A Big Fight over Tiny Chips

By Charles Alexander

Japan and the U.S. are struggling for supremacy in semiconductors

Traditionally, the industrial strength of a nation has been measured by its ability to make things big: the immense blast furnaces of its steel mills, the vast concrete expanses of its dams and the monumental skyscrapers towering over its cities. In the future, industrial might will flow increasingly from the power to make things small: the microscopic electrical circuits that form the core of computers, calculators, missile control panels, televisions, video games and all other electronic products. Called semiconductors, these circuits are most commonly etched in invisibly intricate detail on thin silicon chips as small as a baby's fingernail. Marvels in miniature, the chips can execute commands, perform complex calculations and store libraries of information. What iron and steel were to the Industrial Revolution, semiconductors are to the Electronic Age.

American companies pioneered electronic technology and have dominated the industry ever since primitive semiconductors were first mass-produced in the 1950s. Now that supremacy is being threatened by a formidable and frightening competitor: Japan. Last year Japanese companies, led by Hitachi, Fujitsu and Nippon Electric, captured 70% of the world market for a new, advanced chip called the 64K RAM (for random access memory) that is expected to become the biggest-selling semiconductor product by 1985. This chip can store 65,536 separate bits of data, or four times the capacity of the 16K RAM, which until recently was the industry standard. For U.S. chipmakers, who have watched the Japanese cripple the American auto, steel and television industries, the 64K strike was ominous. Says W.J. Sanders III, chairman of Advanced Micro Devices, one of the many semiconductor firms that have sprouted in Northern California's Silicon Valley: "This highly successful, productive U.S. industry, the leading edge of this country's economic future, is hurting."

The struggle for the chip market took a new turn last week when the Department of Justice announced that it was investigating six Japanese firms for possibly conspiring to limit their exports to the U.S. and prop up chip prices. The probe came as a surprise because only last year the Japanese had been cutting prices to boost exports. Many Tokyo officials saw the investigation as Washington's attempt to retaliate against their success in the semiconductor confrontation.

The stakes in the chip competition are staggering. Worldwide sales of semiconductors are expected to surge from $14 billion last year to $27 billion in 1985, including $2 billion for the 64K RAM alone. "Almost everything is going to have chips, even your lawnmower," says Harald

Malmgren, a trade consultant in Washington, D.C. Japanese companies last year garnered about 33% of all world chip sales, up from 27% in 1980, and not far behind the U.S. share of 43%. Says an official of the Electronic Industries Association of Japan: "The chip war must be more and more intensified, as time goes by, between Japan and the U.S. That's the industrial destiny of both of us."

One reason the Japanese took the lead in the market for the newest generation of memory chips was their price cutting in the early competition. In 1981 Japanese firms dropped the cost of a 64K RAM from about $23 to as low as $5, and it has stayed at roughly the same level this year. Though major American electronics companies like Motorola can afford to match that kind of price, the smaller, more specialized Silicon Valley firms like Intel and National Semiconductor are more hard-pressed to stay competitive.

Silicon Valley chipmakers complain that they fell behind in the 64K competition because Japanese firms benefited from relatively cheap bank loans (as low as 6% vs. about 16% in the U.S.) and government aid for research and development. Moreover, the Americans say, such large and diversified companies as Hitachi (1981 sales: $15 billion) and Nippon Electric ($5 billion) could afford to forgo profits on memory chips in order to undercut competitors. In the jargon of foreign trade, Japan has allegedly "dumped" chips in the U.S. market at a price lower than production costs.

The Japanese deny such charges, arguing that their prices are low because of efficient, highly automated production lines. The Japanese obtain higher yields than most U.S. companies. This means that a smaller number of Japanese chips have to be discarded because of defects. Many U.S. semiconductor customers admit that price is not the only reason they buy Japanese. Says an executive of a major computer company: "When it comes to memory-chip quality, the Japanese have no serious competition."

The U.S. Government's responses to the Japanese chip challenge have so far been indecisive and sometimes contradictory. Though the Administration has not directly demanded that Japan reduce its exports, Commerce Department officials late last year began informal discussions with the Japanese about the problems they were creating for the U.S. semiconductor industry. In February, Administration officials let it be known that the White House was considering putting restrictions on Japanese chip sales in the U.S. The device was to be a rarely used law that allows the President to curb imports deemed to be a threat to national security. The rationale was that semiconductors are crucial components of weapons systems and that the U.S. should not become dependent on foreign suppliers.

At about the time that news of the White House deliberations appeared in the American press, the Japanese government warned its chip manufacturers to make sure that their marketing practices in the U.S. were beyond reproach. Says Atsuyoshi Ouchi, senior executive vice president of Nippon Electric: "We were told that we had to be particularly careful about the possibility of being slapped with charges of dumping."

