Pre-emption used to be the watchword of Bush foreign policy. The world's sole superpower would not hesitate to wield force against an imminent threat to its security. The old doctrines of the Cold War era -- of containment and deterrence of a potential enemy -- were disdained as weakness.

Now, facing the most serious national security challenge since the end of the Cold War -- the nuclear weapons programs of Iran and North Korea -- the administration is reaching back to those oldies but goodies.

The determination of Iran and North Korea to develop nuclear weapons has so far been largely unchecked by this administration. The North Koreans, since breaking out of the freeze agreed to during the Clinton administration, have been steadily producing plutonium, and presumably warheads. The Iranians, after the election of hard-line President Mahmoud Ahmadinejad, reversed their deal to suspend uranium-enrichment activities, the crucial step toward nuclear weapons.

Diplomatic negotiations in both cases have produced little movement. But a military strike on their nuclear facilities is almost inconceivable. The danger of potentially horrendous retaliation and the sapping of American will and resources in Iraq have almost killed that option.

"As shaky as a policy of containment is, it is certainly preferable to confrontation, 'rollback,' or 'regime change' through military force,'' wrote conservative national security expert Thomas Donnelly in a recent analysis. "Containment is, in fact, regime change by tolerable means, and the solution to the problems of Iran and North Korea lie in an indirect approach.''

While we try to contain a nuclear Iran and North Korea, suggested Donnelly, we should surround Iran with movements for democratic change in Iraq and Afghanistan. North Korea, he believes, will be changed through Chinese influence.

Donnelly cautions that there may be circumstances when containment proves even more risky than intervention -- say if Iran tries to slip nuclear materials to Islamist terrorists. Iran is less stable than the Soviet Union, though it is worth remembering that the first 15 years of the Cold War brought us to the brink of nuclear war once and close to it several times.

For the administration, this is a stealth policy shift. That is no surprise. It flows directly from the mess in Iraq, a mistake the administration can never really acknowledge.

For those who once touted American global domination, it is still hard to face the reality that containment is impossible without allies and partners. By ourselves, we cannot press those regimes by cutting off their access to investment and advanced technology.

The administration is rightly moving to take Iran to the United Nations Security Council to seek a mandate to enforce the demands of the International Atomic Energy Agency. North Korea is undoubtedly watching this carefully.

China and Russia, who have veto power in the Security Council, are reluctantly going along. But they still resist any move to impose economic sanctions against Iran. Nor are the Europeans, Japanese and others who depend on oil and gas from Iran eager to halt their investment and trade.

Similarly in the case of North Korea, the Chinese and South Koreans are not prepared to cut the flow of economic aid and investment into the otherwise isolated North Korean state. This is less a case of economic interests than a fear that sanctions will escalate to greater confrontation, even war.

"The strategic challenge the Bush administration faced was to convince the rest of the world that Iran is more dangerous than the United States,'' says nuclear proliferation expert George Perkovich. "They finally did it -- and it took Ahmadinejad to do it,'' referring to the inflammatory rhetoric, including threats to "wipe Israel off the map,'' issued by the Iranian leader.

The administration made some headway down the same path with North Korea by engaging in direct talks with that regime this past fall, dispelling the image that the United States was unwilling to negotiate. But that progress has been undermined recently because hard-liners inside the Bush administration pulled the plug on such talks.

Managing an effective containment partnership will be a huge challenge. And there is still tremendous resistance inside the administration to engaging and negotiating -- and compromising -- with the enemy. But that was always a part of making containment succeed, even at the height of the Cold War.

Containment is no silver bullet. It is merely, as Donnelly puts it, "the least bad alternative, but not by a lot, and not under all circumstances.'' And right now, it is the only game in town.

This fellowship program has been established, with the generous support of the POSCO TJ Park Foundation, to enable key personnel of Korean NGOs to spend time at leading North American universities gaining knowledge and experience that will further the development of NGOs in Korea.

The fellowship program will be supported by a consortium comprising Columbia University, George Washington University, Indiana University, Stanford University and the University of British Columbia. Each university will host two fellows each year for five years, starting in September 2006.

A delegation from the China Semiconductor Industry Association (CSIA) headed by its president, Mr. Zhongyu Yu, visited Stanford University on November 5, 2005. As part of its visit on campus, the delegation was invited to speak at SPRIE's seminar series on the rise of China's innovation competence. Mr. Yu and his colleagues shared with the audience the latest developments in China's integrated circuit (IC) industry as well as their understanding of the underlying driving forces, the level of competency, the role of the government and China's integration into the global innovation system.

