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In the Chips : America's semiconductor industry again leads the world. But new Asian competitors are gaining strength. And you can never count Japan out.

March 05, 1995|LESLIE HELM | TIMES STAFF WRITER

HILLSBORO, Ore. — A cavernous concrete shell rising from the mud in this community south of Portland echoes with the whining drills of construction workers. They are rushing to complete a $400-million semiconductor production facility for Silicon Valley chip maker Integrated Digital Technologies.

Across a nearby field, Intel Corp. is breaking ground on a $2.2-billion complex. LSI Logic, another Silicon Valley company, is scouring the neighborhood for a place to build its newest plant.

Call it America's high-tech renaissance. As profits rise and stock prices soar, American chip companies, which make the guts of virtually all high-tech products, are once again investing huge sums on research and production in America.

Today it seems natural that America should be the world center of leading-edge technology. After all, the idea of packing electronic circuits on a silicon chip is an American invention, America still boasts the world's leading chip designers, and the technology for personal computers--the biggest consumer of chips--is being driven by American companies such as Microsoft, Compaq, Intel and Apple.

But it's easy to forget that just a decade ago, U.S. chip makers were swamped by a rising tide of Japanese competition. Intel, now by far the world's largest and strongest producer of chips, was so weak it needed a $250-million investment from IBM to keep it alive.

As late as 1987, a report by the Defense Science Board Task Force concluded that "the ability (of Japan) to dominate the semiconductor industry would appear to be a mere step along the strategic way for Japanese firms to dominate the world information market."

Without a vibrant semiconductor industry, America's progress in new fields such as wireless communications, multimedia and personal computers would have been hampered, damaging the broader economy.

"If we had lost our strong position in the semiconductor industry, there is no question it would have hurt our standard of living," says Kevin McGarity, senior vice president of Texas Instruments' semiconductor group.

How America responded to that challenge is a story about the nation's awakening and maturing as a global technology player. It is a story that sheds light on changing management practices as well as the debate raging over the proper role of government in industry--debate that has been reignited by the new Republican-controlled Congress.

And it is a story that offers a lesson about corporate complacency and hubris, about how an inflated self-opinion will lead inevitably to a sudden and disastrous downfall.

In the 1970s, it was the U.S. chip maker that grew arrogant and paid the price. In the 1980s, it was the Japanese who came to believe that world domination in electronics was their birthright. Now, as the orders and the profits continue to pour in, U.S. firms must struggle against the temptation to see their success as simply the result of superior creativity and ingenuity. For the chastened Japanese are now re-emerging, and chip makers in South Korea, Taiwan and Singapore are getting stronger every day.

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In historical terms, it's all very recent. AT&T invented the transistor in 1948, Texas Instruments took it a step further by creating the integrated circuit in 1959, and by the early 1970s, a rapidly growing chip business centered in Silicon Valley in the San Francisco Bay Area had sprung up. It was managed by cocky engineers who found thrills in the fast-paced, make-or-break world where innovation and speed were everything.

When powerful Japanese electronics companies took big chunks of the semiconductor market each time they conquered a new sector of the consumer electronics industry, the chip makers shrugged. Japan was a copier, not an innovator. America's cutting-edge designs and its domination of the global computer industry would keep fleet-footed Silicon Valley companies one step ahead.

When the Japanese firms pooled their resources in the 1970s and won government backing for a series of joint projects aimed at cramming even more circuits onto silicon, nobody noticed.

So the industry was shocked in 1979, when computer maker Hewlett-Packard published a study showing that Japanese companies' products had defect rates one 27th those of U.S.-made products.

"It was a 'emperor has no clothes' statement," recalls Ken Newton, now director of procurement at HP. "There were screams of outrage and anguish. People felt they had been betrayed." American executives denied the charges and accused Japan of cheating by screening out defective chips. They also cited pirating of designs and dumping as reasons for Japan's success.

Some of the accusations were true, but they missed the key point. Since cost is based on the number of good chips taken from a wafer, or yield, Japan's low level of defects meant its costs were also sharply lower. The entrepreneurial firms' short-term profit mentality was yielding to the long-term bulldozer approach of Japanese conglomerates.

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