Fellow Interview: Terry Daly

Periodically we’ll be interviewing Senior CEME Fellows to check in on their latest research, big questions they’ve been pondering and everything they’re keeping an eye on in the world. Today we spoke with technology business executive, Terry Daly.

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Interviewer: What are the questions that keep you up at night around your current work?
TD:I have spent most of my career in the semiconductor industry. Semiconductors are at the heart of the digital economy – your mobile phone, the internet, industrial applications, automotive, defense, aerospace. Semiconductors will continue to be at the epicenter of the digital side of human evolution over the course of the next three-four decades.

My focus here has revolved around the buildout of the semiconductor industry in China. While China is substantially behind the rest of the world in semiconductor development and manufacturing, they have a very strong country initiative in place to elevate the competency of the semiconductor industry. They are putting a lot of money behind it, having announced a multi-year 150 billion dollar investment to bring up this industry. China imports more semiconductor content value than oil. The Government of China is trying to move more of the production and high tech jobs into the country. Beyond these advertised objectives, a very important objective for China is access and control of leading-edge technology for its defense, intelligence and cybersecurity interests. China is directly subsidizing companies to build up an indigenous industry. Of equal interest to my research is China’s creation of a set of quasi-sovereign wealth funds. These are in the form of investment management companies and private equity firms, like those in Silicon Valley, but funded by the Chinese Government. Canyon Bridge is one example. China is aggressively moving to adapt their deployment of sovereign wealth for bolstering national security through these entities.

There are several international dimensions to China’s actions. One is national security. US Government basically wants to inhibit China’s ability to build its semiconductor industry by blocking access to leading edge technology. Second, as a WTO member China has committed to comply with trade rules, including industry subsidization. At the same time, US and global companies in the industry are aggressively pursuing the growth opportunity in China. Increased investment in this sector is also fueling the creation of small companies and startups in the region. There are multiple dimensions of how this will play out.

With that background, what keeps me up at night?

(i) What’s really happening on the ground in China? More research needs to be done to understand where the investment is being deployed, the creation of quasi sovereign wealth funds and the relationship between the central government and the provinces. There are also several MNCs on the ground with very creative partnerships with various entities of Chinese governments and companies to profit from the surge in opportunities. Intellectual property protection remains a core issue.
(ii) Is China unfairly criticized for pursuing economic interests? China is maligned in the industry for unfair subsidization and creating overcapacity, Is that criticism merited? Several countries such as Singapore, UAE and Norway have deployed sovereign wealth in other types of industries. Developed countries like Japan have spent 10 billion dollars over the last 5 years to restructure and rationalize their uncompetitive semiconductor industry. Is China’s approach fundamentally different from other countries? Are they being held to a different standard?
(iii) What do these developments entail for various stakeholders in this globally competitive industry? Key to my focus are the policy implications of these developments for the US and Chinese governments, the CEOs and board members of companies who must navigate this complex landscape, and for new companies being created in China. I am also interested in the intersection of national security with China’s strategy of subsidization. Is the threat real or perceived? On the trade front, what will be the implications for companies? The new administration in Washington hasn’t yet outlined a clear trade policy. The semiconductor industry is not a US industry – it is truly global and the new policy must take that into account.

Looking back a few decades, the semiconductor industry was largely based in the US, Europe and Japan. In the eighties, Taiwan, South Korea and Singapore started catching up and have now become major front-runners of this industry. China is now on the upswing while Europe has fallen behind. From my perspective, China is where the future action will be – not only because of the large investments being made, but because it has demonstrated an ability to take a sector and develop high levels of expertise. In the next two or three decades, China will be a central player.

Interviewer: What do you see in the developments and events around the world today that make your work relevant and timely?
TD:The geopolitical situation between China and the US informs my work and makes it relevant and timely. Among the key issues are trade, currency, North Korea, the South China Sea, and Taiwan. Taken together this creates a very complex geopolitical environment within which companies must operate. On matters of timeliness, the Chinese-funded private equity firm Canyon Bridge is currently attempting to acquire a US-based company called Lattice Semiconductor. This acquisition is currently being reviewed by US Government’s Council of Foreign Investments (CFIUS). This will be an interesting first test for the Trump administration with respect to policy on enabling Chinese entities to gain control of US technology via acquisition. It is also interesting to note that the last presidential commission report issued by the Obama administration, in January this year, was on the competitiveness of the semiconductor industry. It profiled the role that China is playing and expressed concern along several lines – foremost was national security.

Both the US and China have similar objectives from an economic standpoint. Both want high-tech industries, good jobs and to promote innovation. From a trade stand-point they want to have an industry sector that is positive or in balance from an import-export perspective. They also want access to leading technology for the secondary purpose of national security, intelligence, space and cybersecurity. However, there is a divergence of starting points – the US is way ahead while China is still catching up. How this landscape plays out and how global companies navigate the waters will be fascinating.

Interviewer: Where do you see the greatest opportunities for impact for students who affiliate or work with CEME and IBGC?
TD: The greatest opportunity for Fletcher students exists in strengthening their ability to take the theory out of the classroom and put it to practice; and translate thought processes into policy recommendations for stakeholders – making an impact. These recommendations can positively influence players in the industry to achieve their business results and strategic objectives without getting caught in the crosshairs of the geopolitical currents. It is an opportunity for the Fletcher student to bring the unique Fletcher cross-disciplinary approach and put it over a target like this. The second major opportunity is the ability to network and meet people in global industries and governments, and potentially translate that to career opportunities that would not have been imaginable before coming to Fletcher.

Interviewer: What is the most interesting book you have read recently?
TD: Dealing with China: An Insider Unmasks the New Economic Superpower by Henry M. Paulson, Jr.