I ask Maia if he's worried about some hungry new design start-up from Shanghai knocking on Apple's door tomorrow with a new generation digital media player chip -- faster, cheaper, more powerful than ever before?

"Oh, we're always worried," he says, laughing. But he's not panicking. He is confident that the Valley will find a way to maintain its leadership. "The innovation and the standards and the leading-edge stuff is still primarily coming out of the U.S.," he says. Maia notes that all the "offshore companies" -- the chip companies based in China and Taiwan and Korea -- want to set up shop in Silicon Valley, "so that they can keep their ear to the action."

By "action," Maia means the cutting edge, the latest innovations in design, the ferment that comes from being the historical center of the world's computer business. "We are here," says Maia. "We are the action. We are creating the action."

Indeed, just a block or two from PortalPlayer, stands Hynix Semiconductor, a Korean manufacturer of memory chips. In the global economy, it makes sense for the world to come to Silicon Valley as much as for the Valley to go to the world.

I ask PortalPlayer India's J.A. Chowdary what is to stop Indian chip designers from working directly with Asian manufacturers, cutting out the Silicon Valley middleman. He soothingly invokes a "golden triangle" of U.S. designers, Indian engineers and Chinese manufacturers, balanced in a mutually beneficial stasis for a good long time. "The design and architecture development is done in the U.S. The development work is done at comparatively lower costs in India and has a huge manpower of skilled technicians. And the manufacturing is done at affordable and cost-effective prices in China. Each country has its own significant part to play, and contributes in a major way, to the successful production and exporting of globally competitive products. This model will continue to grow and will sustain each other."

In a perfect world, that "golden triangle" would be a globalization dream come true. Every country, every region, contributes what it does best, and the tight links and interconnections made possible by global networks allow everything to work smoothly together, without friction. A rising tide of world prosperity raises all boats.

It could happen. The figures on job losses and vacancy rates in Santa Clara don't prove that the Valley is in decline. It's just as likely, notes University of California at Berkeley economist Cynthia Kroll, that the empty offices are a result of overbuilding during the go-go dot-com years as they are of outsourcing. Burned by the excesses of the bubble, the Valley is acting more prudently now.

"It's very hard to disentangle the wave of off-shoring from weakness in the economy," says Greg Linden, a researcher at Berkeley studying the global semiconductor industry.

It's also hard to refute the oft-heard argument in favor of outsourcing that suggests that companies like PortalPlayer would not exist at all if they did not rely heavily on offshoring. In other words, the 80 employees that PortalPlayer has in the United States would not be possible without the 100 in India.

But there are a couple of other factors to consider in the perfect world of the globalized golden triangle. The chip industry is one of the crown jewels of a highly industrialized economy. If outsourcing leads to a critical mass of technology expertise and manufacturing capability migrating to locations outside the United States, the long-term consequences could be severe. So the Pentagon is worried that it won't be able to find local suppliers of chips necessary for next-generation weapons systems. Economists worry about spiraling trade deficits.

An odd, intriguing aspect of globalization is that the decision by the fabless design houses to pursue their individual interests -- cheaper costs -- plays right into the hands of national entities focused on their own strategic imperatives. It is no accident that Taiwan became a leader in bleeding-edge, made-to-order chip manufacturing, or that China looks set to follow in its much smaller neighbor's path. Before Chang started TSMC, he directed a government research institute that targeted strategically important technology development. In both Taiwan and China, the government has encouraged the chip industry with tax breaks, real estate deals, loans and an assortment of other incentives.

That's because government and business leaders in East Asia consider the chip industry not just as a source of economic profits but as a key component of national strength. So while the fabless companies shed what they consider nonessential, East Asia eagerly snaps up everything it can. As a result, "disaggregation" on the one side has led to "reaggregation" on the other. Look at the PortalPlayer chip: manufactured in Taiwan, tested and packaged in Taiwan, Korea or China, and plugged into an iPod in China.

"The supply chain of the market has fundamentally shifted to Asia," says Len Jelinek, an iSuppli analyst.

This shift has some people very worried -- and they are not just out-of-work engineers. They fear that advanced R&D follows the physical location of production. If you are a cutting-edge engineer interested in working with innovative new techniques for chip manufacturing, you will be drawn not to Silicon Valley but to the scores of brand new fabs being built in Asia. So, for example, the foreign-born engineers getting Ph.D.s at Stanford and Berkeley, who used to get jobs in the Valley, will now increasingly go back to their homes where they can work at the top of their field. That is where engineers are being trained to use the newest tools, and that is where further innovations in technology are likely to spring from.

That is also why analysts in Silicon Valley and policymakers in Washington are asking a host of urgent questions. Will state-of-the-art chip design be the next link in the chain to move? What happens when the U.S. military needs a custom-designed new chip but all the facilities capable of manufacturing it are in China? Will the PortalPlayers of the Valley continue to stay one step ahead of their foreign competitors? Or has Silicon Valley midwifed its own successor into being through its eagerness to divest itself of manufacturing and every other "nonessential" job?

As the U.S. trade deficit with China continued to rise in the spring of 2005, along with signs that China's chip industry was surging ahead at a remarkable pace, the questions were being asked with increasing frequency. In April, the Defense Science Board, an advisory group to the Pentagon, released a 118-page report warning that critical semiconductor manufacturing technology was migrating to Asia, and in particular, China. Also in late April, at hearings held before the U.S.-China Economic and Security Review Commission to evaluate China's high-technology development, speaker after speaker testified to the rapid growth of China's chip-making industry. Meanwhile, venture capitalists in Silicon Valley are making their own move across the Pacific right now, pouring millions of dollars into Chinese chip design start-ups.

Will one of those start-ups end up displacing PortalPlayer? Will the new skyscrapers of Shanghai cast a dark shadow over the office parks of Santa Clara and Mountain View, Milpitas and San Jose? Over the past few years, if you were discussing the challenge of globalization in the Valley, the topic usually was India, with its legions of inexpensive programmers. But today, more likely than not, the country on everybody's mind is the Middle Kingdom.

End of Part 1. Next: China's love affair with the chip

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