Big Changes Coming for Chip Makers

With Intel and Advanced Micro Devices, two Silicon Valley standouts, reporting losses and layoffs--and with Japanese companies continuing to gain in the world semiconductor market--these seem to be dark days indeed for the U.S. electronics industry. The Defense Deparment even fears for the industry's existence, worrying that one day it might have to depend on Japan for the electronic circuits that form the heart of modern weaponry.

Demands for government action and exhortations to U.S. business to catch fire competitively are heard from many quarters, and there is a danger that we will do in electronics what we did in the last decade in energy: shout and point fingers at each other, with little benefit and even some harm to the business at hand.

The competitive situation is serious, but we should not lose our heads. Instead, we should reflect on the strengths of U.S. electronics companies and see just how industry and government could turn the situation around. In that respect, we might reflect on how a well-run U.S. semiconductor company is coping with the competitive environment.

Took Hard Decision

The company in question is Motorola, the Chicago-based leader in two-way radio communications that gets about a third of its $6 billion in sales from the microelectronic chips that are the driving force in almost all modern products. Motorola's earnings are way up this year, $131 million for the first nine months, compared to $28 million for a year ago, because business in Asia is going great guns--including lately even in Japan--and because Motorola took the hard decision in 1985 to cut its losses in a ruinously competitive part of the semiconductor business.

Motorola's good business in Asia--the markets in Korea, Taiwan and Singapore as well as Japan--demonstrates two things: that world markets are available to U.S. companies that pay their dues in time and money, and that the U.S. government sometimes can and should help. Motorola went to Asia 15 years ago to sell simple electronic devices to the Hong Kong toy market and stayed to build what business people call a regional infrastructure. About five years ago, says Executive Vice President James Norling, the company began to put resources into Japan, buying a small local company and building on from there, hiring executives away from Japanese firms.

Tough Japanese Market

But Motorola didn't get the level of business in Japan that it got in the rest of Asia--or Europe or the United States. Japan is a tough market, sure, but some of Motorola's products, such as its microprocessors, are technologically far ahead of anything the Japanese companies had. Artificial barriers, rather than economic competition, held Motorola (and other U.S. suppliers) back while Japanese companies kept a hammer lock on 92% of Japan's semiconductor market.

So this year, the U.S. Treasury helped Motorola in the cost competition by changing the relationship of the dollar and the yen, and the U.S. Commerce Department negotiated a trade agreement aimed at forcing open Japan's market. An early result is that increased business in Japan is now contributing to Motorola's improved earnings.

Meanwhile, here at home, Motorola last year decided to phase down its production of the most basic memory chips, where Japanese competitors such as NEC Corp. had made pricing uneconomic. It was a strategic retreat, not a rout. Motorola, aided by its research capabilities, was able to switch its activities in memory chips to another, more sophisticated variety, one that promises to yield further developments in microprocessors.

The point to keep in mind is that Motorola was not left without options when a product ran into difficulty because like other U.S. semiconductor companies--Intel and Texas Instruments, importantly--it spends proportionately more on research than its Japanese competitors.

Another point is that the new memory chips that Motorola and others are concentrating on could change the worldwide competition from one of selling great volumes of basic memory chips to one of selling smaller numbers of chips for specific uses. Here, says analyst Victor deDios of Dataquest, the electronics industry research firm, U.S. firms hold the lead and Japanese companies must play catch-up.

Yes, but can U.S. industry hold the lead in the $31-billion worldwide business in which Japan has advanced to 47% of the market? The next five years are crucial, says Daniel Klesken, a founder of Dataquest who is now a Montgomery Securities analyst. We will see a lot of changes, including mergers among the smaller companies and government-aided joint ventures in research.

The thought to keep before us is that the most competitive teams act decisively in the late innings. And if firms like Motorola are any guide, we have--to paraphrase another fellow at a dark hour in our economy--little to fear but fear itself.

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