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The Fairchild Deal : Trade War: When Chips Were Down

THE FAIRCHILD DEAL: Next: Fairchild's demise.

November 30, 1987|WILLIAM C. REMPEL and DONNA K.H. WALTERS | Times Staff Writers

WASHINGTON — To some it was like selling Mount Vernon to the redcoats: Fairchild Semiconductor, a pioneer of America's high-technology industries and the mother company of Silicon Valley, was being purchased by foreign rival Fujitsu of Japan.

It was, in business terms, a friendly takeover. Executives of the ailing California computer chip maker had gone to Japan in search of a financial savior. Fujitsu had been invited, even urged, to bid.

But to then-U.S. Commerce Secretary Malcolm Baldrige the deal was bigger than a $200-million transaction between two private companies. At stake was America's future--its military security, its economic health and its technological leadership.

Attacked Sale

In a move that insulted Japan, angered some in the Reagan Administration and generated shock waves that continue to ripple through the international trade and investment communities, Baldrige attacked the sale as a threat to national security.

Over breakfast with reporters at the Sheraton Carlton here last March, Baldrige "drew a line in the sand" and told Japan it could not cross without a fight. His message: America's high-technology industries, already bloodied by what he regarded as predatory trade practices, had to be protected from Japanese acquisition and the battle would start here, with the Fairchild-Fujitsu deal.

"I've come out against it," Baldrige said simply. "That's something that gives me great problems."

From the moment Fujitsu announced on Oct. 23, 1986, that it was buying an American corporate icon, the Fairchild deal had been a business transaction entangled in politics. Administration "techno-hawks" saw it as "part of a master plan of the Japanese to take over the U.S. information industry." But White House economists worried about who would underwrite the national debt if Japanese investors and their money felt unwelcome here.

Ideological Brawl

The debate within the Administration dissolved into what some called an ideological brawl, "an unholy war" waged in meetings of the Committee on Foreign Investment in the United States (CFIUS)--a little-known interagency panel chaired by the Treasury Department. Even the Justice Department's routine antitrust review became embroiled in the political conflict.

The issue was going to the Cabinet the morning that Baldrige had breakfast with reporters; the morning that a $200-million business deal between two private companies exploded under the pressures of international politics. Five days later, Fujitsu abandoned its bid.

The U.S. semiconductor industry, worried about a "domino effect" and who would be next if Fairchild ownership went to Japan, cheered the news. A sentimental symbol of the industry had been kept out of Japanese hands. The first domino hadn't fallen. Not yet.

The extraordinary intervention also slashed Fairchild's market value and cleared the way for U.S. rival National Semiconductor to acquire Fairchild at a "fire sale price," about half the original Japanese offer. That raised questions about who benefited most: the country, the computer chip industry or National Semiconductor.

How Fairchild, a past-its-prime computer chip company, became a pawn in the U.S.-Japan trade war is a study in fear--corporate survival fears, national security fears, economic fears and an underlying distrust of the Japanese.

Chapter II

Is Nothing Sacred?

Fairchild. In the annals of high-technology, its very name is mythic. Its roots crowded out the plum orchards of California's Santa Clara Valley and replaced them with industrial plants; prunes gave way to the new cash crop--silicon.

Fairchild begat the Silicon Valley. Founded by eight engineers from a Palo Alto company who left to start their own shop with a lot of brash ideas and a little venture capital, Fairchild Semiconductor became a magnet for brilliant electrical engineers and savvy young businessmen; it nurtured them in their apprenticeships and then was the model when they struck off on their own ventures. Fairchild was a breeding ground for ideas and people who would change the world.

It was at Fairchild that a young engineer named Robert Noyce developed the first practical integrated circuit, a miracle of design that could store, channel and manipulate millions of electrical signals on a fingernail-sized sliver of silicon, the basic ingredient of sand.

The integrated circuit--or semiconductor, or computer chip--was the foundation for a new world of miniaturization. Now room-size computers fit on desktops, calculators into shirt pockets and televisions onto wristwatches.

Varied Uses

Chips control pacemakers, video games and guided missiles. They put voices in automobile dashboards, intelligence in home appliances and men into space. Without it, any hopes for a Strategic Defense Initiative would be nothing more than another "Star Wars" fantasy.

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