goods are being shipped.

Taken together, these recommendations will require new investments and an extraordinary degree of international cooperation. But increased container security will not only help the United States prevent terrorism, it will also help all countries reduce theft, stop the smuggling of drugs and humans, crack down on tariff evasion and improve export controls. What's more, such a program would require an investment of just one one-hundredth of the capital that could be lost if we shut down the global container shipping system after an attack.

Container security is a complex problem with enormous stakes. American officials insist that existing programs have matters well in hand. But we cannot afford to take these perky reassurances at face value while the same officials fail to embrace promising initiatives like the Hong Kong pilot project.

Despite a late start, Pakistan's information technology entrepreneurs and the government are hoping to make it big in the global marketplace for outsourcing of IT-enabled services. How have other countries succeeded and where does Pakistan stand?

Naween A. Mangi spoke from New York to Ron Hira, professor of public policy at the Rochester Institute of Technology, and Rafiq Dossani, senior research scholar at the Walter H. Shorenstein Asia-Pacific Research Center at Stanford University.

Software exports, call centres and medical transcription firms have become all the rage over the last three years. Young entrepreneurs are returning after years spent working at major tech firms in the US to start up their own ventures and the government is forecasting that IT will be the next big thing in Pakistan's economy.

So far, the numbers tell a less-than-compelling story. In 2004, although the software and IT enabled services business was worth $300 million, (including hardware the figure is $600 million), exports and outsourcing made up for just $33 million of that. By comparison, India logged $12.8 billion in software and services exports in 2004.

Still, the Pakistan Software Export Board, a federal body set up to promote outsourcing, forecasts that the business will grow by at least 45 per cent annually for the next five years. A lot of that growth will come from call centres and business process outsourcing which last year made up one-fourth of total exports. In the next ten years, the PSEB aims to be at the top of the class of tier two global IT companies.

But as experts and practitioners agree, Pakistan will need more than ambitious aims to meet that goal. Prof Ron Hira, whose new book Outsourcing America assesses the impact on the US job market, says the outsourcing industry is set for rapid growth in the next few years and if done right, developing countries like Pakistan could benefit from the boom.

Hira is an expert who has testified before the US Congress on the implications of outsourcing. "Pakistan isn't on the map yet," he says. "India dominates what most people think about [when it comes to outsourcing]."

Rafiq Dossani, an expert on outsourcing and a senior research scholar at Stanford University says there are several reasons for that. First, is the poor quality of infrastructure.

"When the Internet tanked recently, that created a really bad perception that the country has not thought through even the most rudimentary aspects," Dossani says. "Deregulation in this area is too limited." He says that while voice services have benefited from the deregulation, data services are still uncompetitive.

He says there are too many stumbling blocks since bandwidth is more expensive than in other countries. "The costs are outrageous at four or five times what they should be," he says.

Dossani identifies the thin segment of English speakers as a second hurdle in the way of a flourishing outsourcing industry in Pakistan. "Of the 30 per cent of the population that lives in urban Pakistan, one tenth speak English that's good enough to work at a call centre," he says. "And of those five million or so, only about one million are available to come into this field as the rest are working elsewhere."

Then, he says poor marketing also holds the industry back. "You just don't see the trade body [in Pakistan] working like India's Nasscom to project a positive image," he says. "The Pakistani diaspora has done well and there is a great need to better use that network."

He forecasts that the outsourcing business in Pakistan can be at least $1 billion in size but says this is only possible if alliances are formed with countries like India and China.

"The Philippines has done well by understanding that it cannot reach critical mass on its own and therefore forming alliances and pitching themselves as a second location to offset country risk," he says. Dossani also says Pakistan has the advantage of a highly skilled group of entrepreneurs which "is the reason why the tiny industry does exist."

Hira adds that since Pakistan entered into the industry late, playing catch up is an inevitable need. However, the sector can take advantage of the circumstances in other countries. "India has done a lot of things right," he says. "They have been successful at not just attracting foreign investment but also building their own companies and leveraging the large Indian diaspora," Hira says.

"India is also so talked about that people are comfortable doing business there. But since wages are rising, Pakistan can use that as an entry point." He says that while countries like India have accumulated critical mass and scale, others are distinguishing themselves in different ways.

Eastern European wages are slightly higher than Pakistan and companies in that region have specialized in near-shoring by targeting the European market. Russia, meantime, is aiming at the U.S. market in both services and manufacturing while the Philippines and Malaysia are targeting services.

"The question really is how you separate yourself from the pack," Hira says. "You can compete on price to a certain extent but you have to offer something more to distinguish yourself."

He says U.S. companies are now moving from pilot stage outsourcing to full deployment which indicates both the success of the pilot projects and the rapid growth that is likely to come in the outsourcing market for the next few years. "There will continue to be a backlash from U.S. workers, but by and large there has not been any real policy movement to restrict outsourcing so there is still a large opportunity," he says.

Hira admits that the extent to which a growing outsourcing industry ties into the broader economy in terms of job creation remains unclear but he says, other advantages emerge. "In India, for example, it remains unclear that they've been able to link the benefits [from outsourcing] back in, but the big benefit is that they have created world class management which can then move into other sectors."

