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Betting on Chips : Technology: Upstart Silicon Valley firms are finding success by manufacturing abroad. Critics say the strategy helps foreign rivals at the expense of U.S. industry.


SAN FRANCISCO — In the classic tradition of the Silicon Valley entrepreneur, Gordon Campbell has struck it rich in the computer chip business. The company he founded less than six years ago, Chips & Technologies, had sales of nearly $300 million last year, and Campbell himself has amassed a fortune.

But unlike traditional semiconductor companies, Chips & Technologies does not actually manufacture anything. Rather, like most of the newer, entrepreneurial semiconductor firms, San Jose-based Chips & Technologies designs and markets its products and pays other companies to produce and package them. In practice, that means that most of Chips' chips are made by Japanese firms.

Such a strategy is clearly an attractive one for semiconductor entrepreneurs, and in many cases it's the only rational one. A factory to produce silicon chips--the tiny but complex parts that form the internal circuitry of computers--can cost several hundred million dollars, and start-up companies simply can't afford it.

Yet many in the U.S. chip business, notably big-company executives such as Andrew S. Grove of Intel and W. J. Sanders III of Advanced Micro Devices, believe that design and marketing firms like Chips & Technologies are doing nothing to help the embattled American electronics industry. By working with Japanese, Taiwanese and South Korean manufacturers, these critics say, the firms are bolstering competitors who already lead the United States in key chip-production technologies.

Moreover, since the engineers and executives who form start-up chip companies are almost always refugees from larger firms--Campbell had been a manager at Intel--these newer enterprises may also be sapping the strength of the big American companies carrying the flag for the United States in the international technology wars.

Could it be that the entrepreneur, the icon of Silicon Valley and American capitalism, does more harm then good in a high-tech world where cash-rich international conglomerates rule?

Small companies staunchly defend their contribution to U.S. technological prowess, maintaining that entrepreneurial firms are far more innovative and do a better job of meeting customer needs than large ones.

But others say innovation isn't enough.

"For years we've splintered, and as we've done so we've hurt the capabilities of the large, powerful companies," said Alfred J. Stein, president of mid-size chip maker VLSI Technology, based in San Jose. "All these little companies get a niche, and that detracts from the strength one could achieve from massive size."

Indeed, the debate over the so-called fabless chip companies--they lack the chip fabrication facilities known as "fabs"--is just one aspect of a broader conflict between large and small companies in Silicon Valley. Big companies consider the smaller ones parasitic and short-sighted. Small companies view the established firms as slow moving, bureaucratic and given to blaming their own management failures on the government and the Japanese.

That split has contributed to the controversy over what, if anything, the government should do to enhance the competitiveness of the U.S. chip industry. While the large companies have strongly promoted the Sematech research consortium and the U.S.-Japan semiconductor trade agreement, many small firms consider these policies little more than special favors for certain big companies. Entrepreneurs care far more about lower capital gains taxes and lower interest rates, which would make it much easier for them to raise money and invest.

One of the few things the two camps agree on is that fierce personal rivalries, the growing number of lawsuits and a general atmosphere of contentiousness in Silicon Valley are seriously hampering the development of cross-ownership arrangements, licensing deals, joint ventures and other kinds of alliances that could help American companies compete. If the new fabless chip companies had more ties to U.S. manufacturers, some of the conflicts would disappear.

The semiconductor business is not the only one where America's love affair with small entrepreneurial firms has worked to the benefit of overseas competitors. The breakup of the greatest techno-giant of all, American Telephone & Telegraph, was a boon to American entrepreneurs, but among the greatest beneficiaries have been European and Asian telecommunications equipment companies.

In chip-making equipment, advanced materials and machine tools, foreign companies have profited from the fragmentation of American industry.

T. J. Rodgers, president of the fast-growing manufacturer Cypress Semiconductor in San Jose and an outspoken critic of the chip establishment, says better links between "the ever-smaller mass of the designers and the ever-larger mass needed to be a manufacturer" are crucial to strengthening the U.S. semiconductor business. He calls the rapid growth of fabless firms that work with Asian manufacturers "a camouflage for the gutting of American industry."

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