Business: Thinking Small

Little whizzes raise the specter of buggy whips

No one took to the computer more eagerly or saw its usefulness more quickly than the businessman. Now, 24 years after General Electric became the first company to acquire a computer, these versatile machines have become the galley slaves of capitalism. Without them, the nation's banks would be buried under the blizzard of 35 billion checks that rain down on them annually, and economists trying to project the growth of the nation's $2 trillion economy might as well use Ouija boards. In the airline industry, computers make it possible to reserve a seat on a jumbo jet, pay for it by credit card, and enable the plane itself to fly. In many industries, computers design the products the companies sell. Automakers, for example, use computers to view a prospective new car from any angle; then the computers analyze the market to see if the design will sell.

In fact, the ravenous and growing appetite of U.S. companies for data-processing machines and control devices accounted for a major portion of last year's $41 billion computer business. Only 15 years ago, IBM was for all practical purposes the computer industry. But the explosive rise in demand has surpassed even IBM's ability to gobble up new orders. Though the company continues to grow at a healthy rate (its 1977 profits of $2.7 billion on sales of $18.1 billion were up more than 13% over the year before), the nation's other manufacturers of large computers -- Control Data, Burroughs, NCR, Honeywell and Sperry Univac -- are also booming. Mean while, the clamoring demand has created markets for smaller and younger companies that make minicomputers and peripheral equipment, such as data storage facilities and keyboard terminals, to be used with the big "main frames."

Now the arrival of the miracle chip has given a further boost to an already vital industry. Far from rendering the big computer obsolete, the miracle chip has opened the way for the design of custom-made supercomputers more powerful than any thing dreamed possible a few years ago. At the same time, the chips are radically lowering the cost of the minicomputers. These small computers, in turn, are being used for more and more of the routine functions that until recently had to be handled by main frames -- at considerable cost to the user.

By spawning new computers in abundance, many industry experts believe, the chips will indirectly give rise to a whole new industry of "software"companies to develop and market the programs that computers need to perform their tasks. Explains Richard Melmon, director of marketing for Umtech Corp., a maker of home computers: "No one would buy a stereo hi-fi if he could not also buy records or tapes to play on it, and it's the same with computers. We soon will see the dawn of a whole new kind of publishing industry."

Benjamin Rosen, chief microelectronics analyst for New York's Morgan Stanley investment banking firm, sees the chips as the major technological development of our time. Says he: "It will have more impact on our society in the next 20 years than any other invention."

Though still in its infancy, the miracle chip has already given rise to one of the most astonishingly competitive and fastest growing industries the nation has ever seen.

Among the 50 or so companies producing the versatile little devices are some of the nation's largest electronics and computer firms-- IBM, Motorola and Texas Instruments, where Computer Scientist Jack Kilby pioneered in developing the integrated circuit, the predecessor of the chip. Also included are a host of brash upstarts that did not even exist ten years ago (see box). Last year's chip sales of $235 million, while still modest compared with the revenues of the entire computer industry, are expected to grow by a startling 50% annually and exceed $800 million by as early as 1981. Behind this remarkable rise are the incredible economies of scale involved in the manufacture of the chips; once the complex and costly task of designing them and preparing them for production has been completed, the price per chip becomes almost exclusively dependent upon how many are sold. As a result, every time cumulative production doubles, the chips decline in price by about 30%. Meanwhile, declining prices stimulate increased sales, and these in turn lead to further price declines. It has been a long time since the inflation-battered American economy has seen a better example of how prices are supposed to behave in a free market. A typical example: in 1971 a Sharp Electronics pocket calculator sold for $395; today a more sophisticated model retails for $10.95. With their low cost and versatility, says Mai Northrup, vice president of Rockwell International, the chips are already "turning many present products into buggy whips."*

Ironically, the industry's prodigious ability to produce the chips is also its Achilles' heel; the danger that chip makers could eventually produce far more and far more powerful chips than the market can absorb is real. By 1985, according to C. Lester Hogan, vice chairman of Fairchild Camera & Instrument Corp., it will be feasible to build a pocket calculator "that will be more powerful than, and almost as fast as," the $9 million Cray-1, built by Cray Research Inc. in Chippewa Falls, Wis., and recognized as the mightiest computer in the world.

Whether or not consumers are able to buy number-crunching beasts of that sort, industry faces an immediate challenge: what to do with the new and more powerful chips entering the market every few months? Warns William Howard, Motorola's director of strategic operations: "Our biggest problem is going to be finding ways of transforming all this innovation into viable products that are simple to use. If all we do is build more and more intricate devices that look and act like computers, we will not have done our job properly."

