Pacific News Service, Commentary, George Koo, Posted: Nov 05, 2003
Editor's Note: Taiwan's impressive economic gains are poisoned by its refusal to increase ties to mainland China. U.S. influence in the region is similarly diluted by divisive cross-strait relations.
Taiwan President Chen Shui-bian flew halfway around the world to shake hands with Secretary of State Colin Powell in Panama, but he won't or can't reach across the Taiwan straits to Beijing. Unfortunately for the United States, potential American influence in Asia is being diluted by this contradiction.
Recently, Taiwan's Ministry of Economic Affairs organized a business alliance conference to attract foreign direct investments. Absent were representatives from China, Taiwan's biggest economic partner.
A parade of multinationals dutifully marched up the stage to announce plans to invest in Taiwan. Particularly impressive was the message that Taiwan has moved up the high tech food chain toward increasingly higher value-added economic activity.
Taiwan pioneered the idea of making semiconductor devices as a service for others, and now owns up to three quarters of the world's semiconductor fabrication capacity that is for hire. A complete industry sprang up around the now-renowned Taiwan Semiconductor Manufacturing Corporation, a multibillion dollar company. Because of TSMC, Taiwan has become a major semiconductor power to rival the United States, Japan and Europe.
Fabless Semiconductor Association came to the Taipei conference to announce the formation of its first office outside the United States, in Taipei. A "fabless" semiconductor company concentrates on the design of new chips for new applications and contracts the making of the devices to the likes of TSMC.
Taiwan has made an even more amazing leap forward in the manufacture of flat panel displays, capturing over 30 percent of the world market by 2002 and surpassing Japan to become the second largest supplier of the displays, behind South Korea.
Flat panel displays are used in laptops and notebook PCs, camcorders and other electronic gadgets. Their next huge application will be on hang-on-the-wall color TVs.
Yet, Taiwan's future in both semiconductors and flat panel displays rests squarely on its symbiotic relationship with China. China just surpassed Japan as the major supplier of IT (information technology) products to the United States. More than 65 percent of these products were exported by Taiwan companies operating on the mainland.
At the business alliance conference, Vice Minister Yen-shiang Shih was asked if Taiwan could maintain its $30 billion trade surplus with China -- an annual surplus that has more than covered Taiwan's deficit with the rest of the world.
Yen candidly replied that Taiwan will continue to provide the high tech computer innards and consumer electronic appliances that are assembled and exported from China. So long as China keeps its competitive manufacturing edge, Taiwan will continue to have an outlet for its sophisticated semiconductor chips and flat panel displays.
Of course, it's not just in China's export of high tech products that Taiwan serves as the crucial partner. Taiwan also has the insider advantage in serving China's vast domestic market. From fast food to fashion to consumer electronics, Taiwan's presence can be seen in all walks of China.
More than a million Taiwanese now live and work in China. Thousands of young Taiwanese flock to Beijing or Shanghai for graduate school. Despite these developments, the Taipei government would rather look elsewhere for its economic partnerships.
According to Taiwan's own statistics, only 145,000 mainland professionals have been permitted to visit the island in last 10 years. About twice that number of visitors goes from Taiwan to mainland China every month.
Taiwan companies have invested over $100 billion in China. China has made zero investments in Taiwan because local regulations forbid it.
Tourists out of China already represent the third largest in the world, but none are allowed to visit Taiwan. Every year about 10 million mainlanders visit Hong Kong. If one out of 10 were to visit Taiwan, it would more than double the number of tourists Taiwan receives annually. Taiwan's economy would easily get a billion-dollar shot in the arm.
At the conference, Taiwan made clear its desire to develop its tourist industry. Yet the most obvious source of tourism, from across the strait, was ignored. In contrast, about two out of every three Taiwanese who go abroad for vacation went to the mainland.
China's economic boom has benefited everybody in the region, not just Taiwan. Trade with neighboring Asian countries is increasing at 50 to 100 percent per year. Everybody seems to understand the importance of China as part of the integrated regional economy except the Taiwan government.
In action and in rhetoric, Chen Shui-bian tends to dismiss China's importance and point to Taiwan's own supposedly more democratic and by implication superior economic system. The United States has heretofore supported Chen's delusion. Instead, the Bush administration should be telling Taiwan to listen to the wise counsel of Singapore's senior statesman Lee Kuan Yew.
Recently, the former prime minister publicly urged the current Taiwan government to face economic reality and play less politics in its cross-straits relations. Whether it's high tech, low tech or no tech, Taiwan's future lies in maximizing its relationship with China, not minimizing it.
Wednesday, November 5, 2003
Thursday, September 4, 2003
Don't Blame China for America's Economic Ills
Pacific News Service, Commentary, George Koo, Posted: Sep 04, 2003
Editor's Note: Like it did with Japan some 20 years ago, America seems to be looking East for an excuse for its own troubled economy. This time, China and its currency, the renminbi, are the scapegoat.
If the recent action of members of Congress bemoaning the loss of U.S. jobs is any indication, the United States is suffering from another anxiety attack and loss of confidence. These lawmakers accused China, in particular, of sabotaging the American economy by unfairly undervaluing its currency, the renminbi, against the dollar.
Bear in mind that China first pegged its currency to the dollar almost 10 years ago. When, three years later in 1997, Asian economies suffered a flight of capital and drastic devaluation of local currencies, China was universally praised for holding fast to the peg: it refused to devalue the renminbi in order to protect its share of export trade. (Interestingly, China's exports inexorably marched on despite a stronger currency relative to its faltering neighbors.)
Since then the dollar has weakened against world's major currencies, including the renminbi. Now, suddenly, forcing China to raise the value of the renminbi is being touted as the magical cure to America's economic ills.
This is somewhat reminiscent of America's ire with Japan some 20 years ago. At the time, Japan also held a huge trade surplus and was accused of keeping its yen artificially weak relative to the dollar.
Japan acquiesced and raised the value of the yen. But that did not solve America's economic woes in the early 1980s. Detroit screamed the loudest about the "unfair" competition, but failed to recapture lost market share even as Japanese carmakers raised their prices.
Some long-forgotten member of Congress even smashed a Japanese-made VCR on the steps of Capitol Hill to great fanfare, but this contributed not a whit to solving America's economic problems.
Whereas Japan was a closed economy that discouraged foreign investment and therefore outside participation in its economic growth, China has been open to foreign direct investment and attracted more of such investment than any other nation last year.
Companies invest in China by building manufacturing facilities there. China provides a productive work force at stable wage rates; one that works hard, learns fast and makes a wage high enough to raise its living standards.
Companies that have invested in China make more money by being able to export high quality goods at reasonable prices.
American consumers benefit by being able to buy these goods at a reasonable price and thus improve their standard of living without having to deal with the chaos of escalating inflation.
It has been a winning arrangement for all.
Those who claim that China is enjoying an unfair advantage with an artificially weak renminbi have failed to explain how any currency revaluation is going to bring jobs back to the United States.
Consider the most extravagant claim: The renminbi is being artificially depressed by 40 percent. Even if the renminbi were adjusted upward by 40 percent -- from 8.28 yuan to one U.S. dollar, to 5 yuan to $1 -- the average cost advantage of the Chinese worker over the U.S. worker would drop from 20 to 1 to a "mere" 12 to 1. How much net gain in jobs for the United States will result from that?
The reason China has become the factory for the world is because companies that used to supply the U.S. market from Taiwan, Korea and Mexico have moved their production to China to remain in business. The truth is that most of those jobs have not been in the United States for decades.
Some economists point out that China buys in the global markets almost as much as it sells. China buys products for domestic consumption, and it also purchases intermediate materials that need to be converted into export products. An economically strong China is looked upon as a possible tractor to pull the world out of the economic muck.
Wringing one's hands because we have been beaten in terms of cost and productivity won't solve anything. As recent as three years ago, we were bragging about the superiority of American technology and productivity. We need to get back to that frame of mind.
Forcing the renminbi off the peg is tantamount to destabilizing China's economy. And nobody wins from a weakened Chinese economy.
Editor's Note: Like it did with Japan some 20 years ago, America seems to be looking East for an excuse for its own troubled economy. This time, China and its currency, the renminbi, are the scapegoat.
If the recent action of members of Congress bemoaning the loss of U.S. jobs is any indication, the United States is suffering from another anxiety attack and loss of confidence. These lawmakers accused China, in particular, of sabotaging the American economy by unfairly undervaluing its currency, the renminbi, against the dollar.
Bear in mind that China first pegged its currency to the dollar almost 10 years ago. When, three years later in 1997, Asian economies suffered a flight of capital and drastic devaluation of local currencies, China was universally praised for holding fast to the peg: it refused to devalue the renminbi in order to protect its share of export trade. (Interestingly, China's exports inexorably marched on despite a stronger currency relative to its faltering neighbors.)
Since then the dollar has weakened against world's major currencies, including the renminbi. Now, suddenly, forcing China to raise the value of the renminbi is being touted as the magical cure to America's economic ills.
This is somewhat reminiscent of America's ire with Japan some 20 years ago. At the time, Japan also held a huge trade surplus and was accused of keeping its yen artificially weak relative to the dollar.
Japan acquiesced and raised the value of the yen. But that did not solve America's economic woes in the early 1980s. Detroit screamed the loudest about the "unfair" competition, but failed to recapture lost market share even as Japanese carmakers raised their prices.
Some long-forgotten member of Congress even smashed a Japanese-made VCR on the steps of Capitol Hill to great fanfare, but this contributed not a whit to solving America's economic problems.
Whereas Japan was a closed economy that discouraged foreign investment and therefore outside participation in its economic growth, China has been open to foreign direct investment and attracted more of such investment than any other nation last year.
Companies invest in China by building manufacturing facilities there. China provides a productive work force at stable wage rates; one that works hard, learns fast and makes a wage high enough to raise its living standards.
Companies that have invested in China make more money by being able to export high quality goods at reasonable prices.
American consumers benefit by being able to buy these goods at a reasonable price and thus improve their standard of living without having to deal with the chaos of escalating inflation.
It has been a winning arrangement for all.
Those who claim that China is enjoying an unfair advantage with an artificially weak renminbi have failed to explain how any currency revaluation is going to bring jobs back to the United States.
Consider the most extravagant claim: The renminbi is being artificially depressed by 40 percent. Even if the renminbi were adjusted upward by 40 percent -- from 8.28 yuan to one U.S. dollar, to 5 yuan to $1 -- the average cost advantage of the Chinese worker over the U.S. worker would drop from 20 to 1 to a "mere" 12 to 1. How much net gain in jobs for the United States will result from that?
The reason China has become the factory for the world is because companies that used to supply the U.S. market from Taiwan, Korea and Mexico have moved their production to China to remain in business. The truth is that most of those jobs have not been in the United States for decades.
Some economists point out that China buys in the global markets almost as much as it sells. China buys products for domestic consumption, and it also purchases intermediate materials that need to be converted into export products. An economically strong China is looked upon as a possible tractor to pull the world out of the economic muck.
Wringing one's hands because we have been beaten in terms of cost and productivity won't solve anything. As recent as three years ago, we were bragging about the superiority of American technology and productivity. We need to get back to that frame of mind.
Forcing the renminbi off the peg is tantamount to destabilizing China's economy. And nobody wins from a weakened Chinese economy.
Wednesday, May 14, 2003
Book Review - “The Chinese in America” by Iris Chang
NCM, George Koo, Posted: May 14, 2003
Iris Chang in her latest book, The Chinese in America, examines the phenomenon of an immigrant community still regarded as foreign despite having lived in America for more than 150 years. To Iris, the Chinese experience in the United States has been more of a series of repetitive cycles rather than a monotonic progression from victims of brutal abuse to becoming widely accepted as a “model minority.”
Chang chronicles early experiences that branded the Chinese. In 1877, there was Denis Kearney, a demagogue who rose to political power by fanning an anti-Chinese hysteria, accusing them of stealing the white man’s livelihood. In 1950, Senator Joseph McCarthy began a witchhunt to look for communists under every bed and an inquiry on “who lost China” to communism. The Chinese American community especially felt the heavy siege of suspicion and glare of McCarthyism.
In 1853, the conviction of killers for the murder of Chinese immigrant Ling Sing was overturned on the grounds that the “inferior caste of people who were non-citizens,” meaning Chinese, cannot testify against whites. In 1982, Ronald Ebens and Michael Nitz used a baseball bat to bash Vincent Chin to death. Even though Chin was born in America, Ebens and Nitz did not spend even one night in jail.
