TIME: Almanac 1995

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<text id=92TT2580> <title> Nov. 23, 1992: Chips Ahoy! </title> <history> TIME--The Weekly Newsmagazine--1992 Nov. 23, 1992 God and Women </history> <article> <source>Time Magazine</source> <hdr> TECHNOLOGY, Page 62 Chips Ahoy! </hdr><body> America's semiconductor industry, nearly given up for lost, is making an electrifying comeback By THOMAS MCCARROLL -- With reporting by Edward W. Desmond/ Tokyo and David S. Jackson/Santa Clara Not too long ago, the U.S. semiconductor industry faced extinction. After dominating the worldwide market since the invention of the computer chip in 1958, American manufacturers were devastated by foreign competition during the past decade. Led by the Japanese, low-cost Asian copycats undercut prices and mowed down U.S. chipmakers with murderous effect: the semiconductor industry lost more than $4 billion and 25,000 jobs between 1983 and 1989. Dozens of firms abandoned the business. American companies also hurt their own cause with shoddy work and high defect rates. Written off by many experts, the semiconductor industry seemed destined for the same fate as steel, autos and televisions. Recalls Gordon Moore, chairman of Intel, the ranking U.S. chipmaker: "We were given up for dead." But hold on. Like a high-tech phoenix, the U.S. semiconductor industry appears to be rising again. Rejuvenated by innovative product lines, protectionist trade policies and state-of-the-art manufacturing, chipmakers are staging a stunning comeback. Such Japanese firms as NEC and Toshiba are still on top, with a 45% share of the $60 billion worldwide chip market. But their grip is slipping, while American companies are closing the gap and may be on the verge of retaking the lead. The U.S. share has surged to 42% this year, up from the 1989 low of 37%. Inspired by the revival of semiconductor companies, even manufacturers of vital chipmaking equipment are enjoying a resurgence. The importance of this race is enormous. Described as the rice of the electronic age and the crude oil of the 21st century, computer chips are the fundamental building blocks of modern electronics. The fingernail-size chips of silicon power everything from video games and fax machines to washing machines and guided missiles. Japan and the U.S. are locked in a global struggle to control future generations of powerful chips that will form the basis of such gee-whiz products as pocket supercomputers, 3-D interactive televisions and wristwatch telephones. If the computer-chip revival here can be sustained, says Fred Zieber, president of Pathfinder Research, "you could see the return of the MADE IN THE U.S.A. label on TVs, VCRs and telephones.'' The impressive gains by U.S. chipmakers can be chalked up largely to Yankee know-how in specialized chips. While Asian chipmakers continue to excel in mass-produced, low-margin areas like basic memory chips, U.S. companies are focusing on devices with more functions and higher profits. American semiconductor firms, for example, have always maintained a comfortable lead in microprocessors, the "brains" of computers, with about 90% of that market. The gap could widen even further, as U.S. companies roll out new products. Last week Digital Equipment introduced the new Alpha chip, which the Guinness Book of World Records anointed as the fastest microprocessor on the market. But the Americans are also reclaiming lost ground in memory chips. Intel, for instance, is the major producer of "flash" memory chips, one of the fastest-growing segments of the market. Flash chips, which can retain information even when the power is turned off, could one day replace computer disk drives. Other recent innovations include "voice" chips that can store audio recordings like a telephone-answering machine. American chipmakers are also profiting from some Japanese misfortunes. Japanese semiconductor companies have been able to dominate world markets by feeding chips to Japan's own consumer-electronics industry. About 42% of all chips made in Japan are consumed by such companies as Sony and Panasonic. But as global sales of TVs, VCRs, PCs and telephones have fallen because of the worldwide economic slump, so have the fortunes of Japanese chip companies. At NEC, profits are down 71%; at Toshiba, earnings are off 39%. As a result, the Japanese have retreated from some markets. Fujitsu, for example, is closing its U.S. chipmaking plant in San Diego. The factory made one-megabit memory chips, whose price has plunged in the wake of overproduction by South Korean firms. Japanese firms have recently had to contend with stiff competition from low-cost producers in Taiwan as well. They have also fumbled: Toshiba invented flash technology, but Intel picked up the idea and ran with it. Says Thomas Thornhill III, an analyst at Montgomery Securities: "We all thought Japan Inc. was the Godzilla that would gobble up the U.S. chip industry. Nobody thinks Japan is the big bad monster now." The turning point for the U.S. semiconductor industry may have been in 1985, when American companies filed an antidumping petition against Japanese chipmakers. The Japanese were selling 256-kilobit memory chips at $2 each, for example, even though they cost an estimated $3 or more to produce. The result was the first U.S.