In the 1980s, the U.S. was wasted with scare that Japan would become the prominent power in manufacturing and technology. Those fears never came to pass. Today the same scares are pointed China. The Middle Kingdom begins to be an even more daunting foe, with its enormous foreign reserves, fast-growing economy, oceans of scientists and engineers, and enormous subsidies to high-tech companies . How real is the China threat?

There is no doubt that China is making fast strides in both infrastructure and technology, but U.S. worry of being overtaken by China appears to be replaced . It takes more than money and might to reach innovation. This is what I learned when researching the inflated values of engineering graduation rates in China and by analyzing its pharmaceutical industry. And this is one of the key findings in a new book titled Chips and Change: How Crisis Reshapes the Semiconductor Industry (MIT Press). Written by Professors Clair Brown and Greg Linden of the University of California at Berkeley, the book proposes a wealth of information about semiconductor development cycles as well as a fresh and informed look at some of China’s key technological variants in those realms.

A few years ago, China seemed to be on track to rule the global semiconductor industry in the same method it currently dominates the electronics manufacturing sector. In 2004, China’s most advanced wafer manufacturer, SMIC (SMI), went public on the Hong Kong and New York market exchanges. The next year, two Chinese chip design companies , Actions (ACTS) and Vimicro (VIMC), had successful Nasdaq IPOs. Boosters of China’s chip industry said there were hundreds more transistor design firms waiting in the wings and many new Chinese chip manufacturers were also starting up.

Obstacle to Advance

Five years later, most Chinese chip firms remain unprofitable. Why? A number of interlocking reasons that propose spins as to why training lots of engineers and spending money to subsidize firms and build conveniences is not enough to create a successful industry.

Because of China’s poor good name for defending intellectual property , multinationals have limited technology remove to China. For instance , chip giant Intel (INTC) is now building a factory in northeastern China but has long delayed locating its most cutting-edge fabrication facilities in China, even though this increases the cost of logistics to supply China-based electronics plants , which are among the biggest consumers of Intel processors.

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