Phenomenal growth of China's IC industry

Mr. Yu first shared with the audience some striking data that clearly illustrated the growth of China's IC industry since 2000. In 2000-2004, the industry grew with a CAGR of 31% from $2.2 billion to $6.7 billion. In 2004, there were 670 IC companies employing a workforce of 130,000, of which 40,000 were engineers. The growth is pronounced throughout the value chain from IC design to IC manufacturing and IC packaging and assembly. In 2004, there were 476 IC design companies and their revenue reached $1 billion, an 81.5% increase from 2003. Domestic companies have made impressive inroads into the development and commercialization of a few specific IC products such as second generation ID cards, audio decode chips, third generation cell phone base band chips and MP3 chips. In IC manufacturing, there were a total of 39 fabrication plants by the end of 2004: one 12-inch plant, nine 8-inch plants and 29 4-inch to 6-inch plants. These plants generated a revenue of $2.24 billion in 2004, a 90% increase from 2003. Meanwhile, three more 12-inch plants are under consideration by SMIC, HHNEC and Hynix. IC packaging and assembly reached $3.49 billion in revenue in 2004.

Multiple forces drive the growth

What has been behind such phenomenal growth? Mr. Yu identified three major driving forces. First is the continuing growth of the domestic market that has provided new demand for outputs from the industry. China has become the largest manufacturing base for most consumer electronics products such as televisions, DVDs, personal computers and mobile phones. For example, in the year of 2004, China manufactured 74 million television sets and 230 million mobile phones. These consumer electronics products are fueling the growth of the China's domestic IC market. In 2004, the market reached $40 billion, making China the second largest IC market in the world with a global share of 22%. The second driving force has resulted from the reform of the financial system, which has substantially improved the investment environment--especially for foreign investment. Foreign investment now accounts for 80% of total investment in the IC industry, even when domestic bank loans are taken into account. Venture capital has become a considerable source of capital. $424 million was invested in 2004. The third driving force is the global recession of the IC industry after 2000. The recession exerted tremendous economic pressure for multinational corporations to relocate their manufacturing and R&D activities to China to take advantage of China's cost advantage.

China still weak in innovation in IC

While the growth of China's IC industry has been impressive, Mr. Yu also pointed out some noticeable weaknesses of the industry. The industry is dominated by low value-added IC packaging and assembly, which accounts for half of the industry's revenue. High value-added IC design work only generated 15% of the total revenue in 2004. Most of the 476 IC design companies are very small. In 2004, only 17 companies had revenues over 100 million RMB (which was about 12 million USD). Among them, only two had revenues over 500 million RMB (about 60 million USD). The technical competence of IC design companies is still very weak. Except for the few aforementioned emerging niches, IC design is very much lagging behind the cutting edge. Most domestic demand for IC is still met by import. As Mr. Yu pointed out, "all the micro components and memory [of domestically manufactured consumer electronics products] are imported."

Government policy

The government is well aware of these shortfalls and policies have been put in place to support the next-phase growth of the industry. Factor inputs need to be boosted. In terms of capital, Mr. Yu estimated that a total of $30 billion investment will be needed in the coming five years to fuel the growth of the industry. Yet, the government will cede its role as a director investor in any IC programs while promoting investments from other sources, being it bank loans, domestic private investment, foreign direct investment or venture capital investment. Human resource is another prime area for improvement since there is a serious shortage of experienced IC engineers. The government has put in plans to "cultivate 40,000 IC designers and 10,000 IC processing technologists" over the coming 6-8 years. More importantly, however, indigenous competence needs to be built. "Independent innovation" has been identified as a priority for public policy in China's 11th five-year development plan. Mr. Yu declared, "our goal is not to copy others' chips but instead to have our own."

China's integration into the global innovation system

Looking into the future, as China's IC industry and market continue to grow, Mr. Yu articulated for the audience the importance of China being integrated into the global innovation system. In the coming five years, there will be plenty of opportunities for Chinese companies and universities to collaborate with innovators from abroad, whether it is to shape next-generation technologies and technical standards, for multinational corporations to set up research and development centers in China, or for universities to collaborate on cutting-edge research. As Mr. Yu declared, "China welcomes mutually beneficial cooperation with American industry and academia in the area of [IC] manufacturing and the innovative work of R&D."

Biography of Zhongyu Yu

Mr. Yu Zhongyu has been engaged in semiconductor research and management for many years and is one of the leaders of China's integrated circuit industry. He has engaged in research and design of IC products and was honored with the National Science and Technology Award. Having joined the government in 1988, he was responsible for organizing and leading the IC project during "7th five-year plan" and "8th five-year plan"; he acted as a member of the leading group for the National "908" project and headed the construction leading group of the Huahong factory in the "909" project. These projects made important contributions to China's IC industry development. Mr. Yu has been the President of the China Semiconductor Industry Association since 2001.

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."