Ling Sing’s case prompted the phrase “not a Chinaman’s chance.” After nearly 130 years, Vincent Chin’s chances fared no better.
Everett Drumwright, then U.S. consul in Hong Kong, concluded in his Foreign Service report, filed in 1955, that nearly all Chinese in America were illegal aliens capable of all sorts of dastardly deeds including spying for China.
FBI Director J. Edgar Hoover also subscribed to the notion that the Chinese community teemed with spies from China. Later, FBI analyst Paul Moore was to refine Hoover’s theory by suggesting that China recruited spies differently relying on “ethnic affinity” rather than the customary blandishments of cash and sex.
Moore’s testimonies before the House Select Committee headed by Congressman Christopher Cox contributed to a sensational report alleging that more than 10,000 PRC company offices in the United States are intelligence gathering stations and all Chinese in the United States regardless of citizenship status are potential spies.
Opponents of President William Clinton used the Cox Report to accuse him of losing nuclear warhead missile technology to China. In response, his administration promptly offered Dr. Wen Ho Lee as the designated sacrificial lamb, the book suggests.
Lee was thrown in solitary confinement for months on 59 charges, all but one of which were later thrown out. He pled guilty to one count in exchange for time spent in jail. One can argue that Lee’s experience was an improvement over the fate of his predecessor scapegoats that were lynched, burned or shot by periodic rampaging mobs in the late 1800’s.
The author also drew positive parallels. Yung Wing became the first Chinese to graduate from a major university (Yale in 1854) and opened the door for others. In the early 1900’s, Chan Chung Wing became the first Chinese to practice law in California. Bessie Jeong was the first Chinese American woman to graduate from Stanford and became a practicing physician.
By breaking the mold, the trailblazers paved the way for others to follow. Today, accomplished Chinese Americans occupy every profession from Tsung Dao Lee and Chen Ning Yang (Nobel laureate physicists), to I.M. Pei (architect), Yo-Yo Ma (music), David Ho (medicine), Elaine Chao (government), to Gary Locke (politics), Charles Wang (software), Jerry Yang (Internet) and many more.
Of course, all Chinese Americans should read this book to truly understand how their roots in America were planted. They will be better braced for the next time they face a random invitation to “go back to where they come from”—even if this means Peoria. This book is not just for Chinese Americans but also for all newly arrived immigrants and conscientious citizens that care to appreciate the deficiencies of American democracy.
To read Iris Chang’s book is to understand that the only recourse is to stand for what is right and vigorously protect the principles that have made America a diverse nation from which its unique greatness sprang.
Iris Chang in her latest book, The Chinese in America, examines the phenomenon of an immigrant community still regarded as foreign despite having lived in America for more than 150 years. To Iris, the Chinese experience in the United States has been more of a series of repetitive cycles rather than a monotonic progression from victims of brutal abuse to becoming widely accepted as a “model minority.”
Chang chronicles early experiences that branded the Chinese. In 1877, there was Denis Kearney, a demagogue who rose to political power by fanning an anti-Chinese hysteria, accusing them of stealing the white man’s livelihood. In 1950, Senator Joseph McCarthy began a witchhunt to look for communists under every bed and an inquiry on “who lost China” to communism. The Chinese American community especially felt the heavy siege of suspicion and glare of McCarthyism.
In 1853, the conviction of killers for the murder of Chinese immigrant Ling Sing was overturned on the grounds that the “inferior caste of people who were non-citizens,” meaning Chinese, cannot testify against whites. In 1982, Ronald Ebens and Michael Nitz used a baseball bat to bash Vincent Chin to death. Even though Chin was born in America, Ebens and Nitz did not spend even one night in jail.
Ling Sing’s case prompted the phrase “not a Chinaman’s chance.” After nearly 130 years, Vincent Chin’s chances fared no better.
Everett Drumwright, then U.S. consul in Hong Kong, concluded in his Foreign Service report, filed in 1955, that nearly all Chinese in America were illegal aliens capable of all sorts of dastardly deeds including spying for China.
FBI Director J. Edgar Hoover also subscribed to the notion that the Chinese community teemed with spies from China. Later, FBI analyst Paul Moore was to refine Hoover’s theory by suggesting that China recruited spies differently relying on “ethnic affinity” rather than the customary blandishments of cash and sex.
Moore’s testimonies before the House Select Committee headed by Congressman Christopher Cox contributed to a sensational report alleging that more than 10,000 PRC company offices in the United States are intelligence gathering stations and all Chinese in the United States regardless of citizenship status are potential spies.
Opponents of President William Clinton used the Cox Report to accuse him of losing nuclear warhead missile technology to China. In response, his administration promptly offered Dr. Wen Ho Lee as the designated sacrificial lamb, the book suggests.
Lee was thrown in solitary confinement for months on 59 charges, all but one of which were later thrown out. He pled guilty to one count in exchange for time spent in jail. One can argue that Lee’s experience was an improvement over the fate of his predecessor scapegoats that were lynched, burned or shot by periodic rampaging mobs in the late 1800’s.
The author also drew positive parallels. Yung Wing became the first Chinese to graduate from a major university (Yale in 1854) and opened the door for others. In the early 1900’s, Chan Chung Wing became the first Chinese to practice law in California. Bessie Jeong was the first Chinese American woman to graduate from Stanford and became a practicing physician.
By breaking the mold, the trailblazers paved the way for others to follow. Today, accomplished Chinese Americans occupy every profession from Tsung Dao Lee and Chen Ning Yang (Nobel laureate physicists), to I.M. Pei (architect), Yo-Yo Ma (music), David Ho (medicine), Elaine Chao (government), to Gary Locke (politics), Charles Wang (software), Jerry Yang (Internet) and many more.
Of course, all Chinese Americans should read this book to truly understand how their roots in America were planted. They will be better braced for the next time they face a random invitation to “go back to where they come from”—even if this means Peoria. This book is not just for Chinese Americans but also for all newly arrived immigrants and conscientious citizens that care to appreciate the deficiencies of American democracy.
To read Iris Chang’s book is to understand that the only recourse is to stand for what is right and vigorously protect the principles that have made America a diverse nation from which its unique greatness sprang.
Friday, March 28, 2003
For China, Iraq Conflict is America's War
Pacific News Service, Commentary, George Koo, Posted: Mar 28, 2003
Editor's Note: China is officially opposed to the war in Iraq, but recent actions show China is most concerned with improving its relationship with the United States and keeping its giant economy growing.
On a recent business trip to Shanghai I asked people about the conflict with Iraq. They had little to say. To the Chinese, this is America's war.
China's top advisory body recently expressed "shock and concern" with the war. But unlike France and Russia, which have strongly opposed the war with belligerent statements and U.N. Security Council veto threats, China's response has been relatively mild.
It has never been in the Chinese character to tell another nation what to do. China long ago concluded that confrontation with the United States was not in its national interest. After Sept. 11, 2001, China actively sought common cause with Washington in fighting terrorism. China's former president, Jiang Zemin, visited President George Bush at his Crawford, Texas, ranch in the fall of 2002 to seemingly seal the alliance.
Since then China has gone out of its way to cultivate friendly relations with the United States.
As the U.S.-led military action in Iraq began, a spokesman from Beijing's Foreign Ministry expressed "regret and disappointment" and indicated that the invasion "violates norms of international behavior." His comments, read during a regularly scheduled briefing, did not criticize the United States by name.
After the first missiles landed on Baghdad -- shown live on China Central Television -- reaction on the street was considerably stronger. The U.S. bombing of the Chinese embassy in Belgrade seemed to bubble to the fore, as most concluded that, in the words of one man, "the U.S. is being a big bully again."
Officially, China continues to work within the U.N. charter and in cooperation with other nations to look for a peaceful solution. Clearly, China is reluctant to take any lead in opposition to the unilateral U.S. action. In any case, events on the ground and in Iraq's airspace are likely to overtake any further and futile attempts at diplomacy.
Looming on the horizon is the threat from North Korea, which the Bush administration seems to think is within China's capability to resolve unilaterally. China has demurred, but offers to assist the U.S. in multilateral diplomacy -- alas, not a strong suit for the Bush administration.
China's priority remains its domestic economy, which must continue to grow at 7 to 8 percent per year in order to create the jobs needed to soak up laid-off workers and rural migrants.
Unfortunately, China's economy is also fueled by oil, and this spells potential future conflict with the United States. In 2000, 31 percent of the oil consumed by China was imported. Within 30 years, China's dependence on imported oil is expected to increase to 84 percent. Much of the world's oil is located in the Gulf region.
China can only hope that by the time competition for oil arises, the United States will be too busy or too exhausted to pick another fight.
Editor's Note: China is officially opposed to the war in Iraq, but recent actions show China is most concerned with improving its relationship with the United States and keeping its giant economy growing.
On a recent business trip to Shanghai I asked people about the conflict with Iraq. They had little to say. To the Chinese, this is America's war.
China's top advisory body recently expressed "shock and concern" with the war. But unlike France and Russia, which have strongly opposed the war with belligerent statements and U.N. Security Council veto threats, China's response has been relatively mild.
It has never been in the Chinese character to tell another nation what to do. China long ago concluded that confrontation with the United States was not in its national interest. After Sept. 11, 2001, China actively sought common cause with Washington in fighting terrorism. China's former president, Jiang Zemin, visited President George Bush at his Crawford, Texas, ranch in the fall of 2002 to seemingly seal the alliance.
Since then China has gone out of its way to cultivate friendly relations with the United States.
As the U.S.-led military action in Iraq began, a spokesman from Beijing's Foreign Ministry expressed "regret and disappointment" and indicated that the invasion "violates norms of international behavior." His comments, read during a regularly scheduled briefing, did not criticize the United States by name.
After the first missiles landed on Baghdad -- shown live on China Central Television -- reaction on the street was considerably stronger. The U.S. bombing of the Chinese embassy in Belgrade seemed to bubble to the fore, as most concluded that, in the words of one man, "the U.S. is being a big bully again."
Officially, China continues to work within the U.N. charter and in cooperation with other nations to look for a peaceful solution. Clearly, China is reluctant to take any lead in opposition to the unilateral U.S. action. In any case, events on the ground and in Iraq's airspace are likely to overtake any further and futile attempts at diplomacy.
Looming on the horizon is the threat from North Korea, which the Bush administration seems to think is within China's capability to resolve unilaterally. China has demurred, but offers to assist the U.S. in multilateral diplomacy -- alas, not a strong suit for the Bush administration.
China's priority remains its domestic economy, which must continue to grow at 7 to 8 percent per year in order to create the jobs needed to soak up laid-off workers and rural migrants.
Unfortunately, China's economy is also fueled by oil, and this spells potential future conflict with the United States. In 2000, 31 percent of the oil consumed by China was imported. Within 30 years, China's dependence on imported oil is expected to increase to 84 percent. Much of the world's oil is located in the Gulf region.
China can only hope that by the time competition for oil arises, the United States will be too busy or too exhausted to pick another fight.
Friday, January 3, 2003
Twisted Flights, Flawed Logic - Time for Taiwan to Face Economic Facts
Pacific News Service, George Koo, Posted: Jan 03, 2003
Editor's Note: The roundabout flights from Shanghai to Taipei are just the beginning of Taiwan's convoluted logic when it comes to China, writes PNS contributor George Koo. Missing a golden opportunity last year to improve relations with its giant neighbor, Taiwan must take steps in 2003 to stop job loss and brain drain across the Taiwan Strait.
For the first time ever, thousands of Taiwanese living in Mainland China will fly from Shanghai, uh, somewhat directly to Taipei to celebrate the Chinese New Year, coming Feb. 1, at home. Specially chartered planes will take off from inside China and touch down in Hong Kong or Macao before proceeding to Taipei.
But instead of a short, one-hour hop from Shanghai to Taipei, the planes will fly two long legs of a triangle, roughly quadrupling the flight time, just to be politically acceptable to Taipei. The planes will be empty of passengers on the return part of the trip. Why? Because there is no formal recognition between governments across the Taiwan Strait, Taipei reasons that the planes cannot behave as if they were bona fide commercial flights.
The passengers will have ample time to ponder the absurdity of it all. Their flight path is comparable to flying from Boston to New York via St. Louis.