Therefore, Hira recommends that Pakistan take a long-term vision not for the next three or five years but for the next two decades. "Right now you can try to pick up the low hanging fruit and absorb the excess demand but don't just think about attracting the individual company to come [to Pakistan]," he says. "Think about how this will fit into the larger set of skills for your country so that you can differentiate yourself much later down the road."

For nearly two decades, most major developing countries have struggled to introduce market forces in their electric power systems. In every case, that effort has proceeded more slowly than reformers hoped and the outcomes have been hybrids that are far from the efficiency and organization of the "ideal" textbook model for a marketbased power system.

At the same time, growing concern about global climate change has put the spotlight on the need to build an international regulatory regime that includes strong incentives for key developing countries to control their emissions of greenhouse gases. In most of these countries, the power sector is a large source of emissions that, with effort, could be controlled.

The United Nations Framework Convention on Climate Change and the Kyoto Protocol included mechanisms that would reward developing nations that cut emissions, but so far the performance of these mechanisms has fallen far short of their potential.

Beginning in 2002, the Program on Energy and Sustainable Development (PESD) at the Stanford Institute for International Studies (SIIS) and the Indian Institute of Management in Ahmedabad (IIMA) have conducted a set of studies to examine the intersection of these two crucial challenges for the organization of energy infrastructures in the developing world. This research, funded by the U.S. Agency for International Development, examined power-market reforms and greenhouse-gas emissions in two key states in India. At the same time PESD was conducting a comprehensive study of electricity-market reforms in five developing countries (Brazil, China, India, Mexico, and South Africa) as well as detailed analyses of the greenhouse-gas emissions from three provinces in China in conjunction with other research partners.

PESD and IIMA presented their findings at a workshop on January 27-28, 2005, at Stanford University. The workshop brought together scholars studying the organization of the electric-power sector and other infrastructures in developing countries with energy policy makers, technologists, and those studying the effectiveness of international legal regimes, with the aim of not only focusing on new theories that are emerging to explain the organization of the power sector and the design of meaningful international institutions, but also identifying practical implications for investors, regulators, and policymakers.

The workshop offered diagnoses of what has gone wrong and what opportunities have nonetheless emerged. It focused on practical solutions and a look at the prospects for different technologies to meet the growing demand for power while minimizing the ecological footprint of power generation.

One of the key conclusions of the research and the workshop, as discussed by David Victor, director of PESD, is that electricity markets in the developing world have not progressed inexorably and consistently from a state-owned model to an open market-based model. Rather, much as the experience of the past ten years in the United States has demonstrated, reform of electric-power systems has proceeded differentially between parts of the industry and between jurisdictional units, with some segments of the power generation, transmission, and distribution systems still dominated by the state and some segments now fully responsive to signals from the market.

This hybrid condition-with portions of the electricity enterprise deregulated and other portions still fully regulated-has proven to be virtually universal and quite durable as well. For the most part, it also has proven beneficial to the overall operation of the system as well as to climate mitigation due to the fact that introduction of market forces to parts of the system tends to have a spillover effect, helping to improve efficiency in parts of the system that remain under state control.

Tom Heller, SIIS senior fellow, noted that the negotiations leading up to the

development of the Kyoto Protocol and subsequent discussions and experience have

demonstrated that the burden-sharing metaphor-expecting developing nations to

make a proportional investment and effort in reducing greenhouse-gas emissions-

will not be successful. Rather, as gross and per capita energy consumption increases in developing nations, which is occurring especially rapidly in China and India, policies and mechanisms that facilitate investment in efficient and clean energy production, transmission, and end-use infrastructures will need to be developed and rolled out.

The Kyoto Protocol provided a Clean Development Mechanism (CDM) to encourage such investment. However, the conclusion reached by practitioners developing such projects in China is that CDM is an inefficient and insufficient mechanism for fostering the magnitude of development projects that will be required to help mitigate the environmental effects of energy growth in the developing nations.

Two problems with CDM were raised at the workshop. First, the bureaucratic hurdles facing developers of CDM projects are daunting. To date no such project has received certification. Second, the Kyoto Protocol's current round of reductions targets expires in 2012, and uncertainty regarding the likely direction and form of future U.S. and European initiatives provides a disincentive to investment in CDM projects.

Alberto Chiappa, managing director of Energy Systems International, noted the good news is that in spite of these difficulties, investors are finding opportunities to develop projects to provide cleaner sources of energy and improve end-use energy efficiency. Professor P.R. Shukla of IIMA pointed out that there is a great need to align development and climate concerns if future mechanisms for climate mitigation in the developing world are to be successful.

Douglas Ogden, program officer at the Energy Foundation, noted that China has made a firm commitment to greatly increase the market share of electricity from renewable sources to 5 percent by 2010 and 20 percent by 2020 and in 2008 will adopt an automobile fuel-economy standard 20 percent more efficient than U.S. CAFE standards. Also, both China and India are engaged in developing natural gas markets in sectors traditionally dominated by coal.

