The U.S. is losing its technological edge! The Japanese are eating our lunch! Just look at the chipmaking industry!
Yeah, just look. Through most of the 1980s, U.S. semiconductor equipment companies suffered startling losses to their Japanese rivals. But now, the Americans are showing strong gains. In 1992, U.S. companies will increase their revenues by 17%, to $5.5 billion, for a 53% share of the worldwide total, according to market researcher VLSI Research Inc. And Japan's revenues will drop 13%, to $3.9 billion, or 38% of the total. Moreover, Applied Materials Inc. in Santa Clara, Calif., may edge out Tokyo Electron Ltd. as the world's largest supplier of chipmaking equipment. Not only are U.S. chipmakers now buying most of the equipment for their new plants from American suppliers but even Japanese companies are purchasing more U.S. equipment. "If you told people that in 1989," notes VLSI President G. Dan Hutcheson, "they looked at you like you were crazy."
HOT WATER. The turnaround started when U.S. companies and the federal government began--belatedly--to take the Japanese threat seriously. In 1981, there was one Japanese semiconductor equipment maker in the top 10. Today, four of the five top makers in the highly fragmented industry are Japanese. "We allowed it to really get out of control," says Hutcheson. "But then people got back to work, and Silicon Valley was no longer a place where people went home at 3 and got into the hot tub and drank wine." The industry began to focus on quality and set up Sematech, a $200 million-a-year research consortium in Austin, Tex., half funded by government.
Meanwhile, the Japanese suppliers have been hard hit by recession at home. Japan's chip business has slid some 12% this year, to $18.4 billion, according to the Semiconductor Industry Assn. That means Japanese companies can't afford to invest as heavily in new equipment (chart). The U.S. chip business, by contrast, grew about 14% this year, to $17.6 billion.
Still, it will be tough for U.S. companies to win back some key areas. Nikon, Canon, and Hitachi lead the market for wafer steppers, which lay a circuit pattern onto a silicon wafer. U.S. companies, such as Silicon Valley Group Inc., are leaping back in with products developed with Sematech help. But because the equipment is so complex, "it would take me a year's worth of work to switch," says Billy D. Walker, who runs a Motorola Inc. chip plant.
U.S. companies have held other parts of the market. Applied Materials is a leader in chemical-vapor deposition (CVD) equipment, which deposits layers of metal on a wafer, and in etching equipment, which carves the circuit lines on a chip. For Applied's fiscal year ended Oct. 25, its revenues were up 18%, to $751 million, and its profits rose 51%, to $39.5 million. Aided by Sematech funds, Lam Research Corp. in Fremont, Calif., an etching-equipment maker, is also growing strongly. Revenues for the quarter ended Sept. 30 were up 21%, to $49.4 million, and earnings jumped 50%, to $3.1 million. "Sematech has been a major factor in our success in the last couple of years," says CEO Roger D. Emerick.
Some chipmakers agree. A few years ago, Intel Corp. predicted it would be buying 70% Japanese equipment by now. Instead, 60% of the $300 million worth of new equipment going into an expansion of a Silicon Valley plant will be from U.S. companies. Intel credits Sematech with helping the turnaround. And Motorola's Walker says his plant buys 88% American equipment, up from about 75% a few years ago.
SWAN SONG? Still, Sematech's future could be in doubt. Some members say its biggest impact has been setting standards and getting suppliers and customers to work closely together. But that may not justify membership fees of 1% of revenues. Micron Technology Inc. and LSI Logic Corp. have dropped out. And Sematech has decided to reevaluate its charter. "Nothing is sacred," says Executive Vice-President M. Frank Squires.
By the time Sematech's budget comes up for review next year, the U.S. industry should be on even stronger ground. The Japanese equipment makers may be recovering too, but analysts believe U.S. manufacturers can hold most of their lead. Now that quality is up, it's just as hard to switch from an established American source as it is to change from a Japanese supplier. That's an outcome the doomsayers couldn't have predicted in 1989.