Taiwan's business community has been clamoring for direct links to the mainland. Some $600 million is spent annually on unnecessary airfare, to say nothing of wasted time in transit.
Since he came to power in 2000, many of President Chen Shui Bian's backers have urged him to move boldly toward full independence from Beijing. The end result is like the charter flights, a compromise that pleases no one and solves nothing.
Last year, the Chinese Year of the Horse, could have been a breakthrough year in cross-strait relations. Both sides just entered WTO and needed to begin bilateral discussion to work out the details. Instead, the horse never left the post. Taipei so artfully stalled that only now have they agreed to meet and begin discussions.
Meanwhile, it has become increasingly obvious that benefits of cross-strait relations are all going in one direction: to China. Taiwan capital, people, production equipment, ideas and products are going to China. By some estimates, as much as $100 billion -- more than one-fifth of the total foreign investment in China -- originates from Taiwan.
What about investment in the other direction, from China to Taiwan? None, because in contrast to Beijing's open door, Taipei's policies restrict visitors from the mainland, rendering such investments impractical.
Advocates of Taiwan independence, particularly those residing comfortably in the United States, like to point out that one cannot live by bread alone, but must have the personal freedom of choice. Sadly, Taiwan's economy has been rolling steadily downhill, and unemployment is at an all-time high. Political choice is hardly on the agenda of folks without bread.
Some of the best and brightest are choosing with their feet. They now live and work in China, most conspicuously in the greater Shanghai area. They are putting roots down in China, bringing their families and buying homes.
One Taipei study estimates that those leaving for the mainland represent 25 percent of Taiwan's economic elite. Their absence ripples throughout Taiwan's economy.
Taiwan's housing market is depressed because more are selling than buying. Instead of seeing their favorite customers every week, popular restaurants now see them every two to three months -- on their periodic return from China.
Even Taiwan's Lions Club feels the economic shift. In the first six months of last year, its membership dropped from 35,000 to 31,000. At its peak, club membership included more than 40,000 professionals. At every meeting, someone else is missing, having left for the mainland.
Taiwan is becoming a depressing place, especially so because the government seems so unaware of the economic consequences of its politics.
Two out of three Taiwan tourists go to the mainland for vacation. Only 1 out of 10,000 tourists from the mainland is able to visit Taiwan. In just 10 months last year, 12 million tourists went globetrotting from China. The Taipei government could see immediate economic benefits merely by welcoming an annual projected stream of 300,000 visitors from across the strait.
President Chen dares not open Taiwan to the mainland for fear of losing his political support and for reasons rooted in paranoia. During the debate about direct flights from the mainland, someone in his administration actually opposed them on the grounds that an unfriendly plane could make a Sept. 11-like beeline for the presidential palace in Taipei.
Chen's approval rating is at an all-time low, as is Taiwan's economy. Everyone is watching to see if he will take decisive action in 2003 to turn things around. If not, his re-election in 2004 is not assured. He came to power with less than 40 percent of the popular vote. He may have to do considerably better next time and not count on a divided opposition to again put him in power.
Editor's Note: The roundabout flights from Shanghai to Taipei are just the beginning of Taiwan's convoluted logic when it comes to China, writes PNS contributor George Koo. Missing a golden opportunity last year to improve relations with its giant neighbor, Taiwan must take steps in 2003 to stop job loss and brain drain across the Taiwan Strait.
For the first time ever, thousands of Taiwanese living in Mainland China will fly from Shanghai, uh, somewhat directly to Taipei to celebrate the Chinese New Year, coming Feb. 1, at home. Specially chartered planes will take off from inside China and touch down in Hong Kong or Macao before proceeding to Taipei.
But instead of a short, one-hour hop from Shanghai to Taipei, the planes will fly two long legs of a triangle, roughly quadrupling the flight time, just to be politically acceptable to Taipei. The planes will be empty of passengers on the return part of the trip. Why? Because there is no formal recognition between governments across the Taiwan Strait, Taipei reasons that the planes cannot behave as if they were bona fide commercial flights.
The passengers will have ample time to ponder the absurdity of it all. Their flight path is comparable to flying from Boston to New York via St. Louis.
Taiwan's business community has been clamoring for direct links to the mainland. Some $600 million is spent annually on unnecessary airfare, to say nothing of wasted time in transit.
Since he came to power in 2000, many of President Chen Shui Bian's backers have urged him to move boldly toward full independence from Beijing. The end result is like the charter flights, a compromise that pleases no one and solves nothing.
Last year, the Chinese Year of the Horse, could have been a breakthrough year in cross-strait relations. Both sides just entered WTO and needed to begin bilateral discussion to work out the details. Instead, the horse never left the post. Taipei so artfully stalled that only now have they agreed to meet and begin discussions.
Meanwhile, it has become increasingly obvious that benefits of cross-strait relations are all going in one direction: to China. Taiwan capital, people, production equipment, ideas and products are going to China. By some estimates, as much as $100 billion -- more than one-fifth of the total foreign investment in China -- originates from Taiwan.
What about investment in the other direction, from China to Taiwan? None, because in contrast to Beijing's open door, Taipei's policies restrict visitors from the mainland, rendering such investments impractical.
Advocates of Taiwan independence, particularly those residing comfortably in the United States, like to point out that one cannot live by bread alone, but must have the personal freedom of choice. Sadly, Taiwan's economy has been rolling steadily downhill, and unemployment is at an all-time high. Political choice is hardly on the agenda of folks without bread.
Some of the best and brightest are choosing with their feet. They now live and work in China, most conspicuously in the greater Shanghai area. They are putting roots down in China, bringing their families and buying homes.
One Taipei study estimates that those leaving for the mainland represent 25 percent of Taiwan's economic elite. Their absence ripples throughout Taiwan's economy.
Taiwan's housing market is depressed because more are selling than buying. Instead of seeing their favorite customers every week, popular restaurants now see them every two to three months -- on their periodic return from China.
Even Taiwan's Lions Club feels the economic shift. In the first six months of last year, its membership dropped from 35,000 to 31,000. At its peak, club membership included more than 40,000 professionals. At every meeting, someone else is missing, having left for the mainland.
Taiwan is becoming a depressing place, especially so because the government seems so unaware of the economic consequences of its politics.
Two out of three Taiwan tourists go to the mainland for vacation. Only 1 out of 10,000 tourists from the mainland is able to visit Taiwan. In just 10 months last year, 12 million tourists went globetrotting from China. The Taipei government could see immediate economic benefits merely by welcoming an annual projected stream of 300,000 visitors from across the strait.
President Chen dares not open Taiwan to the mainland for fear of losing his political support and for reasons rooted in paranoia. During the debate about direct flights from the mainland, someone in his administration actually opposed them on the grounds that an unfriendly plane could make a Sept. 11-like beeline for the presidential palace in Taipei.
Chen's approval rating is at an all-time low, as is Taiwan's economy. Everyone is watching to see if he will take decisive action in 2003 to turn things around. If not, his re-election in 2004 is not assured. He came to power with less than 40 percent of the popular vote. He may have to do considerably better next time and not count on a divided opposition to again put him in power.
Wednesday, November 27, 2002
Role of Venture Capital in the Development of High Technology in Silicon Valley
Text of a speech given in China, November 2002
In less than 2 decades, “Silicon Valley” became the name of a real place, a place that won worldwide recognition as ground zero where commercial breakthroughs in high technology occurred regularly. Silicon Valley, located south of San Francisco became the birthplace of such high tech giants as Intel, Sun Microsystems, Cisco Systems, Oracle, Applied Materials and Genentech—all leaders in their field. The proliferation of semiconductor start-ups that grew into major companies and equipment and material suppliers that grew by supporting this industry led to the coining of the term, “Silicon Valley.”
The emergence of Silicon Valley as the world’s high tech capital would not have been possible without the use of venture capital. Indeed, venture capitalism, i.e., risky investments in emerging young companies for the purpose of earning high returns, also became a widely recognized professional discipline. This recognition came after its spectacular investments in such companies as Apple Computer, Cisco, and Yahoo returned thousands of times original invested amount. No other place in the world has been more successful in the use of venture capital than Silicon Valley. In recent years, Silicon Valley with only about 2% of the U.S. population has attracted as much as 40% of all the venture capital invested in the U.S. During the height reached in 2000, over $60 billion were invested in the U.S. in privately held young companies.
Therefore, no place is better suited to study the relationship of venture capital to development of high technology companies than Silicon Valley. Understanding Silicon Valley is essential to understanding how venture capital can be utilized elsewhere to achieve comparable outcome.
How does venture capital work?
The idea of making early investments in privately held companies for a chance to earn high rate of return did not originate in California but in the traditional east coast financial centers such as New York and Boston. The success of their early investments in Apple, Intel and some others led to decisions to establish branch offices in the San Francisco area which in turn led to the formation of new venture capital partnerships as others follow and as some of original partners split off to form new firms. Success breeds success and as venture capital firms boast of average annual returns of 25 to 35%, more funds become available to make these investments and more groups are formed to manage the invested capital and funds. It is not unusual today for established venture capital firms to manage one billion dollars or more.
Venture capital is invested in early stage, privately held companies in hopes of gaining a windfall profit when such company becomes publicly listed or is merged with another company whereby the acquiring company pays handsomely for their equity stake. It is very important to keep in mind that venture capital investments depend on clear-cut route to being able to liquidate their investments. Most high tech start-ups, as many as 4 out of 5, fail and the investment is written off. However, a successful venture capitalist will manage to make at least one investment that brings a return to more than make up for the losses. Because of the risky nature of these investments, venture capitalists rarely make investments in profitable but slow growing businesses. Such businesses take a long time to go public and do not offer a big enough potential return. Rather, venture capitalists look for companies with the potential of outstanding return on investment. In Silicon Valley, this potential is often referred to as having an anticipated revenue stream of a hockey stick. Companies engaged in developing high tech breakthroughs are more likely to experience the hockey stick phenomenon than say a chain of fast food restaurants. This is why venture capital goes to where high tech breakthroughs are being made.
While the need to make huge return on investments explains the attraction of venture capital to the high tech industries, it does not explain why Silicon Valley can attract such a disproportionate share of the venture capital. To understand that, it is necessary to examine the culture and other characteristics of Silicon Valley.
The Silicon Valley culture and infrastructure
In many ways, Silicon Valley is unique even within the U.S. No other place is as diverse as Silicon Valley. Silicon Valley has room for people from all over the world and they all come, attracted by the pleasant weather and the diversity of people. Diversity is crucial in high technology because diversity automatically ensures many different ways of thinking and looking at problems leading to a host of solutions. Only in this manner can the best solution be synthesized out of contending ideas and emerge as the commercial winner. In a way, high tech innovation is similar to Darwinian survival of the species. Namely, endangered species bordering on extinction suffer from narrow gene pools while healthy species enjoy wide and diverse gene pools. In Silicon Valley today, as one indication of its inclusive diversity, over 30% of the companies are founded or managed by immigrants from China, Taiwan and India.
The best and brightest are attracted to Silicon Valley not only because of the inclusive nature of this place--certainly overt discrimination because of someone’s skin color and other differentiation has largely disappeared. The other reason is that entrepreneurs in Silicon Valley can readily find others of like mind to band together and approach venture capital investors with business plans and proposals. In Silicon Valley, venture capitalists do not refuse to invest on someone just because the particular entrepreneur comes from a failed venture. Since most ventures do fail, the investor gives the entrepreneur credit for having gained valuable experience even if the previous venture failed. This tolerance for failure is crucial in encouraging entrepreneurs to take risks and start companies. The importance cannot be over emphasized. In Silicon Valley, “it is OK to fail.” No other place has quite the same open-minded attitude.
With the success of high tech industries and the growth of venture capital in Silicon Valley, the economic infrastructure also expanded and became part of the environment. Infrastructure needed to support high tech companies include law firms and accounting firms to help them form proper legal structure and organized to meet Securities Exchange regulations with proper stock ownership incentive programs for not just the founders but also for employees joining the high tech enterprise. The legal and accounting firms also help the venture capital firms structure their investments and keep track of their gains and losses. Other parts of the total infrastructure include public relations and advertising firms that serve the marketing and communication needs of high tech companies. Investment banks help the companies with initial public offering and follow-on secondary offerings in the equity market and propose mergers. Specialized commercial banks and leasing firms were established just to serve the high tech companies that more traditional banks dare not touch because the latter did not understand the nature of high tech companies and were frightened by its high mortality rate.