-Japan semiconductor trade agreement, which set up a system of floor prices on Japanese chips. A second accord was signed last year, calling for American and other non-Japanese chipmakers to gain at least 20% of Japan's market. The agreements put an end to dumping and helped American chipmakers gain a 16% share of the Japanese market, a historic high. (Japan insists that the figure is closer to 20% when IBM shipments of chips to its Japanese subsidiary are counted.) Motorola makes the chips that operate Canon's single-lens-reflex camera, for instance, and Texas Instruments supplies the digital processors for Sony compact-disc players. According to the Semiconductor Industry Association, American companies are generating $1 billion a year in extra revenues as a result of the trade pacts. U.S. semiconductor companies are turning their attention to South Korean chipmakers, who were accused of dumping memory chips this year. Last month the Commerce Department levied preliminary antidumping duties as high as 87% against three Korean producers: Samsung, Hyundai and Gold Star. Some U.S. chip-industry leaders want the government to do more. Many even call for a type of national industrial policy on the scale of Japan's powerful Ministry of International Trade and Industry. While such direct intervention is a long shot, Washington has given the industry a big boost through formation of the Sema tech consortium. Created by Congress in 1987, Sematech is a research-and-development group financed on a fifty-fifty basis by the Pentagon and a group of 12 U.S. electronics companies, including Intel, Motorola and IBM. Based in Austin, Sematech set out to restore U.S. dominance in advanced chipmaking equipment, like circuit-printing machines. Sematech has already paid dividends. The consortium has developed lower-cost methods of chip manufacturing by creating computer models that simulate semiconductor assembly lines. And it has devised uniform testing guidelines for equipment to replace the hodgepodge of standards set by different chipmakers. Sematech put persuasion to work as well, cajoling U.S. semiconductor companies into buying more chipmaking machines from American manufacturers. As a result, U.S. equipment makers now command 47% of the world market, up from a low of 44% two years ago. (Japan's share: 45%.) Says Papken Der Torossian, chairman of Silicon Valley Group, the second largest U.S. chip-equipment supplier: "It would not be an understatement to say Sematech saved the industry." The U.S. semiconductor industry helped itself too by dramatically cleaning up its act. American computer chips are no longer riddled with defects. Three years ago, only 50% to 60% of U.S. chips were error-free, compared with 85% to 90% for Japanese semiconductor makers. Now, thanks in large part to vastly improved production facilities, American devices average 90%. To a chip's circuitry, a single speck of dust is like a giant boulder. Intel's new $700 million plant in Santa Clara, California, where its next generation of microprocessors will be produced, will be 1,000 times as clean as a hospital operating room. The battle is far from over for U.S. chipmakers, however. Changes are taking place that will put a premium on specialized chips, costly investments and partnerships. To compete in the future, companies will need to incorporate ever more features onto a single chip. Such semiconductors will cost more to build. It currently takes a minimum of $500 million to construct a modern chip facility. The next generation of plants will cost more than $1 billion. Says Intel's Moore: "It's becoming too darn expensive to go it alone." Intel is working with Japan's Sharp, while Texas Instruments has formed a joint venture with Hitachi. IBM has teamed up with Germany's Siemens and Japan's Toshiba. For U.S. companies, the future promises to be no easier than the past. But the industry will face the next decade in much better shape. Chipmakers have learned from their mistakes, and Washington has recognized their strategic value. With the chips no longer down, though, the inmust guard against another wave of complacency. In an increasingly global economy, the competition is never asleep. </body></article> </text>