Chipping Away at a Vast Market

Japan jostles the U.S. for supremacy in semiconductor sales

Autos are the most visible and painful example, but far from the only one. In recent years one stumbling U.S. industry after another--from shipbuilding to textiles to color television sets--has succumbed to the onslaught of aggressive and efficient foreign competitors, especially from Japan.

Now come signs that Japan is looking to add yet another scalp to its lengthening collection of industrial trophies --the $4.8 billion U.S. production of integrated circuits, the hottest and most highly competitive field of advanced industrial technology. The worldwide semiconductor market is expected to soar to $100 billion annually by the end of the century. Moreover, the industry's key product, the confetti-size sliver of silicon known as the microchip, is revolutionizing everything from giant computers to tiny home appliances, making possible a whole new generation of low-cost machines that can "think" and "talk." Says Electronics Analyst Benjamin Rosen: "Within 20 years, microchips will be as economically important as autos, steel, energy and chemicals--a basic global industry without which no nation can claim to be a first-rate power."

Japan is quietly trying to displace the U.S., where integrated circuits were developed early in the 1960s, as the world's leading designer and producer of computer hardware. Already Japanese companies control nearly 25% of the world chip market. Japanese manufacturers have made serious inroads in the 16K RAM (for random access memory) chip, which is capable of containing 16,384 separate bits of information. Japanese producers now control 40% of that U.S. market.

The foreign challenge traces back to the 1973-75 recession, when orders for circuits plunged and the industry reacted by slashing capital spending in new plants and equipment by 52%. During 1979, however, demand for the chips surged as toymakers and electronics companies incorporated them into TV computer games and "smart toys" for tots. But domestic producers such as Intel, Advanced Micro Devices and Texas Instruments were unable to fill the orders. Japanese manufacturers quickly filled the gap.

To keep their industry forging ahead, Japanese semiconductor firms are investing heavily. Large and financially solid companies like Nippon Electric and Toshiba are already either taking over existing U.S. semiconductor firms or else setting up plants in the heart of the industry in Santa Clara County's "silicon valley," southeast of San Francisco. Japan's ten largest chip makers plan in 1980 to spend $610 million, vs. $476 million last year, to boost production. While American firms have shipped much of their semiconductor production to countries where labor is inexpensive and work can be done by hand, the Japanese are putting money and expertise into automation. Says Kaiichiro Odagawa, one of Toshiba's top chip research executives: "We're using automatic bonding machines, which assure uniform bonding to attach the microscopically thin wires to the chip." The results are high quality and reliable products.

Unlike their U.S. counterparts, Japanese companies are under no pressure from banks or stockholders to show breathless annual jumps in revenues and profits. They are therefore able to wait for markets to develop. Says Tamotsu Harada of Japan's Electronic Industry Association: "We are looking 20 to 30 years ahead, but the U.S. idea of long-term is two to three years."

Japan Inc., however, will not find the U.S. semiconductor industry the somnolent pushover that American steelmen or watchmakers proved to be. The U.S. microchip business is young, rapidly growing and aggressive. Dallas-based Texas Instruments, for example, pioneered the ingenious "talking" computer chips for the children's learning game Speak & Spell. T.I.'s invention opens up the possibility for everything from computerized automobile speedometers that can actually call out the speed to "talking" books for blind people.

Japan's foray into the chip game is quickening the pace of the entire industry. Earlier this year Japanese scientists stunned a San Francisco semiconductor conference by demonstrating that they had mastered the rudiments of designing a super microchip capable of handling 262,144 bits of information. This 256K RAM chip is no more advanced than several that U.S. makers are working on, but American manufacturers were surprised that Japan had come so far so fast. Japanese producers now believe that they can have a 256K RAM chip on the market by 1983, and U.S. chip makers are not discounting the threat.

If the U.S. microchip industry is to retain its technological lead, which still remains large, it will have to spend vast sums on research and equipment. Notes Rosen: "Outside of chips for consumer products like watches and calculators, the Japanese have created virtually no industry standards. They have been emulating U.S. designs." But the costs will be huge. A decade ago the price tag on a high-volume semiconductor plant to produce a state-of-the-art chip was $2 million. Today the cost of such a plant is $50 million.

A principal cause of the U.S.'s downfall in television manufacturing was that the industry spent as little as 3% of its revenues on research and development. Semiconductor companies are determined not to repeat that mistake and are pumping all the money they can into their firms. Most are spending about 10% of revenues on research. The ratio of capital spending to sales has doubled since 1976.

Even so, the Japanese will be formidable competitors in this high-chip game. Last spring the West Coast computer giant Hewlett-Packard shocked the industry by releasing a comparative study of 16K RAM chips supplied by three Japanese and three U.S. firms. The best American models had failure rates nine times higher than those of the best Japanese products. To American auto, television and steel executives, the results sounded all too familiar.

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