Foreign firms nip at U.S. lead in tech R&D

[Dave Farber <dave () farber net>]

-----Original Message-----
From: peter () redesignresearch com
To: dave () farber net
Subject: Foreign firms nip at U.S. lead in tech R&D
Date: Wed, 05 Mar 2003 15:20:49 +0000 (GMT)

This story was sent to you by peter () redesignresearch com with these 
comments:

Dave - This article in today's Marketwatch bears close reading by your 
constituency. Peter Jones

From CBS.MarketWatch.com, online at:

http://cbs.marketwatch.com/news/story.asp?guid=%7B38488826%2D63CD%2D463F%2D9F19%2DECC90D8553A3%7D&siteid=mktw

HAUNTED BY OVERSEAS R&D CHALLENGERS

        

3/5/2003 12:22:03 AM

By Mike Tarsala

12:22 AM ET Mar 5, 2003


SAN FRANCISCO (CBS.MW) -- Richard Chang, a graduate of Southern 
Methodist University
and a long-time research and development executive at Texas Instruments, 
is the kind
of guy who puts both the Pentagon and top U.S. research executives on 
edge.


After a long career in the United States, including a stint at a chip 
startup, Chang
became chief executive of Shanghai-based Semiconductor Manufacturing 
International
Corp., a company founded in April 2000 that has emerged almost overnight 
as a
worldwide force in computer chip-making.


Borrowing techniques Chang and others at SMIC learned in Taiwan and the 
U.S., the
Chinese company is expected to be one of the world's largest low-cost 
producers of
high-end semiconductors in just a few more years. Already, SMIC is 
rivaling advanced
plants in Taiwan -- and undercutting their production prices.


So much for the Defense Department's hopes that the Chinese would stay 
two
generations behind the U.S. in its advanced manufacturing processes. 
Gone, too, are
hopes of the Taiwanese that they could stay years ahead of mainland 
China's high-end
manufacturing capabilities.


SMIC is a lower-cost way to build semiconductors for U.S.-based chip 
designers --
not a direct competitive threat to companies like Intel  or Texas 
Instruments
Indeed, SMIC is one of TI's chip manufacturers.



Powerhouse in the making

_______________________________________________________________________


But when American researchers look at the rapid rise of SMIC, they see 
the threat of
a technology powerhouse in the making. SMIC is one of several companies 
in China
benefiting from that country's 10 percent economic growth, billions of 
dollars in
direct government support for university and corporate R&D projects, 
and the
country's skilled and cheap employee bases.


"Anybody who's not keeping their eye on China, they're making a very big 
mistake,"
says Mark Bernstein, head of Palo Alto Research Center, the Silicon 
Valley lab where
researchers invented the laser printer, the graphical computer interface 
and other
breakthroughs of the personal computer boom.


"China is emerging as the most powerful country in the world, in terms 
of its
manufacturing capabilities and the investments that are flowing in."


While China rapidly expands, the U.S. technology industry is 
contracting. Last year,
the 100 biggest North American tech players cut their R&D spending 
by an average
of 6.8 percent, according to data compiled by CBS.Marketwatch.com. See 
related
stories, graphics about the report.


Bernstein says Silicon Valley is gradually turning away from 
cutting-edge research
and development projects -- the work that maintains U.S. technological 
hegemony.


U.S. companies are busy with incremental improvements like revising 
existing
software, changing the design of computer ink cartridges, or marginally 
bumping up
the speed of chips, Bernstein says. At the same time, he sees few 
examples of
"systematically innovative" companies -- ones that are investing in the 
kind of
aggressive work that gave rise to the idea of "cutting-edge 
technology."



'More D, less R'

_______________________________________________________________________


"There is a real issue about America's ability to continue to stay 
dominant -- to
continue to invest in the future and not to unravel the present," says 
Bernstein,
whose labs are a wholly owned subsidiary of Xerox . "I see more D and 
less R in the
U.S. -- and that's going to be a big problem."


On the other hand, even if the pace of American R&D is indeed 
waning, the level
of commitment to corporate innovation is not, says Paul Vais with Apax 
Partners, a
Menlo Park, Calif.-based venture capital firm that manages $11 billion 
for its
institutional clients.


Vais contends that R&D spending was often wasteful and repetitive in 
the late
1990s, so a pullback should be expected in the post-bubble years.


Now U.S. companies are being forced to spend their shrinking research 
dollars more
wisely. And as far as foreign competition goes, says Vais, it would be 
impossible for
China to shake the United States from its position as the world's 
technology
epicenter.


It is possible, however, that any long-term lull in American R&D 
commitments
will give companies in China and elsewhere a chance to cut into the 
market position
of dominant U.S. companies -- even in specialized software and services, 
says Matt
Ocko, managing director of Archimedes Capital, a Silicon Valley-based 
venture firm
that invests in U.S. companies with manufacturing and engineering 
centers in China
and India.


"Technology executives and venture capitalists who are more focused on 
their golf
games than understanding capacity for innovation and the size and growth 
of the IT
markets in China and India are making the same mistake that Detroit 
executives made
regarding the Japanese in the late 1970s," Ocko says.


