U.S. Semiconductor Industry Rebounds From Hard Knocks

Against all expectations and predictions of recent years, momentum in one of the world’s most important industries has shifted. U.S. companies are gaining global market share in semiconductors, the electronic chips that these days power not only computers but car engines, medical devices, telephones and toys.

This year U.S. companies are likely to capture 40% of the $58-billion world semiconductor market, continuing a rising trend in the last two years. The Japanese industry still holds 48%, thanks to its dominance in memory chips, although it is losing share in memory to up-and-coming Korean firms. European companies hold about 8% of the world market.

Meanwhile, the U.S. industry’s success with chips of great technical complexity and variety, such as microprocessors, has put it in tune with new trends combining computing, telecommunications and video.

Major chip firms--Motorola, Intel, Texas Instruments, Advanced Micro Devices, National Semiconductor along with Micron Technology and others--are doing well today, even with global economies in distress. And the future is promising.

Their experience is significant for what it says about industry in a changing world. In one sense, U.S. companies have been fired in an entrepreneurial caldron, keeping up with changing technology while trying to report a profit--or restrain losses--amid brutal price competition.

But they’ve also been helped by Sematech, the government-industry research consortium that has been getting $200 million a year in funding from a dozen major companies and the Defense Department. Sematech remains controversial, and may suffer budget cuts, but many credit it with saving U.S. industry’s place in semiconductor manufacturing.

The irony is that less than a decade ago learned professors and honored economists wrote off the U.S. semiconductor industry as a loser to the concentrated corporate power of Japan Inc. And many derided Sematech, because they thought government shouldn’t help U.S. industry or that the help would be wasted.

But that’s the way with predictions. Not so long ago, International Business Machines was feared as a behemoth that would crush the U.S. computer industry. Today IBM, severely buffeted by change, is regarded as a spent runner unable to keep up with fleet competitors--although the latter judgment is undoubtedly as foolish as the earlier one.

The moral is simple: Predictability and certainty are not to be had whether you’re in business or investing from the sidelines. The stock market’s vision on semiconductors has been intermittent and prices of all the companies, including Intel and Motorola, have had a bumpy ride.

One reason for confusion is that companies, here and in Japan, are not so much contending with each other as with headlong technological change. And technology is not an easy call.

For example, Japanese industry’s strong suit--consumer electronics--seemed easy to understand. Televisions, VCRs, compact disc players would use more and more electronic chips and so, inevitably it seemed, Hitachi, Toshiba, NEC, Fujitsu and others would dominate the global semiconductor business. From there they could go on to rule the computer business. But that hasn’t happened.

In contrast, U.S. industry has been driven by the increasing complexity and affordability of computers. Microprocessors have brought the power of room-sized machines down to desktop workstations, while constantly declining prices have lured customers. Powerful personal computers are on sale these days for $800 and less.

But in Japan’s orderly markets, computers are expensive--more than $2,000 for the least-expensive PC. And high prices have stunted computer usage. Some 2 million personal computers a year are sold in Japan compared with more than 10 million in the U.S. market--even in this recession year.

One result is that U.S. demand for semiconductors is growing 15% a year, says Fred Zieber of Pathfinder Research, a San Jose firm covering the semiconductor field. Profits are up and U.S. chip makers are pushing on to new levels of their art.

It has been a dramatic turnaround. Only four years ago, the industry was reeling. Suppliers of laser and lithography processes and other semiconductor equipment were dropping out. Sematech was founded in 1988 to pool research efforts in an attempt to keep U.S. manufacturers in the game.

And it has worked, says Michael Borrus, a leading author on technology and director of the Berkeley Roundtable on the International Economy. “Because of Sematech, the equipment industry has recovered. U.S. firms can develop advanced semiconductors on U.S. equipment, rather than depending on others.”

The sentiment is not nationalistic but realistic, says Borrus. To be even a partner in global industry--as in a research venture IBM is entering with Toshiba and Siemens of Germany--U.S. companies must hold their own. “And let’s not kid ourselves, having the capabilities in U.S. firms results in more and better opportunities for Americans.”

That said, the welcome success of U.S. companies is only one play in a very long game--unlike football there are no final whistles in global industry. The outlook is for more change, more competition, more uncertainty.

But business was never meant to be predictable. Like life itself, business is an adventure.