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Text File | 1993-04-08 | 10KB | 187 lines

                                                                                TECHNOLOGY, Page 62

Chips Ahoy!


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 produc