An entire profession emerged that called themselves “free lance technical writers.” These writers contract their services to high tech companies to help them write user’s manuals, technical brochures and a host of documents to help the companies convey what they have developed to the public. Human capital firms helped high tech companies set employee hiring policies and help locate and recruit people with the needed skill sets. Successful entrepreneurs often retired from active management and became consultants and advisors to venture capital firms and to other start-ups. Arguably the trend to outsourcing gained impetus from Silicon Valley because young start-ups have limited resources and most in need of outside assistance. Most models of Macintosh from Apple Computer, for instance, were designed by independent product design services and made by contract manufacturers.
Frequently overlooked but a vital part of the Silicon Valley infrastructure is the widespread presence of professional associations. These associations organized along industries or common interests meet regularly. Ostensibly, these meetings feature speakers and topics of general interest to its membership. Equally important, these gatherings offer opportunities for professionals to meet regularly with each other and form friendships, to network and exchange ideas and resumes and to assess the potential of each as a future co-founder of the next new start-up enterprise. The Churchill Club meets frequently hosting panel discussions on high tech development and regularly draws an audience of 4-500. AAMA, the oldest Asian American organization in Silicon Valley, draws 1-200 in their monthly dinner meeting. AAMA used to be known as Asian American Manufacturers Association but since not much was being made in Silicon Valley nowadays, the name was recently changed to Asian American Multi-Technology Association. Younger organizations such as Hua Yuan Science & Technology Association and China Information Networks Association tend to organize their events on weekends and can draw over 1000 young Chinese professional to their events. The Indus Entrepreneurs was organized as network for immigrant professionals from South Asia and widely recognized for not just their conferences but as a breeding ground for many successful high tech enterprises founded by Indians and Pakistanis. There are many other networking organizations and associations in Silicon Valley that space do not permit listing here. The important point is that the success of Silicon Valley is dependent on an environment where people can mingle and ideas cross-pollinate.
In summary, the success of Silicon Valley begins with its open environment where all comers with the skills and drive to succeed are welcome. Venture capital then followed to invest in this concentration of entrepreneurial energy. The spectacular returns from these investments in turn spawned a host of supporting professions that made Silicon Valley the high tech capital that it is today. A frequently asked question from foreign visitors is: “What should the government do to encourage the birth of other Silicon Valleys?” The flippant retort from most denizens of Silicon Valley is: “As little as possible.”
Government’s role in Silicon Valley
Most Silicon Valley entrepreneurs regard the government as more of a hindrance than help. For example currently a heated debate is going on between the venture capitalists and entrepreneurs on the one side and the Security Exchange Commission on the other. The SEC wants to force all companies to account stock options as a real expense. Silicon Valley companies argue that stock options are vital incentives for people working in young companies and cannot be accurately valued when the success of the company is still in doubt. If companies are forced to expense stock options, the worry is that then stock options would cease to be a preferred method to motivate the employees. At present, engineers and others join young companies for the excitement of starting something new and toil long hours at below market wages because they are motivated to see their company succeed and their wealth realized through stock options.
Silicon Valley companies also resent the export control policies of their federal government. They regard such policies as unreasonable and arbitrary and directly impact their competitive position. As a spokesperson from Semiconductor Manufacturing International Corporation recently pointed out, SMIC can buy equipment from European supplier and expect delivery in two weeks, from Japan in two months and from the U.S. the delivery is uncertain and may take 6 months or more, most of that time spent getting necessary government clearances.
However, the U. S. federal government also plays a vital role in at least two major respects to ensure the continued development of high tech industries. The most important is in promulgating clear and transparent regulations that govern the equity market. Other than making sure that the rules and regulations apply to all companies equally, the government stays out of the way. Whether a company is ready for a public listing in the stock market is controlled only by the market conditions. When the market is strong and many investors are participating, even some of the inferior companies can go public because of high public demand for new issues. When the market is weak, even the best companies have difficulty getting a listing.
Letting the market decide when and if their investee companies can become publicly listed is extremely important to the venture capitalist. When they make an investment, they hope to liquidate in three to five years. Best way to liquidate is to list their portfolio company in the stock market. The venture capitalist watches the stock market with care, constantly comparing the reception of the stock market to how their portfolio company might be worth. They are in regular conversation with the investment bankers to determine when to best offer a portfolio company to the initial public offering (IPO) process.
The federal government also plays a vital role as the provider of funds for research and development work that no venture capitalist would contemplate underwriting. These R&D work tend to be fundamental in nature with no certainty of outcome and no practical applications in sight. Best examples that come to mind would be research grants from National Institute of Health to various university research labs that led to breakthroughs in genetic engineering. Then a host of companies were funded by venture capital and other private capital sources to convert the laboratory discoveries with additional downstream development into commercial successes. The discoveries from the labs at the medical schools of Stanford and University of California at San Francisco led directly to the formation of Genentech and Chiron and the San Francisco bay area now hosts the largest cluster of biotech firms in the U.S. Advances in modern medicine and therapy would not have been possible without government support. Government funding in military defense and space exploration also led to commercial successes in the private sector. The Internet and many advances in electronics and materials can be directly attributed to original funding by the federal government.
Thus the role of the government can be simply summarized. The primary responsibility of creating a fair, open and regulated environment for the equity market is vital to maintaining the confidence of the investor public and ensuring a clear path of liquidity to the venture capitalist. No professional venture capitalist can operate in an environment where he cannot see a path to liquidating the investment. Secondly, government funding is essential to generating basic technological advances. Only the central government can assume such risks and technological advances drive innovations with commercial implications.
The venture investing process
In Silicon Valley the venture investing process has more or less evolved into a standard procedure. Some firms specialize in investing in the first round of funding where the risk is highest but the potential return is also highest since the amount invested can be relatively small for the equity stake comparable to later rounds of investment at higher cost. Other firms prefer later rounds of financing; some even invest only in the round just prior to the company going public. By and large, venture capitalists never consider themselves as passive investors but claim to help their investments succeed by being active investors. They add value by serving on the board of the investee companies, by acting as advisors to the management team, by helping to recruit needed executives, by introducing the investee company to other companies for the purpose of forming alliances and by introducing the company to the financial community (Wall Street). Not all venture capital firms are accorded with the same regard. Entrepreneurs pursue blue ribbon firms that consistently enjoy above industry average returns not just for their money and their connections. Having such famous venture capital firms as investors imply endorsement and validation of the company and its business objectives.
It should not be surprising that venture capitalists place highest importance in the character of the people they are investing in. The venture capitalist needs to know if the team of entrepreneurs has integrity, can get along with each other and can work with the investor. Their worst nightmare is to invest in a dishonest team who will stop communicating with the investor after funding and run the company without input from the venture investor. In Silicon Valley the due diligence process is rigorous. Usually the venture capitalist after extensive analysis and deciding that interest exists in investing in the company will offer a term sheet outlining the boundaries of the deal. Such term sheets are always subject to verification of representations made by the entrepreneurs in the due diligence process. There are even professional service firms to perform the due diligence investigations. A typical claim by many venture capitalists is that out of every 100 business proposals and plans they review, only about 10 are invited to face to face meetings resulting in 2-3 term sheets and only about half or less of those conclude in actual investments.
Despite the emphasis on technology, Silicon Valley venture capitalists are rarely dazzled by just the technology. They do not invest in “solutions looking for problems to solve.” They look for and ascertain that there will be markets for the products being proposed by the entrepreneur. In other words the business potential is more important than the novelty of the invention. They are fond of saying if they must have an “A” and a “B,” then they would rather have an A team for marketing and a B team for R&D than the other way around.
While venture capital has played a vital role in transforming Silicon Valley into a high tech capital, only about 25% of the Silicon Valley start-ups receive professional venture capital funding. Others start by their own bootstrap, or funds from family and friends. I have not seen a comparison of the survival rates of the two kinds start-ups but not all professionally funded companies survive and non-professionally funded enterprises can also grow into major companies. The most famous example of the latter was Hewlett-Packard, which was started by the two founders long before there was a Silicon Valley and venture capital. Cisco was founded by a husband and wife team and grew for a long time without venture capital.
Conclusion
In the final analysis, high technology development depends on having skilled and motivated people in an open environment where ideas can be freely tested. Entrepreneurs with the best ideas are more likely to attract professional investments. The best managed companies and sometimes the luckiest companies are most likely to reach the critical mass and become an attractive investment for the investing public or as a target for acquisition. Venture capitalists with the best record of making successful investments will have the least problem of raising new funds to invest in new companies. As they become successful, they become better known and are likely to be introduced to superior ideas from more proven entrepreneurs. The quality of their deal flow improves and thus increases the probability of their making more profitable investments. Such accelerating cycle applies to both the proven entrepreneur and the successful venture capitalist. The market forces determine the fate of their efforts.
Another question sometimes asked is: “How to attract premier venture capital firms from Silicon Valley to operate in places like China?” The answer is: “With a great deal of difficulty.” Venture capitalists are hands-on investors. They need to be near their investee companies and they need to be able to help their portfolio companies succeed. To most venture capitalists, with selected exceptions, China is far away and is a place they do not understand and can offer little added value. The exceptions are those individuals that are familiar with both sides of the Pacific, knowledgeable in both environments and can help their investee companies bridge the gap and gain an advantage by establishing cross border alliances. They can make astute investments on both sides and gain leverage by introducing companies from one side to work with the other.
The future is bright for China to develop high tech industries because China has plenty of human talent and entrepreneurial energy. As soon as the path to liquidity can be clearly defined, more and more professional venture investors will come to China with funds to invest. Let the snowball roll down the mountain!
In less than 2 decades, “Silicon Valley” became the name of a real place, a place that won worldwide recognition as ground zero where commercial breakthroughs in high technology occurred regularly. Silicon Valley, located south of San Francisco became the birthplace of such high tech giants as Intel, Sun Microsystems, Cisco Systems, Oracle, Applied Materials and Genentech—all leaders in their field. The proliferation of semiconductor start-ups that grew into major companies and equipment and material suppliers that grew by supporting this industry led to the coining of the term, “Silicon Valley.”
The emergence of Silicon Valley as the world’s high tech capital would not have been possible without the use of venture capital. Indeed, venture capitalism, i.e., risky investments in emerging young companies for the purpose of earning high returns, also became a widely recognized professional discipline. This recognition came after its spectacular investments in such companies as Apple Computer, Cisco, and Yahoo returned thousands of times original invested amount. No other place in the world has been more successful in the use of venture capital than Silicon Valley. In recent years, Silicon Valley with only about 2% of the U.S. population has attracted as much as 40% of all the venture capital invested in the U.S. During the height reached in 2000, over $60 billion were invested in the U.S. in privately held young companies.
Therefore, no place is better suited to study the relationship of venture capital to development of high technology companies than Silicon Valley. Understanding Silicon Valley is essential to understanding how venture capital can be utilized elsewhere to achieve comparable outcome.
How does venture capital work?
The idea of making early investments in privately held companies for a chance to earn high rate of return did not originate in California but in the traditional east coast financial centers such as New York and Boston. The success of their early investments in Apple, Intel and some others led to decisions to establish branch offices in the San Francisco area which in turn led to the formation of new venture capital partnerships as others follow and as some of original partners split off to form new firms. Success breeds success and as venture capital firms boast of average annual returns of 25 to 35%, more funds become available to make these investments and more groups are formed to manage the invested capital and funds. It is not unusual today for established venture capital firms to manage one billion dollars or more.
Venture capital is invested in early stage, privately held companies in hopes of gaining a windfall profit when such company becomes publicly listed or is merged with another company whereby the acquiring company pays handsomely for their equity stake. It is very important to keep in mind that venture capital investments depend on clear-cut route to being able to liquidate their investments. Most high tech start-ups, as many as 4 out of 5, fail and the investment is written off. However, a successful venture capitalist will manage to make at least one investment that brings a return to more than make up for the losses. Because of the risky nature of these investments, venture capitalists rarely make investments in profitable but slow growing businesses. Such businesses take a long time to go public and do not offer a big enough potential return. Rather, venture capitalists look for companies with the potential of outstanding return on investment. In Silicon Valley, this potential is often referred to as having an anticipated revenue stream of a hockey stick. Companies engaged in developing high tech breakthroughs are more likely to experience the hockey stick phenomenon than say a chain of fast food restaurants. This is why venture capital goes to where high tech breakthroughs are being made.