So far, nearly 85% of the industry's production is winding up in the retail market, mostly in the form of TV games, digital watches and calculators. Though products like these are giving the chip makers the sales volume needed to boost output and cut prices, they are hardly a durable base for a high-technology industry. For long-term growth, the chip makers are looking toward four key areas with huge potential:

Automobiles. Last year Detroit bought only about $2 million worth of chips, but by the early 1980s the auto industry is expected to become a more than $1 billion market in its own right. At General Motors, chips are already at work regulating the ignition systems of Olds Tornados. GM President Elliott Estes estimates that by 1988 fully 90% of his company's cars will contain even more elaborate electronically controlled ignition systems. Though a computer in every car is still a couple of years away, both Ford and GM last year signed separate long-term contracts with Motorola to deliver upward of $160 million in chip systems annually to the two automakers.

Communications. In addition to a massive program that is gradually replacing electromechanical switching devices throughout its huge system, Ma Bell is looking into miracle chip applications that would turn the family phone into both burglar alarm and fire alarm, as well as home intercom system. Chips will be used to monitor equipment and alert maintenance teams to potential problems before they occur. Says Lee Thomas, Bell Labs' microprocessor chief: "Applications of the microprocessor five years from now will make the present ones look silly." Motorola has invested $20 million in developing a chip-operated portable phone that weighs less than 2 Ibs. and has no cord. Be- ginning in 1979, residents of Washington and Baltimore will be able to use the phones as part of an experiment conducted jointly by the American Radio Telephone Service and the Federal Communications Commission. For a basic monthly charge of approximately $100, subscribers will be able to carry their telephones with them wherever they go in the Baltimore-D.C. area and, if they wish, make or receive phone calls while they are walking along the street.

Office Equipment. Before the miracle chip, companies that wanted a computer had to choose between either huge and highly expensive main frame units or smaller, less powerful -- but still costly -- minicomputers. By radi cally lowering the cost of the traditional minicomputer, miracle chips have dramatically expanded the business market for the minis; their sales are growing at a remarkable 40% annually. At the same time, the chip-equipped minis are proving to be an economical way to get more value for the money out of an existing main frame. They store information and process it lo cally, keeping it handy for when it is needed. This allows computer operators back at headquarters to schedule the arrival of incoming data in a steady, manageable way.

One obvious problem with the growing use of computers in business is the corresponding increase in "computer crime."

Though electronic pilfering currently amounts to less than 1% of the $41 billion in annual business thefts by employees and company executives, it is far more serious than stealing from petty cash, and much harder to uncover. In 1973 officers of Eq uity Funding Corp. of America, a Los Angeles-based insurance firm, used the company's computer to give a false impression of Equity's assets by fabricating $2 billion worth of phony life in surance policies. Since big computers can cost tens or even hundreds of dollars a second to operate, their unauthorized use for private purposes is also a form of theft. For instance, last month two Defense Department employees were indicted in San Francisco for stealing $2,000 worth of time on a Government computer in order to develop a marketing plan for a private company they hoped to establish.

A far greater danger to U.S. businessmen is that they may not be able to keep pace with the product innovations made possible by the miracle chips. For example, while the color-television industry was pioneered by a U.S. firm, RCA, American companies were slow to realize the revolutionary impact that transistors and semiconductors were destined to have. As a result, the market was opened to lower-priced foreign models that exploited the new technology. Given that first foothold, Japanese manufacturers have ever since been a growing threat to the U.S. color-TV industry.

Though they are still several years behind the U.S. in miracle-chip technology, Japanese computer makers are rapidly catching up, in part with the help of government subsidies. For now, Japanese computer imports are less than 1 % of the total U.S. market, but they have multiplied eightfold since 1974 and, according to studies by Quantum Science Corp., a marketing research house, could have a significant impact on IBM itself with in the next five years. Japanese manufacturers have also shown imagination in designing chip-controlled appliances; all the home video recorders sold in the U.S. are made in Japan, as well as the majority of the low-priced pocket calculators.

Perhaps, as Bell Labs' Thomas suggests, &"the most exciting applications will not come until the kids who are still in high school and have grown up with pocket calculators and home computers become the engineers of the 1980s and 1990s." But the miracle chip is here now, and if American business does not quickly take the lead in exploiting its myriad and ever growing capabilities, a potentially enormous market could slip through its fingers. sb

*One such product is the slide rule, made obsolete by the faster, more accurate and inexpensive pocket calculator. Keuffel & Esser Co., once the world's largest producer of slide rules, stopped manufacturing them in 1972.

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