The Chips Are Flying Again

By Charles P. Alexander

Manufacturers race to fill orders in a $14.6 billion market

After two years of sputtering sales, U.S. manufacturers of semiconductor chips, which form the core of computers and all other electronic products, are coming on strong once again. Chip orders reached $830 million in July, up 70% from a year ago. The phenomenal demand for personal computers has powered much of the semiconductor surge, but big orders are also coming from the manufacturers that use chips in telecommunications products, photocopiers, autos and military equipment like missile-control panels. Says Gary Arnold, National Semiconductor's chief financial officer: "We're seeing the strongest and broadest uptick in the history of the company."

The turnaround came so swiftly that the chipmakers are struggling to meet demand. Orders are running 50% ahead of shipments. If that continues, some electronics companies, particularly the many firms trying to break into the personal-computer business, may be unable to get enough chips. Already, Motorola and Intel have had to allocate supplies of some of their chips among competing customers. Says William Davidow, a senior vice president at Intel: "We're going to be living with considerable shortages for the next year or so."

The only substantial weak spot remaining for semiconductor manufacturers is in sales of ROM (for read-only memory) chips, which are commonly used in video games. The chipmakers are stuck with huge inventories of ROMs because of the slump in games sales.

The scramble for many other kinds of chips is reminiscent of the shortages that developed in the late 1970s. During the 1973-75 recession, U.S. chipmakers cut back their spending on new plants and equipment, and when the economy recovered, they did not have enough capacity to satisfy a sharp rise in demand. As a result, Japanese companies were able to take away customers and become a major force in :he chip market. Between 1975 and 1982, Tapan's share of world semiconductor sales jumped from 21% to 34%, according to Dataquest, a California research firm.

This time around, many U.S. companies, including Intel, Advanced Micro Devices and the Mostek unit of United Technologies, continued to build new plants even as the recession unfolded, that reason, they hope they can boost production as quickly as the Japanese can. At the moment, the Japanese semiconductor companies are also having trouble meeting demand for chips by customers in their own country.

One of the fiercest U.S.-Japanese contests will be in the production of memory chips, which accounted for 22% of last year's $14.6 billion in semiconductor sales worldwide. Japanese companies startled the U.S. industry by capturing 70% of the market for the bestseling 64K RAM (for random-access memory), a chip that can store 65,536 bits of information. Now the battlefront is moving to the next generation of chips: a 256K RAM, which has four times the memory capacity of the 64K and is expected to generate annual sales of up to $3.5 billion by 1987. At least six Japanese companies, led by Hitachi and Fujitsu, have shown samples of the 256K to customers. Several American firms, including Motorola, Texas Instruments and Mostek are gearing up to challenge the Japanese, but the leading contender is a newcomer to the chip wars, the Western Electric subsidiary of A T & T. Until now, Western Electric has produced chips only for its internal use in building telephone equipment or for the Government.

Western Electric advertisements proclaim that its 256K RAM is "shattering the myth that America has fallen behind in microelectronics technology." The company has vast financial resources and unquestioned technological prowess, but skeptics wonder if it has enough marketing skill for the fast-moving chip competition. Asks George Gilder in Release 1.0, an electronics-industry newsletter: "Can a monopoly-coddled monster find happiness in the merchant semiconductor mar ket? Can an elephant play jacks?"

American firms are still far ahead in sales of microprocessors, chips that can perform computations and manipulate information, rather than just store it. In this market, the showdown is between Intel and Motorola. Intel may pull away be cause of its new alliance with IBM, the world's largest computer manufacturer. Last December, IBM bought 12% of Intel for $250 million, and this summer it increased its share to 13.7%. When IBM designed its immensely popular personal computer, the company chose an Intel microprocessor to be the heart of the machine. Because many companies are coming out with personal computers designed to use the same programs as the IBM machine, Intel's microprocessor sales have exploded.

The chipmakers are looking ahead to production of a 32-bit microprocessor, which is expected to have its peak sales in about five years and has twice the computational power of the 16-bit chip that is the current industry pacesetter. Western Electric, Hewlett-Packard and NCR Corp. have already unveiled 32-bit chips in hopes of passing Intel and Motorola in the microprocessor race.

In the long run, the most successful chipmakers may be the companies that can switch quickly to a new manufacturing process that promises to revolutionize the way chips are made. Known as CMOS (for complementary metal oxide semiconductor), the technique produces chips that require much less electric power than standard models, generate less heat and can better tolerate changes in temperature. Such chips are ideal for small, portable computers, televisions, radios and tape players that run on batteries. Because Japan dominates world sales of many of these miniature electronic products, the country has taken an early lead in producing CMOS chips. But U.S. manufacturers are investing heavily in the new technology to keep from being left behind. Says Intel's Davidow: "Within five years, every product we introduce will be CMOS." Several new semiconductor companies, including Cypress, Zytrex, and Integrated Device Technology, are concentrating on making CMOS chips, hoping to leap ahead of the industry's leaders.

For now, most chipmakers are prospering, but the semiconductor business remains as treacherous as a journey past Darth Vader's Death Star. As technology keeps changing and competition from Japan intensifies, some of today's high-flying companies could be shot down at any time.

--By Charles P. Alexander. Reported by Michael Moritz/San Francisco

With reporting by Michael Moritz This file is automatically generated by a robot program, so viewer discretion is required.