While the need to make huge return on investments explains the attraction of venture capital to the high tech industries, it does not explain why Silicon Valley can attract such a disproportionate share of the venture capital. To understand that, it is necessary to examine the culture and other characteristics of Silicon Valley.
The Silicon Valley culture and infrastructure
In many ways, Silicon Valley is unique even within the U.S. No other place is as diverse as Silicon Valley. Silicon Valley has room for people from all over the world and they all come, attracted by the pleasant weather and the diversity of people. Diversity is crucial in high technology because diversity automatically ensures many different ways of thinking and looking at problems leading to a host of solutions. Only in this manner can the best solution be synthesized out of contending ideas and emerge as the commercial winner. In a way, high tech innovation is similar to Darwinian survival of the species. Namely, endangered species bordering on extinction suffer from narrow gene pools while healthy species enjoy wide and diverse gene pools. In Silicon Valley today, as one indication of its inclusive diversity, over 30% of the companies are founded or managed by immigrants from China, Taiwan and India.
The best and brightest are attracted to Silicon Valley not only because of the inclusive nature of this place--certainly overt discrimination because of someone’s skin color and other differentiation has largely disappeared. The other reason is that entrepreneurs in Silicon Valley can readily find others of like mind to band together and approach venture capital investors with business plans and proposals. In Silicon Valley, venture capitalists do not refuse to invest on someone just because the particular entrepreneur comes from a failed venture. Since most ventures do fail, the investor gives the entrepreneur credit for having gained valuable experience even if the previous venture failed. This tolerance for failure is crucial in encouraging entrepreneurs to take risks and start companies. The importance cannot be over emphasized. In Silicon Valley, “it is OK to fail.” No other place has quite the same open-minded attitude.
With the success of high tech industries and the growth of venture capital in Silicon Valley, the economic infrastructure also expanded and became part of the environment. Infrastructure needed to support high tech companies include law firms and accounting firms to help them form proper legal structure and organized to meet Securities Exchange regulations with proper stock ownership incentive programs for not just the founders but also for employees joining the high tech enterprise. The legal and accounting firms also help the venture capital firms structure their investments and keep track of their gains and losses. Other parts of the total infrastructure include public relations and advertising firms that serve the marketing and communication needs of high tech companies. Investment banks help the companies with initial public offering and follow-on secondary offerings in the equity market and propose mergers. Specialized commercial banks and leasing firms were established just to serve the high tech companies that more traditional banks dare not touch because the latter did not understand the nature of high tech companies and were frightened by its high mortality rate.
An entire profession emerged that called themselves “free lance technical writers.” These writers contract their services to high tech companies to help them write user’s manuals, technical brochures and a host of documents to help the companies convey what they have developed to the public. Human capital firms helped high tech companies set employee hiring policies and help locate and recruit people with the needed skill sets. Successful entrepreneurs often retired from active management and became consultants and advisors to venture capital firms and to other start-ups. Arguably the trend to outsourcing gained impetus from Silicon Valley because young start-ups have limited resources and most in need of outside assistance. Most models of Macintosh from Apple Computer, for instance, were designed by independent product design services and made by contract manufacturers.
Frequently overlooked but a vital part of the Silicon Valley infrastructure is the widespread presence of professional associations. These associations organized along industries or common interests meet regularly. Ostensibly, these meetings feature speakers and topics of general interest to its membership. Equally important, these gatherings offer opportunities for professionals to meet regularly with each other and form friendships, to network and exchange ideas and resumes and to assess the potential of each as a future co-founder of the next new start-up enterprise. The Churchill Club meets frequently hosting panel discussions on high tech development and regularly draws an audience of 4-500. AAMA, the oldest Asian American organization in Silicon Valley, draws 1-200 in their monthly dinner meeting. AAMA used to be known as Asian American Manufacturers Association but since not much was being made in Silicon Valley nowadays, the name was recently changed to Asian American Multi-Technology Association. Younger organizations such as Hua Yuan Science & Technology Association and China Information Networks Association tend to organize their events on weekends and can draw over 1000 young Chinese professional to their events. The Indus Entrepreneurs was organized as network for immigrant professionals from South Asia and widely recognized for not just their conferences but as a breeding ground for many successful high tech enterprises founded by Indians and Pakistanis. There are many other networking organizations and associations in Silicon Valley that space do not permit listing here. The important point is that the success of Silicon Valley is dependent on an environment where people can mingle and ideas cross-pollinate.
In summary, the success of Silicon Valley begins with its open environment where all comers with the skills and drive to succeed are welcome. Venture capital then followed to invest in this concentration of entrepreneurial energy. The spectacular returns from these investments in turn spawned a host of supporting professions that made Silicon Valley the high tech capital that it is today. A frequently asked question from foreign visitors is: “What should the government do to encourage the birth of other Silicon Valleys?” The flippant retort from most denizens of Silicon Valley is: “As little as possible.”
Government’s role in Silicon Valley
Most Silicon Valley entrepreneurs regard the government as more of a hindrance than help. For example currently a heated debate is going on between the venture capitalists and entrepreneurs on the one side and the Security Exchange Commission on the other. The SEC wants to force all companies to account stock options as a real expense. Silicon Valley companies argue that stock options are vital incentives for people working in young companies and cannot be accurately valued when the success of the company is still in doubt. If companies are forced to expense stock options, the worry is that then stock options would cease to be a preferred method to motivate the employees. At present, engineers and others join young companies for the excitement of starting something new and toil long hours at below market wages because they are motivated to see their company succeed and their wealth realized through stock options.
Silicon Valley companies also resent the export control policies of their federal government. They regard such policies as unreasonable and arbitrary and directly impact their competitive position. As a spokesperson from Semiconductor Manufacturing International Corporation recently pointed out, SMIC can buy equipment from European supplier and expect delivery in two weeks, from Japan in two months and from the U.S. the delivery is uncertain and may take 6 months or more, most of that time spent getting necessary government clearances.
However, the U. S. federal government also plays a vital role in at least two major respects to ensure the continued development of high tech industries. The most important is in promulgating clear and transparent regulations that govern the equity market. Other than making sure that the rules and regulations apply to all companies equally, the government stays out of the way. Whether a company is ready for a public listing in the stock market is controlled only by the market conditions. When the market is strong and many investors are participating, even some of the inferior companies can go public because of high public demand for new issues. When the market is weak, even the best companies have difficulty getting a listing.
Letting the market decide when and if their investee companies can become publicly listed is extremely important to the venture capitalist. When they make an investment, they hope to liquidate in three to five years. Best way to liquidate is to list their portfolio company in the stock market. The venture capitalist watches the stock market with care, constantly comparing the reception of the stock market to how their portfolio company might be worth. They are in regular conversation with the investment bankers to determine when to best offer a portfolio company to the initial public offering (IPO) process.
The federal government also plays a vital role as the provider of funds for research and development work that no venture capitalist would contemplate underwriting. These R&D work tend to be fundamental in nature with no certainty of outcome and no practical applications in sight. Best examples that come to mind would be research grants from National Institute of Health to various university research labs that led to breakthroughs in genetic engineering. Then a host of companies were funded by venture capital and other private capital sources to convert the laboratory discoveries with additional downstream development into commercial successes. The discoveries from the labs at the medical schools of Stanford and University of California at San Francisco led directly to the formation of Genentech and Chiron and the San Francisco bay area now hosts the largest cluster of biotech firms in the U.S. Advances in modern medicine and therapy would not have been possible without government support. Government funding in military defense and space exploration also led to commercial successes in the private sector. The Internet and many advances in electronics and materials can be directly attributed to original funding by the federal government.
Thus the role of the government can be simply summarized. The primary responsibility of creating a fair, open and regulated environment for the equity market is vital to maintaining the confidence of the investor public and ensuring a clear path of liquidity to the venture capitalist. No professional venture capitalist can operate in an environment where he cannot see a path to liquidating the investment. Secondly, government funding is essential to generating basic technological advances. Only the central government can assume such risks and technological advances drive innovations with commercial implications.
The venture investing process
In Silicon Valley the venture investing process has more or less evolved into a standard procedure. Some firms specialize in investing in the first round of funding where the risk is highest but the potential return is also highest since the amount invested can be relatively small for the equity stake comparable to later rounds of investment at higher cost. Other firms prefer later rounds of financing; some even invest only in the round just prior to the company going public. By and large, venture capitalists never consider themselves as passive investors but claim to help their investments succeed by being active investors. They add value by serving on the board of the investee companies, by acting as advisors to the management team, by helping to recruit needed executives, by introducing the investee company to other companies for the purpose of forming alliances and by introducing the company to the financial community (Wall Street). Not all venture capital firms are accorded with the same regard. Entrepreneurs pursue blue ribbon firms that consistently enjoy above industry average returns not just for their money and their connections. Having such famous venture capital firms as investors imply endorsement and validation of the company and its business objectives.
It should not be surprising that venture capitalists place highest importance in the character of the people they are investing in. The venture capitalist needs to know if the team of entrepreneurs has integrity, can get along with each other and can work with the investor. Their worst nightmare is to invest in a dishonest team who will stop communicating with the investor after funding and run the company without input from the venture investor. In Silicon Valley the due diligence process is rigorous. Usually the venture capitalist after extensive analysis and deciding that interest exists in investing in the company will offer a term sheet outlining the boundaries of the deal. Such term sheets are always subject to verification of representations made by the entrepreneurs in the due diligence process. There are even professional service firms to perform the due diligence investigations. A typical claim by many venture capitalists is that out of every 100 business proposals and plans they review, only about 10 are invited to face to face meetings resulting in 2-3 term sheets and only about half or less of those conclude in actual investments.
Despite the emphasis on technology, Silicon Valley venture capitalists are rarely dazzled by just the technology. They do not invest in “solutions looking for problems to solve.” They look for and ascertain that there will be markets for the products being proposed by the entrepreneur. In other words the business potential is more important than the novelty of the invention. They are fond of saying if they must have an “A” and a “B,” then they would rather have an A team for marketing and a B team for R&D than the other way around.
While venture capital has played a vital role in transforming Silicon Valley into a high tech capital, only about 25% of the Silicon Valley start-ups receive professional venture capital funding. Others start by their own bootstrap, or funds from family and friends. I have not seen a comparison of the survival rates of the two kinds start-ups but not all professionally funded companies survive and non-professionally funded enterprises can also grow into major companies. The most famous example of the latter was Hewlett-Packard, which was started by the two founders long before there was a Silicon Valley and venture capital. Cisco was founded by a husband and wife team and grew for a long time without venture capital.
Conclusion
In the final analysis, high technology development depends on having skilled and motivated people in an open environment where ideas can be freely tested. Entrepreneurs with the best ideas are more likely to attract professional investments. The best managed companies and sometimes the luckiest companies are most likely to reach the critical mass and become an attractive investment for the investing public or as a target for acquisition. Venture capitalists with the best record of making successful investments will have the least problem of raising new funds to invest in new companies. As they become successful, they become better known and are likely to be introduced to superior ideas from more proven entrepreneurs. The quality of their deal flow improves and thus increases the probability of their making more profitable investments. Such accelerating cycle applies to both the proven entrepreneur and the successful venture capitalist. The market forces determine the fate of their efforts.
Another question sometimes asked is: “How to attract premier venture capital firms from Silicon Valley to operate in places like China?” The answer is: “With a great deal of difficulty.” Venture capitalists are hands-on investors. They need to be near their investee companies and they need to be able to help their portfolio companies succeed. To most venture capitalists, with selected exceptions, China is far away and is a place they do not understand and can offer little added value. The exceptions are those individuals that are familiar with both sides of the Pacific, knowledgeable in both environments and can help their investee companies bridge the gap and gain an advantage by establishing cross border alliances. They can make astute investments on both sides and gain leverage by introducing companies from one side to work with the other.
The future is bright for China to develop high tech industries because China has plenty of human talent and entrepreneurial energy. As soon as the path to liquidity can be clearly defined, more and more professional venture investors will come to China with funds to invest. Let the snowball roll down the mountain!