Once known to Silicon Valley as a cheap source of tech workers, Ocko 
says that China
is quickly building its reputation as a technology hardware maker.



Outpacing Cisco

_______________________________________________________________________


China's leading manufacturer of telecom and networking gear, Huawei 
Technologies, is
one of the best examples of the Communist-led nation's recent successes 
in
high-margin electronics. Founded in 1988, Huawei has about 10,000 
R&D engineers
among its 22,000 employees.


Huawei is making gear that competes with networking equipment by Cisco 
Systems , at
a far lower cost.


Huawei, which faces a patent-infringement suit filed by Cisco in federal 
court, is
gaining industry clout -- and revenue. Its international sales, much of 
it to
U.S.-based firms, rose 68 percent to $552 million last year, a time when 
most other
U.S. networking-equipment firms suffered double-digit sales declines.


The threat to American technology goes beyond China. India may pose an 
even larger
challenge in technology services, where competition among U.S. firms is 
already
fierce. Many U.S. tech companies see services as a way to lock in 
customers to
predictable, multi-year purchasing patterns.


Indian conglomerate Wipro Ltd. , which derives about 38 percent of its 
revenue from
doing development work for other companies, is one of the best examples 
of India's
tech capabilities.


Wipro can design computer chips as well as write customized software for 
foreign
tech companies. And they do it on the cheap -- a fifth of what U.S. 
companies might
charge. For that reason, Wipro counts major North American tech 
companies as its
customers, including Cisco, Sun Microsystems , Canada's Nortel Networks  
and AT&T



India's growth

_______________________________________________________________________


Executives assert that India poses little immediate threat to the U.S 
technology
industry's dominance. But the country's technology services market is 
projected to
grow 23 percent over the next three years, according to market research 
firm Gartner
-- much faster than in the U.S. That will fuel the country's growing 
industry -- and
the ability to conduct research.


U.S.-based services companies shouldn't worry -- their market dominance 
will
continue in software and services for the near future, says Vivek Paul, 
Wipro's
president.


"But will the U.S. continue to have the biggest technology spending 
growth? Perhaps
not," Paul said. "Outsourcing is on everyone's radar screen, and Wipro 
is synonymous
with outsourcing."


Roger Siboni, chief executive of software maker E.Piphany, says his 
California
company's R&D department is outsourcing employees from Wipro, as 
well as two
other Indian companies. His goal is to have at least a third of his 
R&D employees
working in India within the next 12 months, up from about 10 to 15 
percent now, even
if it means layoffs of his U.S. staff.


Siboni says that he's worried about Wipro becoming a competitor in time. 
Wipro is
already starting to build divisions dedicated to customer-relationship 
software. "And
that's how it starts," he says. They're an asset to me now, but over 
time, they might
not be."


There are at least a dozen hot spots overseas where companies are moving 
up the
technology food chain, producing high-end specialized products and 
services -- from
Bangalore, India to Birmingham England, to Oslo, Norway -- instead of 
only making
mass-produced gadgets for consumers.



Not just for Furby

_______________________________________________________________________


And then there's Taiwan. Sunplus, a Taiwanese company that started 
making chips for
the Furby electronic toys sold in the early '90s and is now making chips 
for
hand-held computers.


And some Taiwanese companies worried about encroachment from the Chinese 
are making
strides in more advanced industries, such as chip design. That's putting 
them in
direct competition with dozens of U.S. firms. With $3.4 billion in sales 
last year,
Taiwan ranked second behind the U.S. last year in revenue from 
chip-design companies,
according to Taiwan's Institute for Information Industry. Chip design 
sales have
increased in each of the past five years in Taiwan, the group says.


It's not as if foreign competitors must start from scratch to compete 
with some of
the most advanced U.S. companies. There's a treasure trove of R&D 
available to
developers in other countries who are looking for it -- much of it in 
the form of
university and communal industry projects that post detailed information 
on the
Internet.


Ocko says many projects are waiting to be resurrected -- ones involving 
faster
chips, software to allow cheaper provisioning of DSL and cable modems, 
and wireless
systems intended to leapfrog current technologies.


"A lot of people think this stuff is irrelevant," Ocko says. "But it's 
just lying
around like nuclear weapons in some old Soviet republic, waiting to be 
used by the
Chinese and the Indians."


He says that some of those projects are being be brought back to life 
overseas by
former holders of special U.S.-issued visas who had been working on them 
until they
were laid off in today's leaner climate. Now, when they return home, 
their knowledge
is sought by start-ups in China, India and elsewhere, Ocko says.


"As the U.S. sluggishly awakes, American tech companies will realize 
that foreign
firms have battle-tested products that are generating revenue, and they 
have strong
R&D commitments, "Ocko says. "We're grossly underestimating what 
smart people
with substantial government support and a growing home market will do to 
U.S.
companies, where employees are spending more time fighting turf battles 
over who gets
an office or who gets a cube."


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