Not long after that, Japanese shipments of the 64K RAM to the U.S. slowed down a bit, and the price of their chips stopped falling. The Japanese firms said they were limiting their exports because of strong demand for chips in their domestic market. Some industry analysts in the U.S., however, suspected that the Japanese were reducing their shipments to avoid facing U.S. import restrictions.

Washington's involvement took a bizarre twist last week when the Justice Department, perhaps acting on complaints from U.S. computer companies that buy imported chips, said it was investigating the possibility that Japanese firms had conspired, in violation of antitrust law, to limit exports and hold up semiconductor prices. The Japanese companies were bewildered by the announcement. First they had been politely warned by the Commerce Department that they were exporting too many chips; now they were being accused by Justice of shipping too few. "You're damned if you do and damned if you don't," says William Tanaka, a Washington lawyer for the Electronic Industries Association of Japan. U.S. semiconductor manufacturers were equally perplexed. Says Alan Wolff, counsel of the Semiconductor Industry Association: "The Justice probe is very strange. It's as if they're saying to the Japanese, 'Why aren't you chopping your prices and driving American industry out of business?' " There was no official explanation for the Government's inconsistency. Shrugs one exasperated trade official: "The Justice Department doesn't consult with people around town before taking actions like this."

Many semiconductor executives argue that unless the Government develops a strong, coherent policy to help their industry, Japan will continue to make disturbing inroads into the chip business. Motorola Chairman Robert Galvin, for one, has called for restrictions on imports if Japan does not change its trade practices. Says he: "Anyone in the electronics industry who does not think that the bell tolls for them is ignoring the obvious."

That note of alarm may be premature. Many other chipmakers are confident that, with or without special Government action, they can best the Japanese. "We are an industry imbued with a great deal of macho," says Intel President Andrew Grove. "We don't concede things. We're a bunch of top dogs." In fact, Motorola, Intel and other American firms have already improved their memory-chip production techniques and begun to whittle away at Japan's lead in sales of the 64K RAM. Benjamin Rosen, an independent industry analyst, has estimated that Japan's share of the world 64K market may drop from 70% to 56% this year. Though American firms have fallen behind in the memory competition, they are still ahead in the production of logic chips, which can perform computations and manipulate information, rather than just store it. U.S.

companies, led by Intel and Motorola, are particularly strong in the most advanced mass-produced logic chips sold in the general market, which are called microprocessors. Says Peter Tierney, a semiconductor expert with Sperry Univac, a major American computer manufacturer: "If you named the ten best microprocessors, I don't think there would be a Japanese product among them." The U.S. also appears poised to take an early lead in sales of the newest generation of logic chips known as "gate arrays." These versatile chips can be tailored in small batches to meet the special needs of individual customers.

Ironically, the outcome of the semiconductor contest could be affected by two giant American companies that have never sold a chip: IBM and the Western Electric unit of AT&T. They make millions of chips, but use them internally to build such finished products as computers and telephone switching equipment. IBM produces more 64K RAM chips than all the world's semiconductor firms combined. The company's manufacturing process for the 64K achieves a phenomenal 60% yield of perfect chips, compared with a maximum of 50% claimed by the Japanese.

IBM and AT&T have exceptionally skilled semiconductor scientists. In a recent speech IBM President John Opel declared: "We have the lead in technology, and we intend to keep it." IBM may soon mass-produce a 288K RAM memory chip, which can store 294,912 bits of information.

Western Electric leads in developing so-called linear chips, including one that enables computers to imitate the human voice.

If these two behemoths ever decided to go into the business of selling chips, it could be a blow to Japanese hopes for semiconductor supremacy. Both firms have considered such a move. "I would not preclude that in the future we could think about becoming sellers," says Paul Zweier, a senior executive vice president of Western Electric. Meanwhile at IBM, Paul Low, a vice president, says, "We contemplate it regularly." Both IBM (1981 sales: $29 billion) and Western Electric ($13 billion) have the resources to build production lines large enough to compete with the big Japanese firms.

The technological prowess of IBM, Western Electric and the scrappy, innovative chipmakers of Silicon Valley makes it almost certain that the U.S. will be able to hold its own in the semiconductor contest. The possible applications of chips are limitless, and the potential market is so vast that there will be room for vigorous semiconductor industries in both the U.S. and Japan. The Japanese challenge will help spur American chipmakers to even greater technological achievement. --By Charles Alexander. Reported by Dick Thompson/San Francisco and Frederick Ungeheuer/New York

With reporting by Dick Thompson, Frederick Ungeheuer

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