Monday, September 2, 2002
Latest Olive Branch to Taiwan
Beijing’s Tang Shubei came to San Francisco area to deliver the keynote speech at the second annual banquet of Chinese for Peaceful Unification over the Labor Day weekend. Not surprisingly, his views contrasted sharply from the recent rhetoric from Taiwan president Chen Shui-bian and his administration.
About a decade ago Tang was the second most senior person to represent Beijing in the cross strait negotiations. Since Chen’s predecessor, Taiwan president Lee Tenghui halted the discussion in early 1990’s, Tang became head of the Cross Strait Relations Research Institute in Beijing.
Lately, Chen has been testing how far he can go promoting Taiwan independence and not arouse precipitous reaction from Beijing. Instead of lobbing test missiles over Taiwan, Beijing’s response was to send Tang.
While Tang’s remarks delivered before a crowd of 400 was clearly for Chen’s benefit, he presented a perspective unfamiliar to most Americans and policy makers in Washington.
First of all he pointed out that people on both sides of the strait consider people of Taiwan as ethnic Chinese and Taiwan as part of China. Taiwan’s current constitution still recognizes that Taiwan and the mainland are part of one China. “This remains so,” Tang said, “Despite the constitution having undergone six revisions under Lee Tenghui’s administration.”
Even today, less than 20% of the people on Taiwan are in favor of independence. “We can accept the 60 to 70% of the people in favor of status quo,” he said. “We are not interested in forced integration. Let us work to earn the trust and prove that reunification is better than being separate.”
Some of the benefits are already quite evident. Mainland needs Taiwan’s capital and expertise. Taiwan needs the mainland’s low cost base, huge labor supply and market. Approximately 70% of China’s electronic exports come from Taiwan investments, he said.
Every year, more than 3 million people visit across the strait. Without direct linkage, this has meant an extra expenditure of $600 million in travel costs detouring via Hong Kong or Macao that could be used far more productively.
Tang went on to point out that as a major country, it is natural that China should invest in order to modernize its national defense. Such expenditure is totally unjustified, and unnecessary, for Taiwan with only 23 million people to maintain nearly the same defense budget. Such expenditure can only harm Taiwan’s smaller economy.
The solution, Tang suggests, is for both sides to de-emphasize the political differences, i.e., the difference between Republic of China and People’s Republic of China. Emphasize instead that all are Chinese.
Mainland needs to continue to grow economically so that people of Taiwan will be persuaded of the benefits of being part of China. “In the meantime, if Taiwan will foreswear declaring independence, mainland will foreswear use of force. End of problem,” he said.
Taiwan has expressed concern about recognition and participation in world organizations. This concern can be discussed and negotiated, Tang said. He can envision a subgroup carrying the Taiwan banner under the overall China heading, much like at the Olympics.
As for possible distrust and doubt of Beijing’s intentions, Tang pointed out that even after negotiation is concluded, Taiwan will keep its military and the mainland will not be sending any of its own forces to the island.
Will Chen listen to Tang’s overtures? He certainly should. Recent developments suggest Taiwan is becoming increasingly dependent on the mainland and resisting this trend is not in the interest of its people.
A recent poll revealed that 70% of the recent college graduates on Taiwan have yet to find a job. Last year, for the first time, over 1000 students went to the mainland for education. More are looking to join around a million already living and working on the mainland from Taiwan. Imagine the flood of applicants if the students are able to take the mainland college entrance examination in Taiwan.
Of course the flow of people and funds does not have to be unidirectional. Tsingtao Brewery with 7.5% of Taiwan’s market share has recently announced plans to build a plant near Kaohsiung in southern part of Taiwan.
However, to truly capture the comparative advantages on both sides of the strait, there has to be open travel and exchange of ideas, money and people.
The northern California chapter of Chinese for Peaceful Unification is only two years old and hosted a gathering of 400. In February, over 800 overseas Chinese from over 70 countries convened in Sydney to discuss peaceful unification and rejected the notion of Taiwan independence. No other issue can unite the emotions of all Chinese more than the eventual return of Taiwan to China.
About a decade ago Tang was the second most senior person to represent Beijing in the cross strait negotiations. Since Chen’s predecessor, Taiwan president Lee Tenghui halted the discussion in early 1990’s, Tang became head of the Cross Strait Relations Research Institute in Beijing.
Lately, Chen has been testing how far he can go promoting Taiwan independence and not arouse precipitous reaction from Beijing. Instead of lobbing test missiles over Taiwan, Beijing’s response was to send Tang.
While Tang’s remarks delivered before a crowd of 400 was clearly for Chen’s benefit, he presented a perspective unfamiliar to most Americans and policy makers in Washington.
First of all he pointed out that people on both sides of the strait consider people of Taiwan as ethnic Chinese and Taiwan as part of China. Taiwan’s current constitution still recognizes that Taiwan and the mainland are part of one China. “This remains so,” Tang said, “Despite the constitution having undergone six revisions under Lee Tenghui’s administration.”
Even today, less than 20% of the people on Taiwan are in favor of independence. “We can accept the 60 to 70% of the people in favor of status quo,” he said. “We are not interested in forced integration. Let us work to earn the trust and prove that reunification is better than being separate.”
Some of the benefits are already quite evident. Mainland needs Taiwan’s capital and expertise. Taiwan needs the mainland’s low cost base, huge labor supply and market. Approximately 70% of China’s electronic exports come from Taiwan investments, he said.
Every year, more than 3 million people visit across the strait. Without direct linkage, this has meant an extra expenditure of $600 million in travel costs detouring via Hong Kong or Macao that could be used far more productively.
Tang went on to point out that as a major country, it is natural that China should invest in order to modernize its national defense. Such expenditure is totally unjustified, and unnecessary, for Taiwan with only 23 million people to maintain nearly the same defense budget. Such expenditure can only harm Taiwan’s smaller economy.
The solution, Tang suggests, is for both sides to de-emphasize the political differences, i.e., the difference between Republic of China and People’s Republic of China. Emphasize instead that all are Chinese.
Mainland needs to continue to grow economically so that people of Taiwan will be persuaded of the benefits of being part of China. “In the meantime, if Taiwan will foreswear declaring independence, mainland will foreswear use of force. End of problem,” he said.
Taiwan has expressed concern about recognition and participation in world organizations. This concern can be discussed and negotiated, Tang said. He can envision a subgroup carrying the Taiwan banner under the overall China heading, much like at the Olympics.
As for possible distrust and doubt of Beijing’s intentions, Tang pointed out that even after negotiation is concluded, Taiwan will keep its military and the mainland will not be sending any of its own forces to the island.
Will Chen listen to Tang’s overtures? He certainly should. Recent developments suggest Taiwan is becoming increasingly dependent on the mainland and resisting this trend is not in the interest of its people.
A recent poll revealed that 70% of the recent college graduates on Taiwan have yet to find a job. Last year, for the first time, over 1000 students went to the mainland for education. More are looking to join around a million already living and working on the mainland from Taiwan. Imagine the flood of applicants if the students are able to take the mainland college entrance examination in Taiwan.
Of course the flow of people and funds does not have to be unidirectional. Tsingtao Brewery with 7.5% of Taiwan’s market share has recently announced plans to build a plant near Kaohsiung in southern part of Taiwan.
However, to truly capture the comparative advantages on both sides of the strait, there has to be open travel and exchange of ideas, money and people.
The northern California chapter of Chinese for Peaceful Unification is only two years old and hosted a gathering of 400. In February, over 800 overseas Chinese from over 70 countries convened in Sydney to discuss peaceful unification and rejected the notion of Taiwan independence. No other issue can unite the emotions of all Chinese more than the eventual return of Taiwan to China.
Monday, August 5, 2002
Chinese Americans Contributing to Silicon Valley
Current economic malaise notwithstanding, Silicon Valley has earned universal recognition as the Mecca of high technology. After all, Silicon Valley was where semiconductors were reduced to commercial practice, leading to the development of integrated circuits and microprocessors, which in turn created the personal computer revolution and followed by the proliferation of the use of Internet. Many of the leaders of the high tech industry call Silicon Valley home including such household names as Hewlett Packard, Intel, Apple Computer, Cisco, Netscape, 3Com, Oracle, and Sun Microsystems to name a few. Much of the biotechnology revolution also took place in and around Silicon Valley with such industry leaders as Genentech, Chiron and numerous others. Government and business leaders from all over the world wishing to replicate the success of Silicon Valley have made the obligatory trek to Silicon Valley to see and observe and hopefully capture some of the magic to take home.
The one magic ingredient that is surely unique to Silicon Valley is the diversity of the people living and working there. Nowhere else epitomizes America, a place that has room for everybody, better than Silicon Valley. The one distinction between the America as symbolized by the Statue of Liberty and Silicon Valley is that Silicon Valley attracted very few of the downtrodden but many of the best and brightest from Taiwan, China, Hong Kong, Singapore, Malaysia, India, Pakistan, Iran, Russia, Israel, Palestine, Slovenia, Hungary, Czech Republic and not a few from developed economies such as France, Germany, UK and Canada.
Today of all the people working and living in Silicon Valley, one out of four is an Asian and nearly one third of those are ethnic Chinese, and more than one sixth is a South Asian from India or Pakistan. If all the ethnic Asians were to suddenly disappear from Silicon Valley, most of the high tech companies would implode and the economic shock wave would be felt worldwide.
Annalee Saxenian, a UC Berkeley professor, whose research interests include the contribution of immigrants on America’s technology concludes that in Silicon Valley, IC stands not for integrated circuits but for Indians and Chinese. Indeed her study showed that by 1998, the last year of her study, one out of five high tech start-ups in Silicon Valley were led by Chinese Americans. My guess is that today, 5 years later, the number of companies started by Chinese Americans would make up an even higher ratio. I don’t have hard numbers but my reasoning is based on the following considerations:
(1) There are more Chinese Americans in Silicon Valley now than ever. It is not unusual for any of the many professional associations formed by Chinese Americans to hold a conference on a Saturday and get a room full of people, anywhere from 500 to over 1000 in attendance. I don’t have an exact count, but my guess is that in Silicon Valley there are at least 2 to 3 dozen Chinese American organizations according to professional interests each with at least 100 members. By the way, even though mainstream associations such as the American Electronics Association have many more members, they would be hard pressed to routinely turn out 500 for a conference on a Saturday.
(2) There are also many more venture investors willing to invest in start-up companies headed by Chinese Americans now than ever before. Taiwan capitalists have found lucrative deal flows by investing in Silicon Valley and more than 100 of these venture capital firms have set up branch offices in Silicon Valley. Mainstream venture capitalists that used to not look at deals with Chinese American CEOs now realize that they are missing out. They even have Chinese American partners in their firms and now they do not hesitate to invest in start-ups headed by Asians.
The Silicon Valley today is far different from the San Francisco Bay Area I moved to in 1971. In the old days, Santa Clara valley south of San Francisco was a valley of vanishing fruit orchards waiting for the high tech revolution to be recognized and for someone to coin the term, Silicon Valley. Today, every town and city in the bay area tries to lay claim to being part of the mythical Silicon Valley. Then we planned our Sundays for a trek to San Francisco Chinatown to enjoy a dim sum lunch and a load of Chinese groceries to cart home. Today we don’t go to San Francisco for food anymore, just about every city in the greater bay area has at least one shopping mall, developed and owned by Chinese Americans, full of Chinese restaurants and one major grocery store that carries goods from greater China. Thirty years ago, venture capital was just getting started as an investment vehicle and venture capitalist recognized as a profession. Today, anywhere between $20 to 60 billion of venture capital are invested annually in the U.S. and 35 to 40% of all that risk capital have been invested in the San Francisco bay area, an area representing less than 2% of the total U.S. population. For some time now, Silicon Valley has been soaking up more than ten times their fair share of risk capital.
The status of Chinese Americans in Silicon Valley has also changed dramatically over this period of three decades. At Deloitte & Touche, every year we conduct a survey of 50 fastest growing companies in Silicon Valley. In one recent year, 5 of the 8 fastest growing companies had Chinese American as the CEO except for Yahoo, whose Jerry Yang was a founder but not a CEO. If I remember correctly, his title then was “chief proselytizer.” In the old days, Chinese Americans were automatically presumed to be excellent scientists and engineers but incapable of being a manager much less a senior executive. Today not only do we have Chinese CEOs in small to medium size companies, but we have senior executives in major multinationals such as Applied Material, Hewlett Packard, Intel and others. John Chen has a graduate degree from Caltech so you would expect him to be smart and head some R&D lab. But he is the Chairman and CEO of Sybase, a major software company he is credited with pulling it out of a death spiral and restoring to strong financial health.
