Consumer markets throughout the world have seized up in the wake of the global financial maelstrom, and after a succession of fat years, the technology industry is now in double-digit decline. After taking a pummeling during the Internet bubble, Silicon Valley, the erstwhile Promised Land for technology geeks, is undergoing another baptism of fire. To date, more than 100,000 jobs have been lost in Silicon Valley. Many of the companies started by the area's vaunted "entrepreneur class" are being sold or shut down outright.

What's That Got to Do with Taiwan?

The shock waves from the financial meltdown have now reached the opposite side of the Pacific, and Taiwan is keeping a close watch on developments in the technology corridor on the U.S. West Coast. 

The Hsinchu Science-based Industrial Park previously accounted for one-quarter of the value of Taiwan's total manufacturing output, and the U.S. market, primarily Silicon Valley, was the park's number-two export destination. The Industrial Technology Research Institute forecasts that Taiwan's semiconductor industry will contract by 20 percent this year, dropping below the NT$1 trillion threshold as a result of the downturn in Silicon Valley.

Can Silicon Valley Bring Back the Magic?

Seated at a simple desk adorned only with an Acer laptop, Dr. Paul Huang, former Silicon Valley entrepreneur, founder of Cadence Design Systems Inc. – the world's leading electronic design automation (EDA) company – and the reputed "godfather of EDA," reckons that every ten years or so Silicon Valley undergoes a major reshuffle.

"Every time there's an upheaval, the market is several orders of magnitude bigger than the previous time," Huang says from personal experience. With a major upheaval, those who don't change will not only taste no new opportunities, "they're sure to get wiped out."

So how to adapt? According to Huang, compared to the Japanese, the "smarter and bolder" Silicon Valley players excel at hitting a constantly shifting target. Observing how Silicon Valley adapts and addresses the changes gives one an early leg up on understanding the major trends of the future as they evolve.

In this age of global economic upheaval, Silicon Valley is currently moving in four key directions, setting in motion the next great shift in the global technology paradigm.

Upheaval 1: Silicon Valley Value Shift

Two months ago the last semiconductor plant in Silicon Valley, Intel's D2 plant next to its Santa Clara headquarters, formally closed its doors. Silicon Valley has been utterly bereft of "silicon" since that day.

According to David Wu, vice president for marketing and business development for Fortemedia Inc. and a 30-year Silicon Valley veteran, this historic turning point demonstrates that the market value chain steering Silicon Valley has already shifted directions. In Silicon Valley the hot ticket is no longer the technology- and capital-intensive semiconductor industry, but rather "silicon-free" businesses centered on service applications such as Google and the social networking site Facebook.

Keen venture capitalists with a nose for the market have already cast their votes with their cash. Of total venture capital sunk into Silicon Valley last year, the fastest growing sector was information services (up 64 percent), followed by media and entertainment (up 55 percent). There were no new venture capital projects in the semiconductor industry.

Not Just Services – Life Services

When Silicon Valley was at the forefront of the semiconductor industry, Bob Lin, managing partner of Multi-Dimensional Venture Partners, helped found a number of start-ups there. Silicon Valley, Lin observes, once provided unwavering market stability, like a table supported by four stout legs: human resources, capital, technology and market access.

The new revolution in Silicon Valley is now about creating value through delivery and service. "Pure technology is no longer what is valued," says Lin, who in addition to his investment activities finds time to play the piano and write books.

In addition to ongoing technological innovation and accelerated product development, Taiwan and China have also been major instigators of Silicon Valley's shift in market value.

Taiwan Pushes'Disruptive Innovation'

Taiwan's introduction of the disruptive innovation of low-cost computers, combined with the global market and client shift toward China, has forced Silicon Valley to accelerate the pace of its restructuring.

From the front lines of the market battleground, Jen-Hsun Huang, co-founder, president and CEO of world-beating computer graphics chipset company Nvidia, predicts that the advent of low-cost computers will have a huge impact on Silicon Valley.

"This is the whole computer," Huang declares, holding his company's new Tegra chipset in the palm of his hand. "You're looking at the future."

Only the size of one segment of a finger, the tiny Tegra will embed an ARM central processing unit, graphics processing unit, video processing and other chip functions to become the heart of an entire computer. Huang discloses that Tegra-powered computers will be available in the second half of this year and may cost as little as US$99.

Prices on computers have tumbled from around US$1,500 to between US$300 and US$400 in the space of less than five years.

"Silicon Valley must reinvent itself from the bottom up, the paradigm must shift, and this is the result of Taiwan's low-cost computer innovation," says the Taiwan-born Huang, who now speaks English more fluently than Chinese.

Low-cost computers from Taiwan may have provided the impetus for a structural reshuffling in Silicon Valley, but it is the China market that has prompted companies there to begin leaning toward Asia.

The shift in the direction of market value is but an overture to the eventual shift in the Silicon Valley business model. The highly centralized structure through which Silicon Valley led global technology development in years past is gradually giving way to a more dispersed model of parallel exchange.

Upheaval 2: Upstarts Everywhere

The industrial model of Silicon Valley has transformed from the flying geese paradigm (where an industry rises in one country, and when it begins to decline there, it rises in other countries) to the lotus pond model (where industry clusters move and grow organically).

In other words, on its way forward, Silicon Valley, as leader of the flock, once engaged in a continuing process of jettisoning lower added-value manufacturing and production businesses to those members of the flock bringing up the rear. Now, Silicon Valley is one large lotus flower in the middle of the global technology pond, which is meanwhile filled with others growing in parallel.

