ANALYSIS : Chip Consortium Escalates Global Industrial Race : U.S. Firms Put Japan On Notice That They’ll Fight to Stay Competitive in the Semiconductor Marketplace
What’s behind last week’s unprecedented move by U.S. computer and semiconductor leaders to form a company, called U.S. Memories Inc., to make memory chips?
The industrial equivalent of the arms race in which staying ahead in the electronics industry is as critical to U.S. standing in the world as having the fastest fighter plane was in the military arms race.
It’s a peaceful competition for the most part--although the Defense Department has an abiding interest in the latest technology--with Japan instead of the Soviet Union as the United States’ chief rival.
But above all, it’s a tough competition--so tough that even International Business Machines, the largest computer company and a U.S. technological leader, realizes it will be vulnerable without a healthy American electronics industry around it.
“IBM and the U.S. information industry face intense competition,” IBM’s President Jack D. Kuehler told the Senate subcommittee on competitiveness at recent hearings. In electronics, particularly, Kuehler testified, “we are concerned with the essential infrastructure of our industry, be it semiconductor chips, or tools, or test equipment. This infrastructure is important because semiconductor chips are at the heart of finished goods in many industries--appliances, automobiles, consumer electronics, medical instruments and computers, to name a few,” said Kuehler.
How can a microscopic memory chip, costing less than $20, be the “heart” of so many products and industries? Because having the most advanced memory chips is the real key to competitiveness, Kuehler explained in an interview at IBM’s headquarters in Armonk, N.Y. “A computer is only a package of the latest technology,” he said. “And competitiveness is not a matter of how many geniuses your company has, but of price and performance”--are you getting there first with the most.
Kuehler, a 56-year-old engineer and IBM’s chief technologist, is talking about semiconductor advances that have brought increased performance at lower price to computers--and many other products--in the last decade. Ten years ago, the basic memory chip held 16,000 bits of information--the rough equivalent of 2,000 of the letters and numerals you are now reading. Today’s standard chip holds 1 million bits--or roughly 120,000 letters and numerals. Yet the 1-million-bit chip costs no more today than the 16,000-bit chip did then--and, allowing for inflation in the intervening years, costs far less.
Since a personal computer uses 150 memory chips, at a rough cost of $1,000 to $2,000, it’s clear that having the latest, cheapest and most powerful chips in your machine can make all the difference. “The principle is the same whether it’s a workstation or a mainframe,” says Kuehler. If you’re behind, he says, you’re not delivering a competitive product at a competitive price.
So far, IBM has more than held its own in the memory chip race. In a month or so it will ship computers with chips containing 4 million bits of information--the most advanced technology yet.
But other U.S. electronics companies have been devastated, as Japanese competitors took the lead in semiconductors in the past decade.
It was money that did it. As recounted in “Competing for Control,” a book on electronics competition by Michael Borrus, U.S. companies cut back capital spending in the 1974 recession but Japanese companies kept on building capacity and so had the products to grab market share when business turned up in the late 1970s. That was Japanese industry’s entry into world semiconductor markets.
By 1986 they had pulled ahead, following a competitive Armageddon in which Japanese companies lost $4 billion and U.S. companies $2 billion in semiconductor price wars. Many American companies retired from memory chip production after that, hoping to buy their components from Japanese or other suppliers.
But soon it became clear that Japanese suppliers were also competitors in finished goods. NEC, now the largest maker of semiconductor components, is a challenger in supercomputers. Hitachi, Toshiba, Fujitsu--all powerful in semiconductors--are global competitors in computers, and telephones and appliances.
So American firms had no choice but to keep up in memory chips, despite the increasing expense of the technology, which requires extraordinary vibration-free, dust-free factories.
Even IBM, which spends $6 billion a year--10% of its $60-billion annual revenue--on research feels the bills mounting. “To get the latest semiconductor technology means making a commitment of $250 million to $500 million for a new plant,” said Kuehler. “The financial gamble to remain competitive is escalating at an awesome rate.”
And IBM knows that whatever the cost of keeping up today, it will be higher tomorrow as attempts to pack more information on microchips demands expensive X-ray lithography--a high-science process, explains Joseph Grenier of the San Jose research firm Dataquest, in which X-rays thrown off by accelerating electrons are used to imprint electrical circuits.
IBM already has spent $350 million on an X-ray lithography plant at East Fishkill, N.Y., that will ultimately cost $1 billion.
But the U.S. effort--IBM is the only American company pursuing X-ray lithography--pales beside that of Japan, where 15 companies are planning X-ray lithography plants.
Why are the Japanese doing that? “Because they look down the road and see future opportunities in all industries,” says Jim George, vice president and general manager of memory products at Motorola. Just as Kuehler says, they know that spending the money to gain improved memory chips will yield world markets for all sorts of finished products.
So last week, U.S. industry began pooling its resources to cope with the challenge. Computer competitors IBM, Digital Equipment and Hewlett-Packard, and the semiconductor rivals, Intel Corp, Advanced Micro Devices, National Semiconductor and LSI Logic, put up $50,000 apiece to launch U.S. Memories., a firm that will ultimately demand $500 million in equity financing, along with an equal amount of borrowing.
May Be Questioned
The founding companies are calling for other partners to join, and the venture already has the approval of Texas Instruments and Motorola, two persevering U.S. semiconductor makers. They see, as does IBM which is licensing its most advanced technology to the new firm, that the common effort is in the interests of all because it builds an “infrastructure” capable of assuring business for supplier firms and coming up with advances in manufacturing technology. It promises, in short, that the semiconductor electronics industry doesn’t go the way of consumer electronics, which has practically disappeared in the United States.
Still, the idea of direct competitors pooling resources is a departure in many ways from U.S. industrial tradition, and may be questioned on antitrust grounds. But some scholars hail the venture, seeing such cooperation as a necessary shift for antitrust law from a national to a global focus.
Traditional antitrust thinking holds that consumers are better served by numerous fractionated suppliers, say Thomas Jorde and David Teece, professors at the UC Berkeley Schools of Law and of Business. “But in the world market, with a great diversity of innovation and suppliers, Jorde and Teece write in California Management Review, “consumers are more likely to be injured if U.S. firms attempt to go it alone, and lose out, or if they do nothing.” In that case, Americans may end not only with fewer suppliers to the market, but also with fewer U.S. jobs and higher prices.
Indeed, the industrial arms race is high stakes just like the military one--but with the saving grace that peaceful competition yields more useful results. To be sure, advances in memory chips can bring more proficient gimmickry--a more complex TV set, a hand-held VCR. But it also means computers that teach reading to children and adults alike; it means a better heart monitor in the hospital and a better pacemaker at home. It is, in short, a more worthy arms race--and a critical one for U.S. industry, which is why it launched a common effort last week.