Silicon Valley today is about as level a playing field irrespective of race or national origin as one can find anywhere. It rightly should be considered a model for the rest of America to emulate. But, it was not always this way and it didn’t change overnight. John Chen and other young successful executives owe a debt to those that blaze the trail for them. I am fortunate to be living in Silicon Valley during this time and privileged to being an eyewitness as some of the Chinese American pioneers made history and changed basic attitudes toward Asian immigrants.
Without a doubt, the first pioneer to come to mind is David S. Lee. David started his first company in 1969 called Diablo Systems, a company that made daisywheel printers. He sold the company to Xerox in 1972 for $28 million. One of the first things Xerox did was to replace David as the executive in charge, so David resigned and started Qume the following year. Qume continued to make refinements in the daisywheel printer and the company was sold to ITT in 1978 for $165 million. This sale returned 93 times original investment for the investors. David made his first million in 1972 when he was 34 and his sale of Qume was the first Silicon Valley company to be sold for over $100 million.
When David was raising venture funding for Qume, despite his track record with Diablo Systems, the investors insisted on the right to put in a CEO over David as a condition for their investment. When ITT bought the company, they made David the number one executive and then later made him a corporate vice president in charge of three divisions. At that time, ITT was in the top ten of Fortune 500 companies and David was undoubtedly the highest ranking Chinese American executive in Corporate America from Silicon Valley. He repaid ITT for their confidence in his management ability by staying with ITT until his division was sold to Alcatel, the French telecomm equipment company.
By the time David left ITT in 1984 he was already a legend in Silicon Valley. While he continued to acquire and run high tech businesses, he also began to think about –as he put it—working for future generations. He became politically active as a fundraiser. Being a Republican he supported most Republican candidates at all levels but he also supported Asian American candidates regardless of political affiliation. He encouraged Asian Americans that were Democrats to be active and support their candidates. To David, participating in the political process and having a place at the table was more important than the political affiliation. When Bill Bradley ran for the Democratic nomination for president, he was a visiting scholar at Stanford. David was among the first to host a dinner party for the senator so that some of the notable Chinese Americans in Silicon Valley can meet him.
David has served on presidential commissions for three successive presidents from George Bush Sr. to Bill Clinton to George W. He has been on the board of regent for the University of California system since 1995. He is very aware of his responsibility as the only Chinese American regent to serve in a system where Asian American students represent 40% of the enrollment. He has been president of Chinese American associations, visible supporter of many Asian American causes and a tireless speaker at functions to encourage others. He makes a difference by example.
Pauline Lo Alker was born in China and grew up in Hong Kong. She came from a “traditional” Chinese family where she was told that her mission in life was to support her brothers. Her parents enter her to school a year early so that she could keep an eye on her older brother. Her dream was to attend Northwestern University, but her parents kept the acceptance letter and scholarship notification from her. In the end she and her brother left Hong Kong to attend Arizona State where Pauline took on double major of music and mathematics. During her senior year she was introduced to the computer, which she took on with total enthusiasm. After graduation in 1964, to her chagrin the only job open to her was to be a bookkeeper at Sears & Roebuck.
Pauline’s first break came a year after graduation when she met someone in the computer department of General Electric who offered her a job as a manuscript typist. Not the plum job but at least it was in the right department. She rented an IBM Selectric, learned to type on it and took the job. A month a half later, a programming job opened and she applied and was selected over four others. Her high tech career was finally launched. By 1972, Pauline had moved to Silicon Valley to become the 37th employee of Amdahl Corporation, then a start-up computer company. She then moved on to mid-level management positions at Four Phase Systems and Intel.
Pauline came to prominence in 1980 when she joined Convergent Technologies, a computer workstation company, as their vice president of marketing. In four years she oversaw sales of half a billion dollars worth of workstations. Convergent was an early high flyer and she was the frequent spokesperson for the company. In 1984, Pauline started Counterpoint Computers, a builder of high performance computers, which was sold to Acer of Taiwan in 1987. She stayed on to run the U.S. business for Acer for a while. In 1990, she was recruited to run and turn around a small company, Network Peripherals, which she did turn around and got it ready for public offering in 1994. The company won the recognition as the most successful IPO from Silicon Valley in 1994. Since 1998 Pauline has been the CEO of Amplify.net, a privately held company in Silicon Valley.
In recent fifteen years or so, Pauline received many honors and awards. She wasn’t just the most visible Asian American women in Silicon Valley but was one of few pioneering women executives who have established their credentials in a mostly male high-tech industry. She was a popular and widely admired role model and she relished her position and took her responsibility seriously. She became the first woman to become the president of AAMA, then standing for Asian American Manufacturers Association. AAMA was and continues to be one of the best-known professional organizations for Asian Americans in Silicon Valley. When it was first formed, it was to serve as a networking and mutual aid organization for Asian Americans. Today, the organization is known in China, Hong Kong and Taiwan as the bridge to Silicon Valley. When Pauline stepped in to lead this organization, the energy level of the entire organization went up, there were more programs put together by more volunteers and attended by more people. Pauline called herself the “self-appointed champion of the young.” She organized and led workshops to teach young engineers about leadership and communication skills and other attributes necessary in order to become successful managers and executives. It was invariably the most popular and best-attended event.
David and Pauline were among the first wave of Chinese Americans that not only helped built Silicon Valley but made the statement that Chinese Americans were not just good technicians but can also be successful entrepreneurs and business executives. Others during the early days of Silicon Valley included David Lam, Lester Lee, Stanley Wang and Ken Fong. David Lam was working at H-P when the white engineer he was training suddenly became his boss. He left to form Lam Research, which became one of the major equipment companies for the semiconductor industry. Subsequently, he went on to lead and/or founded a series of high tech companies. David also served as president of AAMA and on a presidential commission during the Bush Sr. administration.
Lester Lee started a company based on his magnetic media expertise which later evolved to become a supplier of ruggedized industrial PC’s, a profitable and not hotly competitive niche market so that he can devote his energy to social activism. He was involved in the founding of several professional Asian American organizations including AAMA. His opinions and letters to editors are particularly noticeable in the ethnic Chinese newspapers. He and David Lee and Stanley Wang were active Republicans behind many fundraisers in Silicon Valley. In fact he was the first Chinese American to be appointed to the University of California board of regent and he was also the first to serve for a year and then did not get confirmation to serve out the term. He was a victim of political battle between a Democratic legislature and a Republican governor. This failed confirmation was so extraordinary and raised such a stink from the Chinese American community that when David Lee’s nomination came up for confirmation, no one thought to use him as a political football.
Stanley Wang along with his brother started Pantronix, a small company providing the service of assembling and packaging integrated circuits with emphasis on serving companies that supply devices to the military and space agencies. This company has been growing steadily over nearly 30 years and now has plants in Philippines and Kunshan, China as well as Silicon Valley. At Stanley’s company conference room on prominent display are photos of him with every U.S. president from Reagan to the current one. Stanley serves on the board of trustee of the California State University system. The UC system has more glamour and prestige but the state university system serves more students. Stanley has personally made a number of $1 million dollar contributions to the state universities to encourage the improvement in the quality of higher education.
Ken Fong founded Clontech, a biotech company, which he sold to Becton Dickenson in 1999 for undisclosed hundreds of millions. Ken and his wife Pam are known for their generosity to philanthropic causes including endowed chairs and scholarships and for their unfailing support to Asian American political candidates and Asian American issues in need to financial support. Ken has opened a venture investment firm and travels frequently to China to look at developments of biotechnology there.
David Lee, Pauline Lo Alker, David Lam, Lester Lee, Stanley Wang, and Ken Fong are arguably the most prominent of the first wave to grow and prosper and contribute to Silicon Valley becoming a modern legend. At the same time other Chinese Americans also made in roads in Corporate America. Bob Lee was an executive vice president at PacBell, Albert Yu a Sr. VP who led the microprocessor development at Intel and Lee Ting a corporate VP of global logistics for H-P. This group paved the way for others to follow by being role models, community leaders and by giving back to society.
When the Committee of 100 decided to hold the conference in Silicon Valley this year, we felt that it was important to talk about giving back. We wanted to correct any impression that Chinese Americans only take and not give back and we also wanted to stress to our young people the importance of giving back. At the conference, we organized panels to discuss giving back via philanthropy, via not-for-profits and via public service. At our gala banquet, we asked Charles Wang, Chairman and CEO of Computer Associates to talk about his personal approach to giving. Charles is a member of C100 but Computer Associates is based on Long Island in New York and not from Silicon Valley, an easy concession to the recognition that Silicon Valley has no monopoly on giving back.
Charles Wang talked about “The Circle of Giving.” He believes in giving back not only for himself but to involve those around him. To encourage the employees of his company to give, his company matches $2 to every $1 dollar the employees donate to a worthy cause. He personally supports the National Center for Missing and Exploited Children. The Center uses the software provided by Computer Associates to track and quickly retrieves files of missing children and software to help predict facial changes of a missing child, as the child remains missing over years. Charles funds the Smile Train that operates on children with cleft mouths so that they can smile and take on a normal life. The train operates on 25,000 kids per year and has helped 40,000 children in China in just the last 3 years.
On the one hand, we Chinese Americans need to be vigilant over situations where we are being treated as foreigners and where our citizen’s rights are withheld from us. On the other, we need to show that we belong and that we are as American as the next. Americans are famous for their big heart and generosity of spirit; the Chinese Americans can do no less.
I would like to conclude my presentation with a little story about Su Dongpo, arguably one of the best known and best loved poets of China. I did a little research in preparation for the C100 conference and found out that this Song Dynasty poet/government official also started a charity for the specific purpose of helping peasant parents bond with newborn girl babies to reduce infanticide in the countryside. This showed that the Chinese cultural bias favoring male heirs ran deep and hard to overcome. More importantly, I found out that giving back has always been a part of the Chinese culture for those that enjoyed privileged lives.
____________________________________
Based on the keynote address given at the 20th anniversary banquet of Chinese American Forum, 8/3/02, in St. Louis, Mo. Dr. Koo is Director of Chinese Services Group, Deloitte & Touche, a member of Committee of 100 and a board member of Chinese American Forum.
The one magic ingredient that is surely unique to Silicon Valley is the diversity of the people living and working there. Nowhere else epitomizes America, a place that has room for everybody, better than Silicon Valley. The one distinction between the America as symbolized by the Statue of Liberty and Silicon Valley is that Silicon Valley attracted very few of the downtrodden but many of the best and brightest from Taiwan, China, Hong Kong, Singapore, Malaysia, India, Pakistan, Iran, Russia, Israel, Palestine, Slovenia, Hungary, Czech Republic and not a few from developed economies such as France, Germany, UK and Canada.
Today of all the people working and living in Silicon Valley, one out of four is an Asian and nearly one third of those are ethnic Chinese, and more than one sixth is a South Asian from India or Pakistan. If all the ethnic Asians were to suddenly disappear from Silicon Valley, most of the high tech companies would implode and the economic shock wave would be felt worldwide.
Annalee Saxenian, a UC Berkeley professor, whose research interests include the contribution of immigrants on America’s technology concludes that in Silicon Valley, IC stands not for integrated circuits but for Indians and Chinese. Indeed her study showed that by 1998, the last year of her study, one out of five high tech start-ups in Silicon Valley were led by Chinese Americans. My guess is that today, 5 years later, the number of companies started by Chinese Americans would make up an even higher ratio. I don’t have hard numbers but my reasoning is based on the following considerations:
(1) There are more Chinese Americans in Silicon Valley now than ever. It is not unusual for any of the many professional associations formed by Chinese Americans to hold a conference on a Saturday and get a room full of people, anywhere from 500 to over 1000 in attendance. I don’t have an exact count, but my guess is that in Silicon Valley there are at least 2 to 3 dozen Chinese American organizations according to professional interests each with at least 100 members. By the way, even though mainstream associations such as the American Electronics Association have many more members, they would be hard pressed to routinely turn out 500 for a conference on a Saturday.