Mario Pereira, director of Power Systems Research, discussed Brazil's current efforts to develop economical and efficient electricity supply through biomass-specifically ethanol derived from sugarcane bagasse. The ethanol industry was originally developed as a reaction to the oil shocks of the 1970s. Although the majority of electricity in Brazil is provided by hydroelectric projects, sugarcane ethanol has some important advantages. First, the sugarcane fields are geographically close to major centers of demand, and second, sugarcane thrives during drier periods of the year when hydroelectric production declines. The experience in Brazil thus demonstrates that renewables can provide an economically attractive source of energy for developing nations.

Looking toward the future, PESD has several projects under way pertaining to the

intersection of electricity-market reforms and global climate change. The program is expanding its research on power-market reforms through a set of case studies on independent power producer projects in ten developing nations and is also initiating a set of studies examining the introduction of natural gas to regions in India and China.

Much work remains to be done before the interface between electricity-market reform and global climate change is well understood. As energy markets in the developing world expand, addressing this question will become more and more important if we are to stabilize atmospheric levels of greenhouse gases.

The Stanford Institute for International Studies (SIIS) became the Freeman Spogli Institute for International Studies at Stanford University, or FSI, effective September 1.

The name change is in recognition of the $50 million lead gift by Brad Freeman and Ron Spogli to the institute and to Stanford's International Initiative, a bold new venture launched this spring by President John Hennessy to unify and strengthen Stanford's role in global affairs. Freeman ('64), a former Stanford trustee, and Spogli ('70), a former member of the institute's Board of Visitors, are founding partners of the Los Angeles-based investment firm Freeman Spogli & Co.

As the anchor for Stanford's International Initiative, FSI plans to roll out the first of many innovative programs under the auspices of the International Initiative to address global challenges to international security, governance, and human well-being, the initiative's central themes.

Stanford University President John Hennessy launched a wide-ranging International Initiative on Thursday and announced corresponding gifts of nearly $100 million to provide resources and expertise in the quest to help solve some of the most daunting global issues of the century.

Stanford alumni Bradford Freeman and Ronald Spogli, business partners and friends for more than 25 years, have committed a lead gift of $50 million to the new initiative.

"The world's problems-international peace and security, global health, poverty-present themselves in the form of challenges that defy traditional rubrics," Hennessy said. "By unifying and strengthening our efforts in the area of international affairs, we affirm that Stanford has a special role to play in addressing these issues and providing real-world solutions."

Hennessy praised the leadership of Spogli and Freeman for jump-starting the initiative with their gift.

"Brad and Ron are true friends of the university," Hennessy said. "Their philanthropy stands for much more, however, than loyalty to their alma mater. It recognizes the magnitude of what is at stake and acknowledges the responsibility Stanford must assume to advance knowledge in the area of international affairs."

Freeman ('64) and Spogli ('70) are founding partners of the Los Angeles-based investment firm Freeman Spogli & Co. Freeman is a member of the Stanford Board of Trustees; Spogli is a member of the board of visitors of the Stanford Institute for International Studies (SIIS).

"We are very pleased to support the International Initiative and enable the Stanford Institute for International Studies to enhance its focus on key issues and challenges of our times," said Freeman and Spogli.

The lead gift will create up to 10 interdisciplinary professorships and endow the directorship of the Stanford Institute for International Studies. Together with an allocation from the Office of the President, it also will create a $3 million intellectual venture-capital fund to support innovative, interdisciplinary research and teaching in international studies at Stanford. In addition, the gift will support the work of the institute's centers and programs and stimulate collaborations between and among the institute, Stanford's seven schools and the Hoover Institution.

Key Stanford donors have contributed an additional $44 million to meet important objectives of the International Initiative:

Craig ('73) and Susan ('84) McCaw will provide critically important need-based scholarship support for international undergraduate students, which President Hennessy recently articulated as a high university priority.

An anonymous donor has pledged a gift to the Graduate School of Business (GSB) to support its Center for Global Business and the Economy and the institute. The gift will strengthen campus-wide collaborations for the initiative, particularly involving the GSB.

Susan Ford Dorsey has made a gift that will permit a substantial enhancement of the International Policy Studies master's program, to be operated jointly by SIIS and the School of Humanities and Sciences.

Longtime supporter Walter Shorenstein will endow the institute's Asia Pacific Research Center, to be named the Walter Shorenstein Asia Pacific Research Center.

"Thanks to this most generous gift from Brad Freeman and Ron Spogli as well as the contributions from several other farsighted friends of Stanford, the university stands ready to embark on a fundamentally new and very dynamic course in international research and education," said Coit D. Blacker, director of SIIS. "These gifts lay the groundwork for the transformation of international studies at Stanford. We are very excited about what Brad's and Ron's generosity will make possible at Stanford - and very grateful to them for this important vote of confidence in what we are seeking to accomplish."

Stanford's International Initiative will focus on three broad cross-cutting themes: pursuing peace and security in an insecure world; reforming and improving governance at all levels of society; and advancing human health and well being. The International Initiative follows recent multidisciplinary university initiatives in the biosciences and the environment.