Tech Firms Investing Despite Hard Times
In the face of a long and severe downturn in technology industries, the world’s largest electronics companies are not relenting in their investments to build more efficient factories and develop computer chips with greater capabilities.
Intel Corp., IBM Corp., Texas Instruments Inc. and other companies here and abroad, however, are not laying out billions of dollars because they see a sudden upturn in the economy. Rather, they are investing with confidence that the information technology industries--computers, telecommunications and consumer electronics--will enter a new expansion cycle and pull up the U.S. economy by next year.
The information tech industries certainly can move the whole economy. They account for about $1.2 trillion in annual revenue, or 13% of the U.S. output of goods and services. But fears as well as hopes drive the investments.
The U.S. electronics companies and other giants of the global electronics industry--which include Samsung Corp. of South Korea, Taiwan Semiconductor Manufacturing Co. of Taiwan and STMicroelectronics of Switzerland--are investing billions of dollars to push the technological envelope because they know that failing to invest in bad times is the route to oblivion in a competitive world.
It’s an expensive game. New fabrication plants for integrated circuits cost $3 billion. Intel’s capital investment this year will approach $5 billion, and that’s a cutback from $7.5 billion last year and $6.7 billion the year before. IBM is on a multiyear program of investing $12 billion to expand and upgrade its massive semiconductor plant in East Fishkill, N.Y. And Texas Instruments, a leading maker of chips for cellular telephones, has invested more than $4 billion in a new plant at its Dallas headquarters.
The breakthroughs they are trying for include the ability to manufacture electronic chips from larger silicon wafers, a process that effectively would cut their production costs by one-third to one-half, says Carl Howe, an analyst for Forrester Research in Cambridge, Mass.
The leading companies--Intel, Taiwan Semiconductor and IBM--also are pushing to put 100 million transistors on a single chip, a feat that requires imprinting circuits separated by spaces 1,000 times narrower than a human hair.
Companies aim for those breakthroughs so familiar products and industrial processes can have greater functions and ease of use--longer battery life for laptop computers and cellular telephones, for example, or more precise controls for power plants, car engines and space capsules.
Risks are high because the technology slump is more severe than any in the past.
“Sales of computer systems and telephones are down for the third year running. We’ve never seen that before,” says Brian Matas, vice president of IC Insights, a research firm based in Scottsdale, Ariz.
This raises the fear that even when the economy recovers, sales of computers, cell phones and other electronic systems won’t rebound as they have in the past.
The stock market is not thrilled with the electronics firms’ willingness to invest for the future. Intel’s stock, which closed Friday at $18.75 on Nasdaq, is down 49% from its 52-week high and 75% from its all-time high of $75 reached in 2000. Texas Instruments, at $21.99 on Friday on the New York Stock Exchange, is off 41% from the high for the last 12 months and 78% from its record price of 2000.
But this is an industry taught by history to push on with investments in bad times, despite the stock market’s short-term judgments. In the 1980s, markets for computer memory chips, one of the first big products of the electronics revolution, were swamped with tough competition.
The dynamics were similar to the present. As use of personal computers grew, customers demanded that makers increase the capabilities of their circuits, from 4,000 transistors on a single chip to 16,000 and then to 64,000. Pressing forward demanded increasing investments even as competition drove down the prices and profitability of existing chips. Japanese companies, such as NEC Corp, Fujitsu Ltd. and divisions of Mitsubishi Corp., collectively lost more than $4 billion battling for supremacy in memory chips, which had been developed by Intel in the 1970s.
In the 1980s, Intel needed a $350-million investment from IBM just to stay in the race. Companies failed or fell back from world leadership to second-rank status. So great was the concern for the U.S. industry that the federal government and a consortium of private companies invested $500 million apiece to set up Sematech Inc. in Austin, Texas, to undertake expensive research for cash-strapped companies.
The efforts succeeded. Intel and other firms made investments to develop powerful processor chips for personal computers, shifting the technological and competitive focus of the world industry. Technological and economic advances marched together through the 1990s as laptop and hand-held computers came along and the Internet and wireless telephone communications opened up.
Now there is a pause after the boom of the 1990s. What will provide the next advance? Undoubtedly wireless communications, experts say. Young people in Asia and elsewhere are using cell phones and other computing-communi-cation devices in new ways.
Wireless communications lags behind in the U.S., but that could present an opportunity.
“The U.S. is behind in wireless because the phone companies control it and they don’t innovate,” says Roger McNamee, a partner at Integral Capital Partners, a Menlo Park, Calif., investment firm. He’s referring to Verizon Inc., SBC Communications Inc., BellSouth Corp. and other local monopoly descendants of the old Bell system.
U.S. cell phones can’t easily access the Internet, for example, or plug into computers for enhanced capabilities. Nor can they communicate globally as cell phone systems on other continents can, although AT&T; is about to introduce a global wireless service in the U.S. The advanced communications circuits being developed by Texas Instruments and others will find ready markets in the drive to overcome deficiencies in U.S. wireless systems.
It should not be overlooked that the investments being made to push the technological envelope result in fresh discoveries. As Intel and other firms have squeezed complex circuitry into spaces the size of a few atoms, “we have found that silicon at those levels emits light,” says Alex Wong, a Palo Alto-based partner in Apax Partners Inc., a worldwide venture investment firm.
What can result from sand-- which essentially is what silicon is--emitting light? Who knows, but pursuing the possibilities is the reason technology will revive and drive the economy of tomorrow, just as that kind of technological development has transformed the world economy for more than half a century.
James Flanigan can be reached at jim.flanigan@latimes.com