(2) There are also many more venture investors willing to invest in start-up companies headed by Chinese Americans now than ever before. Taiwan capitalists have found lucrative deal flows by investing in Silicon Valley and more than 100 of these venture capital firms have set up branch offices in Silicon Valley. Mainstream venture capitalists that used to not look at deals with Chinese American CEOs now realize that they are missing out. They even have Chinese American partners in their firms and now they do not hesitate to invest in start-ups headed by Asians.
The Silicon Valley today is far different from the San Francisco Bay Area I moved to in 1971. In the old days, Santa Clara valley south of San Francisco was a valley of vanishing fruit orchards waiting for the high tech revolution to be recognized and for someone to coin the term, Silicon Valley. Today, every town and city in the bay area tries to lay claim to being part of the mythical Silicon Valley. Then we planned our Sundays for a trek to San Francisco Chinatown to enjoy a dim sum lunch and a load of Chinese groceries to cart home. Today we don’t go to San Francisco for food anymore, just about every city in the greater bay area has at least one shopping mall, developed and owned by Chinese Americans, full of Chinese restaurants and one major grocery store that carries goods from greater China. Thirty years ago, venture capital was just getting started as an investment vehicle and venture capitalist recognized as a profession. Today, anywhere between $20 to 60 billion of venture capital are invested annually in the U.S. and 35 to 40% of all that risk capital have been invested in the San Francisco bay area, an area representing less than 2% of the total U.S. population. For some time now, Silicon Valley has been soaking up more than ten times their fair share of risk capital.
The status of Chinese Americans in Silicon Valley has also changed dramatically over this period of three decades. At Deloitte & Touche, every year we conduct a survey of 50 fastest growing companies in Silicon Valley. In one recent year, 5 of the 8 fastest growing companies had Chinese American as the CEO except for Yahoo, whose Jerry Yang was a founder but not a CEO. If I remember correctly, his title then was “chief proselytizer.” In the old days, Chinese Americans were automatically presumed to be excellent scientists and engineers but incapable of being a manager much less a senior executive. Today not only do we have Chinese CEOs in small to medium size companies, but we have senior executives in major multinationals such as Applied Material, Hewlett Packard, Intel and others. John Chen has a graduate degree from Caltech so you would expect him to be smart and head some R&D lab. But he is the Chairman and CEO of Sybase, a major software company he is credited with pulling it out of a death spiral and restoring to strong financial health.
Silicon Valley today is about as level a playing field irrespective of race or national origin as one can find anywhere. It rightly should be considered a model for the rest of America to emulate. But, it was not always this way and it didn’t change overnight. John Chen and other young successful executives owe a debt to those that blaze the trail for them. I am fortunate to be living in Silicon Valley during this time and privileged to being an eyewitness as some of the Chinese American pioneers made history and changed basic attitudes toward Asian immigrants.
Without a doubt, the first pioneer to come to mind is David S. Lee. David started his first company in 1969 called Diablo Systems, a company that made daisywheel printers. He sold the company to Xerox in 1972 for $28 million. One of the first things Xerox did was to replace David as the executive in charge, so David resigned and started Qume the following year. Qume continued to make refinements in the daisywheel printer and the company was sold to ITT in 1978 for $165 million. This sale returned 93 times original investment for the investors. David made his first million in 1972 when he was 34 and his sale of Qume was the first Silicon Valley company to be sold for over $100 million.
When David was raising venture funding for Qume, despite his track record with Diablo Systems, the investors insisted on the right to put in a CEO over David as a condition for their investment. When ITT bought the company, they made David the number one executive and then later made him a corporate vice president in charge of three divisions. At that time, ITT was in the top ten of Fortune 500 companies and David was undoubtedly the highest ranking Chinese American executive in Corporate America from Silicon Valley. He repaid ITT for their confidence in his management ability by staying with ITT until his division was sold to Alcatel, the French telecomm equipment company.
By the time David left ITT in 1984 he was already a legend in Silicon Valley. While he continued to acquire and run high tech businesses, he also began to think about –as he put it—working for future generations. He became politically active as a fundraiser. Being a Republican he supported most Republican candidates at all levels but he also supported Asian American candidates regardless of political affiliation. He encouraged Asian Americans that were Democrats to be active and support their candidates. To David, participating in the political process and having a place at the table was more important than the political affiliation. When Bill Bradley ran for the Democratic nomination for president, he was a visiting scholar at Stanford. David was among the first to host a dinner party for the senator so that some of the notable Chinese Americans in Silicon Valley can meet him.
David has served on presidential commissions for three successive presidents from George Bush Sr. to Bill Clinton to George W. He has been on the board of regent for the University of California system since 1995. He is very aware of his responsibility as the only Chinese American regent to serve in a system where Asian American students represent 40% of the enrollment. He has been president of Chinese American associations, visible supporter of many Asian American causes and a tireless speaker at functions to encourage others. He makes a difference by example.
Pauline Lo Alker was born in China and grew up in Hong Kong. She came from a “traditional” Chinese family where she was told that her mission in life was to support her brothers. Her parents enter her to school a year early so that she could keep an eye on her older brother. Her dream was to attend Northwestern University, but her parents kept the acceptance letter and scholarship notification from her. In the end she and her brother left Hong Kong to attend Arizona State where Pauline took on double major of music and mathematics. During her senior year she was introduced to the computer, which she took on with total enthusiasm. After graduation in 1964, to her chagrin the only job open to her was to be a bookkeeper at Sears & Roebuck.
Pauline’s first break came a year after graduation when she met someone in the computer department of General Electric who offered her a job as a manuscript typist. Not the plum job but at least it was in the right department. She rented an IBM Selectric, learned to type on it and took the job. A month a half later, a programming job opened and she applied and was selected over four others. Her high tech career was finally launched. By 1972, Pauline had moved to Silicon Valley to become the 37th employee of Amdahl Corporation, then a start-up computer company. She then moved on to mid-level management positions at Four Phase Systems and Intel.
Pauline came to prominence in 1980 when she joined Convergent Technologies, a computer workstation company, as their vice president of marketing. In four years she oversaw sales of half a billion dollars worth of workstations. Convergent was an early high flyer and she was the frequent spokesperson for the company. In 1984, Pauline started Counterpoint Computers, a builder of high performance computers, which was sold to Acer of Taiwan in 1987. She stayed on to run the U.S. business for Acer for a while. In 1990, she was recruited to run and turn around a small company, Network Peripherals, which she did turn around and got it ready for public offering in 1994. The company won the recognition as the most successful IPO from Silicon Valley in 1994. Since 1998 Pauline has been the CEO of Amplify.net, a privately held company in Silicon Valley.
In recent fifteen years or so, Pauline received many honors and awards. She wasn’t just the most visible Asian American women in Silicon Valley but was one of few pioneering women executives who have established their credentials in a mostly male high-tech industry. She was a popular and widely admired role model and she relished her position and took her responsibility seriously. She became the first woman to become the president of AAMA, then standing for Asian American Manufacturers Association. AAMA was and continues to be one of the best-known professional organizations for Asian Americans in Silicon Valley. When it was first formed, it was to serve as a networking and mutual aid organization for Asian Americans. Today, the organization is known in China, Hong Kong and Taiwan as the bridge to Silicon Valley. When Pauline stepped in to lead this organization, the energy level of the entire organization went up, there were more programs put together by more volunteers and attended by more people. Pauline called herself the “self-appointed champion of the young.” She organized and led workshops to teach young engineers about leadership and communication skills and other attributes necessary in order to become successful managers and executives. It was invariably the most popular and best-attended event.
David and Pauline were among the first wave of Chinese Americans that not only helped built Silicon Valley but made the statement that Chinese Americans were not just good technicians but can also be successful entrepreneurs and business executives. Others during the early days of Silicon Valley included David Lam, Lester Lee, Stanley Wang and Ken Fong. David Lam was working at H-P when the white engineer he was training suddenly became his boss. He left to form Lam Research, which became one of the major equipment companies for the semiconductor industry. Subsequently, he went on to lead and/or founded a series of high tech companies. David also served as president of AAMA and on a presidential commission during the Bush Sr. administration.
Lester Lee started a company based on his magnetic media expertise which later evolved to become a supplier of ruggedized industrial PC’s, a profitable and not hotly competitive niche market so that he can devote his energy to social activism. He was involved in the founding of several professional Asian American organizations including AAMA. His opinions and letters to editors are particularly noticeable in the ethnic Chinese newspapers. He and David Lee and Stanley Wang were active Republicans behind many fundraisers in Silicon Valley. In fact he was the first Chinese American to be appointed to the University of California board of regent and he was also the first to serve for a year and then did not get confirmation to serve out the term. He was a victim of political battle between a Democratic legislature and a Republican governor. This failed confirmation was so extraordinary and raised such a stink from the Chinese American community that when David Lee’s nomination came up for confirmation, no one thought to use him as a political football.
Stanley Wang along with his brother started Pantronix, a small company providing the service of assembling and packaging integrated circuits with emphasis on serving companies that supply devices to the military and space agencies. This company has been growing steadily over nearly 30 years and now has plants in Philippines and Kunshan, China as well as Silicon Valley. At Stanley’s company conference room on prominent display are photos of him with every U.S. president from Reagan to the current one. Stanley serves on the board of trustee of the California State University system. The UC system has more glamour and prestige but the state university system serves more students. Stanley has personally made a number of $1 million dollar contributions to the state universities to encourage the improvement in the quality of higher education.
Ken Fong founded Clontech, a biotech company, which he sold to Becton Dickenson in 1999 for undisclosed hundreds of millions. Ken and his wife Pam are known for their generosity to philanthropic causes including endowed chairs and scholarships and for their unfailing support to Asian American political candidates and Asian American issues in need to financial support. Ken has opened a venture investment firm and travels frequently to China to look at developments of biotechnology there.
David Lee, Pauline Lo Alker, David Lam, Lester Lee, Stanley Wang, and Ken Fong are arguably the most prominent of the first wave to grow and prosper and contribute to Silicon Valley becoming a modern legend. At the same time other Chinese Americans also made in roads in Corporate America. Bob Lee was an executive vice president at PacBell, Albert Yu a Sr. VP who led the microprocessor development at Intel and Lee Ting a corporate VP of global logistics for H-P. This group paved the way for others to follow by being role models, community leaders and by giving back to society.
When the Committee of 100 decided to hold the conference in Silicon Valley this year, we felt that it was important to talk about giving back. We wanted to correct any impression that Chinese Americans only take and not give back and we also wanted to stress to our young people the importance of giving back. At the conference, we organized panels to discuss giving back via philanthropy, via not-for-profits and via public service. At our gala banquet, we asked Charles Wang, Chairman and CEO of Computer Associates to talk about his personal approach to giving. Charles is a member of C100 but Computer Associates is based on Long Island in New York and not from Silicon Valley, an easy concession to the recognition that Silicon Valley has no monopoly on giving back.
Charles Wang talked about “The Circle of Giving.” He believes in giving back not only for himself but to involve those around him. To encourage the employees of his company to give, his company matches $2 to every $1 dollar the employees donate to a worthy cause. He personally supports the National Center for Missing and Exploited Children. The Center uses the software provided by Computer Associates to track and quickly retrieves files of missing children and software to help predict facial changes of a missing child, as the child remains missing over years. Charles funds the Smile Train that operates on children with cleft mouths so that they can smile and take on a normal life. The train operates on 25,000 kids per year and has helped 40,000 children in China in just the last 3 years.
On the one hand, we Chinese Americans need to be vigilant over situations where we are being treated as foreigners and where our citizen’s rights are withheld from us. On the other, we need to show that we belong and that we are as American as the next. Americans are famous for their big heart and generosity of spirit; the Chinese Americans can do no less.
I would like to conclude my presentation with a little story about Su Dongpo, arguably one of the best known and best loved poets of China. I did a little research in preparation for the C100 conference and found out that this Song Dynasty poet/government official also started a charity for the specific purpose of helping peasant parents bond with newborn girl babies to reduce infanticide in the countryside. This showed that the Chinese cultural bias favoring male heirs ran deep and hard to overcome. More importantly, I found out that giving back has always been a part of the Chinese culture for those that enjoyed privileged lives.
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Based on the keynote address given at the 20th anniversary banquet of Chinese American Forum, 8/3/02, in St. Louis, Mo. Dr. Koo is Director of Chinese Services Group, Deloitte & Touche, a member of Committee of 100 and a board member of Chinese American Forum.
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