Silicon Valley, the Quick Route to India

AnnaLee Saxenian, dean and professor at the University of California at Berkeley's School of Information, has studied the Silicon Valley phenomenon for more than 20 years. In her analysis of the lotus analogy, technology and capital flowing out of the Silicon Valley core to the periphery has created a more complex, more diverse flow of human resources, capital and technology in places like India, China and Taiwan. Silicon Valley is at the hub of this rapidly diversifying global technology network, acting as the connector of the world's hi-tech enclaves.

Yet the lotus leaf model of industrial division of labor at the same time cements Silicon Valley's role as the nucleus from which global technology trends emerge.

The shortest path to business between Taiwan and India, for example, runs through Silicon Valley, given the more than 4,000 entrepreneurs of Indian nationality there, each with direct or indirect contact with India's captains of industry and movers and shakers in the Indian technology sector.

Upheaval 3: From IT to Biotech and Envirotech

Once upon a better economic time, you could never get a seat at the Il Fornaio restaurant in Palo Alto. It was "the" spot for Silicon Valley venture capital bigshots to have breakfast and talk business.

Watching Trends More Important than Setting Them

Aside from breakfast at the same upscale Italian eatery, these folks have another thing in common: over the past several years they have all taken their money out of semiconductors and information technology and bet the farm on biotechnology and environmental technology.

"The next paradigm shift in Silicon Valley will not occur in industries related to semiconductors or information technology – that's all in the past," says Serious Materials chairman Marc Porat, who got his start in information economics. "The future of Silicon Valley definitely lies in green technologies, a business worth more than US$1 trillion," Porat continues with conviction.

"Heroes make the times. The times make the heroes. Watching trends is more important than setting them," SoftCapital chairman Wu-fu Chen, a veteran Silicon Valley venture capitalist, believes. The paradigm for innovation was once "know how to do it." In the future it will be "know what to do."

Upheaval 4: The Silicon Triangle

The intimate interaction between Silicon Valley and Taiwan has become a triangular relationship involving China. Will Taiwan and China join hands to supplant Silicon Valley? Or will China elbow Taiwan aside? Or will the Silicon Valley triangle join forces to set off the next great paradigm shift?

Viewed as a separate entity, Silicon Valley, with less land area than the seven cities and counties comprising northern Taiwan and a population of just 2.5 million, accounts for five percent of total U.S. gross domestic product, or over 180 percent of Taiwan's total annual GDP. Prior to China entering the picture, the 100-kilometer hi-tech corridor stretching from Taipei to Hsinchu was enmeshed in a lockstep relationship with Silicon Valley.

Silicon Valley provided Taiwan with an infusion of human capital and technology resources as the first wave of Taiwanese students returned to the island from their stints in America to set up shop, passing work in middle- and lower-end sectors along the value chain on down to the Taiwanese startups and providing the locomotive for the development of Taiwan's technology industry. Along the way, Taiwan mastered the Silicon Valley's "ethos of innovation."

Amidst the current upheaval in the technology sector, the umbilical relationship between Silicon Valley and Taiwan has expanded into a triangular structure with the emergence of China. According to Dr. Chintay Shih, dean of National Tsing Hua University's College of Technology Management, within this "Silicon Triangle," Silicon Valley's role is innovation, technology and general global initiative, while Taiwan occupies the middle ground as contractor, designer and financier, and China serves as manufacturer, secondary designer and market end-user.

Within this triangle also exists a sort of dynamic balance, with the three parties acting as both collaborators and competitors.

As Taiwan has continued to move upstream along the value chain, its own design, R&D and provision of financing have partially supplanted the role Silicon Valley once played. Meanwhile, China's massive developments in manufacturing and production integration have similarly supplanted Taiwan's former role.

Longtime Silicon Valley observer Dr. David Wu even believes Taiwan possesses the total package in terms of human resources, capital and technology, lacking only a big market to complete the picture. If Taiwan can secure real access to China's market, it "should be able to more boldly break away from Silicon Valley and even displace it at the top of the heap," Wu says.

Macronix International chairman Miin Wu left his job at Intel 18 years ago and brought 27 Silicon Valley engineers back to Taiwan with him to found a startup at the Hsinchu Science Park.

Taiwan is now what Silicon Valley used to be, and China is now what Taiwan used to be, Wu analogizes.

"What Taiwan needs to look out for is, in the years following the paradigm shift, China will become capable of doing what Taiwan does, and when that happens, Silicon Valley and China could squeeze Taiwan out," says Wu, who keeps close tabs on developments in China's IC design industry.

Taiwanese Forays into Silicon Valley amid Downturn

On the other hand, Silicon Valley's recent woes have been attracting an increasing amount of Taiwanese interest.

As if on cue, within the past month Kaohsiung mayor Chen Chu and Taipei mayor Hau Lung-pin have each toured Silicon Valley seeking to attract new businesses, vividly demonstrating that Silicon Valley remains a battleground from which Taiwan can ill afford to withdraw. After three years in Silicon Valley, Dr. Joseph Yang, a former director of the National Science Council's Office of International Cooperation, observes that Silicon Valley's current decline is indicative not of a decline in core competence but of skittish financiers. There are still a lot of interesting things cooking. We'll all just have to wait for the next technological spark to start the pot boiling again.

Translated from the Chinese by Brian Kennedy