U.S. Policy Sure to Keep Our Chips Falling

The semiconductor industry, which once promised to boom as the “crude oil of the 1980s,” is about to mimic the oil industry in a different way: becoming an OPEC-like cartel setting prices, allocating production quotas, regulating market conditions. The expected results seem clear enough: higher prices for chip users, larger profits for chip producers.

The producers in question are mainly Japanese, and a large share of the consumers are American. One might conclude that the dastardly bureaucrats of Japan’s Ministry of International Trade and Industry were hatching a plot to enrich their producers at the expense of the United States, which consumes vast quantities of dynamic random-access memory chips--the largest-volume chip sold in the global marketplace. But the architects of this policy, which would lead to a cartel, are none other than the top leadership of our Commerce Department and the U.S. trade representative’s office. They want the Japanese to stop selling their chips at low prices, thus undercutting the American producers.

Their cure, however, is worse than the disease. The symptom of the problem is a steady erosion in the share of the American semiconductor industry in the world’s markets. Semiconductors must be designed, then manufactured. America’s chip producers continue to lead in design, but have lagged in manufacturing. In high-volume, mass-market chips that have relatively simple design requirements, American firms have been unable to keep up with the productivity of Japanese fabrication lines. It’s not that we can’t produce them; we just can’t make them as cheaply. In the more complex, design-intensive chips we remain very competitive.

This diagnosis is now widely accepted within the U.S. industry. It is implicit in recent proposals by the industry for a joint-venture industrial research effort, Sematech, specifically aimed at developing “generic” manufacturing technologies that will boost the productivity of America’s chip lines.

Congress passed legislation in 1980 that allows some degree of public funding for such joint industrial research. But the Commerce Department has refused to implement much of this legislation, and Secretary Malcolm Baldrige has reportedly opposed the Sematech proposal.

Into the breach has stepped the Defense Department, with its own plan to fund the development of semiconductor manufacturing technology. Defense may not be the sponsor of first choice, but it is the only open port in this particular storm. Our semiconductor industry is about to enter under full sail.

The problem, though, is that this is not fundamentally an issue of national security, as the Administration contends. The stakes are commercial and economic--a question of price. The flag of national security is increasingly hoisted at the drop of a hat. We now restrict imports of machine tools on grounds of national security, and we invoke national security to justify the Pentagon’s getting into the high-volume chip business. Most recently we have loudly proclaimed that national security dictates refusing the Japanese firm Fujitsu the right to purchase the failing, French-owned Fairchild, which turns out a minimal volume of proprietary chip designs for Defense Department use.

This is the most dangerous, and the most unnecessary, aspect of the whole mess. If we had wanted to find a reasonable excuse to block this sale, it could logically have been justified as a tit-for-tat for similar Japanese actions. But by legitimizing the excuse of national security to block foreign investment in our high-tech industries we run the risk of being shut out of foreign markets for the same reason. We may soon discover that the damage has been done as we press Brazil to open its computer and semiconductor markets to American firms this spring.

Access to foreign markets is essential to U.S. high-technology firms. In recent years the foreign market has accounted for 40% to 50% of our computer firms’ sales and perhaps one-third of semiconductor sales.

If we must retaliate against the Japanese, the preferred course of action is to levy a punitive duty. The higher costs that American consumers must bear at least will produce tariff revenues for our government. But it is foolhardy to force a protesting Japanese Ministry of International Trade and Industry to form a chip cartel that will boost Japanese profits at the expense of our equipment manufacturers and consumers.

Let us reconsider our policies. We should move aggressively to invest in needed manufacturing technology, use our available bargaining chips to crack open the Japanese market and forget about the predictably unworkable attempt to sustain a domestic chip price far above world market levels.