Raking In the Chips

U.S. semiconductor makers are out of a slump and into their biggest boom

Semiconductor chips are the soul of modern machines. In little more than a decade these tiny electronic marvels have become vital parts of everything from autos and television sets to missiles and battleships. So when U.S. chipmakers stumbled in recent years and lost ground to the Japanese, fears were raised that a glamorous new industry might be going the same uncompetitive way as American cars and steel. Instead, semiconductor makers embarked on a dazzling boom. Worldwide sales of U.S.-made chips jumped fully 20%, to $9.6 billion in 1983, and are expected to show a spectacular 50% increase this year.

The importance of a vibrant semiconductor industry was underscored by Congress last week. In an extraordinary 363-to-0 vote, the House of Representatives passed a bill that would let chipmakers copyright their designs as if they were novels or plays. The measure, approved by the Senate two weeks ago and expected to be signed soon by President Reagan, is meant to safeguard the years of research and the tens of millions of dollars that it takes to create a chip that can pack several hundred thousand electronic circuits onto a silicon sliver smaller than a fingernail. One target of the legislation: the Japanese, who have become the world's No. 2 chipmakers after the U.S., partly by duplicating American designs.

The industry's latest profit reports reveal the extent to which semiconductor makers have been raking in the chips. Last week Intel Corp., a major Santa Clara, Calif., producer of logic and memory circuits, said its third-quarter earnings more than doubled to $70 million, vs. $32.1 million last year. Advanced Micro Devices had an even bigger gain. The Sunnyvale, Calif., chipmaker made $42.1 million in its latest quarter, against $12.2 million for the same period a year ago.

Those glowing income statements reflect both the strength of the U.S. economy and the ever growing pervasiveness of chips. "Semiconductors are here and people now recognize that," says Stephen Zelencik, a senior vice president of Advanced Micro Devices. "They are everywhere, for every reason, in everything." Chips have long since become the most popular components of watches. In cars they monitor antipollution systems and adjust idle speeds. In factories they control robots and automated assembly lines. They are embedded in virtually every major weapons system, where they perform such crucial tasks as aiming guns and navigating flights.

Semiconductor makers are also benefiting from some painful past mistakes. When sales dipped sharply in the 1970s, U.S. chip producers responded by slashing payrolls, halting research and canceling expansion plans. Their cutbacks proved a boon to Japanese companies; they kept building plants and developing products, and thus were ready to grab new markets when business picked up. That lesson did not go unnoticed. During the depths of the 1981-82 recession, U.S. companies continued to invest. "We maintained our level of research-and-development spending," recalls Norman Neureiter, a vice president of Texas Instruments, one of the world's largest manufacturers of memory chips.