Only a few years ago, Heinz Hagmeister had big dreams for Europe's semiconductor industry. Along with fellow Europeans, the chairman of Philips Electronics' chip division vowed to break U.S. and Japanese hegemony with the help of high tariffs, research subsidies, and tough local-content rules. But that formula only compelled U.S. and Japanese rivals to fight harder. Today, they span the European Community from Scotland to Italy, pumping billions into new factories and chip-design centers. With forces massing against the Europeans on their own turf, "we realize we can't do it all and have to rethink our strategies," says Hagmeister.
The battle brewing in Europe's $12 billion chip market could dash once and for all the Continent's hopes for a fully independent technology base. Europeans have already been trounced by Japan in most types of memory chips and by the U.S. in microprocessors, two of the biggest product segments. In a last-ditch attempt, Europeans are scaling back ambitions and seeking alliances with American and Asian partners, who already have been teaming up with each other for years. But if these strategies fail, Europe's position as a power player in chips could atrophy to a niche role by the end of the decade.
The Europeans aren't crying uncle yet. Dutch leader Philips, Germany's Siemens, and Franco-Italian SGS-Thomson Microelectronics, often backed by heavy government subsidies, have too much at stake. More than just a bid to recover Europe's dwindling chip market share, they say their survival is crucial to prevent some $215 billion worth of European-made phone switches, TVs, and other electronic gear from sliding into dangerous dependence on foreign suppliers of vital technology.
HEAVYWEIGHT. But as costs for new technology and manufacturing soared out of reach and losses piled up, their combined world market share has dropped from more than 15% in the early 1980s to 10.6% last year (charts). To stanch huge losses, Philips and Siemens have cut back in memory chips and other cash-guzzling commodities. Instead, they're focusing on narrower targets where they're still strong, such as specialty circuits for communications and consumer electronics. Siemens' 1990 agreement to develop future technology with IBM--extended to Toshiba Corp. last summer--is now the model of things to come.
Only SGS-Thomson still holds on to the goal of becoming a full-range global heavyweight. In mid-November, it got a boost when its French and Italian government owners agreed to kick in $1.8 billion over the next five years. "This is the last chance for Europe to maintain an indigenous semiconductor industry," declares Robert R. Heikes, an industry consultant. But insiders admit that will only buy two to five years to find a foreign partner that can help double SGS's world market share to the 5% needed to be a global player.
As the Europeans turn outward for help, the opportunities--and the risks--for Americans and Japanese are growing. Players such as Texas Instruments Inc. and Mitsubishi Electric Corp. are clambering to do deals that could help boost their local sales. Others with no European fabrication facilities, such as Toshiba, Advanced Micro Devices, and Korea's Samsung, risk "rapid decline as better-positioned competitors gain the tactical advantage," warns Malcolm G. Penn, who is president of market researcher In-Stat Europe.
FEWER HANDOUTS. With the industry entering a new shakeout, the EC and national governments are increasingly powerless to interfere. Since the late 1980s, the EC has levied antidumping duties and fixed floor prices for Japanese and Korean memory chips, creating breathing room for European as well as U.S. companies. But that, as well as local production rules and high import duties of 14%, only pushed companies such as Fujitsu, Hitachi, Mitsubishi, and Intel to set up shop inside the fortress.
At the same time, the EC's support for European chipmakers has taken a backseat to competing interests. To comply with the General Agreement on Tariffs & Trade, for example, the EC has agreed to reduce duties on imported integrated circuits by one-third, to 9%. Government-backed R&D programs have also come up short. The $4.7 billion, seven-year Joint European Submicron Silicon Initiative (JESSI), launched in 1989 to bolster broad chip research, has been forced to retrench. The knife fell late last year: JESSI's budget was cut by 20%, and the effort was refocused on projects with immediate market payoff, such as chip designs for specific products, including mobile phones. Allocations even for 1993 remain uncertain.
With an end to government handouts looming, Europe's chipmakers are working furiously to shape themselves up. In the past two years, SGS-Thomson has cut payroll 25%, to 16,800, and built up a respectable 13% world market share in a memory-chip line called electrically programmable read-only memory, or EPROM--a position essential to keeping SGS on the cutting edge of technology for other chips. After losing $463 million since 1987, President Pasquale Pistorio sees a small profit this year on sales of about $1.6 billion.
Siemens is toughening up, too. Estimated losses of about $300 million annually since 1990 in memory chips leave it no choice. Last May, it scrapped plans for a new factory for 64-megabit dynamic random-access memories (DRAM), signaling that it will no longer fight the Japanese and Koreans for market share after the current generation, now in production with IBM, winds down in the mid-1990s. Moreover, it will transfer all chip assembly from Germany to Singapore and Malaysia. "It's a matter of survival," declares Chief Operating Officer Horst Fischer.
FRENZY. Europe is banking on fast-growing application-specific integrated circuits, or ASICs, to help turn the tide toward long-term profitability. By 1995, Dataquest Inc. forecasts the worldwide market for such chips, customized for mobile phones, auto fuel-injection systems, and the like, will more than double, to $13 billion.
Trouble is, everybody else is pouncing on the same targets. "ASICs is no place to hide," warns Heikes. Motorola Inc. has doubled European staff for designing automotive and communications chips in the past two years and recently put $125 million into expanding production in Britain. Senior Vice-President Barry Waite expects European revenues to grow 20% this year, or twice the market rate. To match the Europeans on systems knowhow, Motorola has struck up a slew of intimate joint-design deals with customers, such as with BMW for engine-control electronics, and even with Philips' own consumer division for new multimedia players.
Texas Instruments, however, is setting the pace. In its strategy to become customers' in-house chip company, TI next year will install and manage a pilot chip line at phone switchmaker L.M. Ericsson's Stockholm labs. Once designs are fine-tuned, manufacturing data will be shipped electronically to TI's Italian plant for quick turnaround of volume production. Three or four more major TI customers may copy the model. "This vertically integrated keiretsu concept for Europe will be hard to beat," brags Roberto Schisano, president of Texas Instruments Europe.
While Americans are making the most headway, the Japanese are coming on strong. Fujitsu, for example, has in the past year increased its staff of chip-design specialists in such hot telecom fields as digital mobile phones. NEC Corp. and Hitachi are pushing computer graphics and cordless phone chips specially designed to European standards. Toshiba Electronics Europe started assembling ASICs last spring at a site in northern Germany.
WAKING UP. Motorola's Waite estimates that Japanese-made equipment in Europe, such as Sony TVs in Britain and Toshiba computers in Germany, will consume 20% of total European chip sales by the late 1990s, up from 5% today. Much of that business may well shift to Japanese chipmakers, taking their cues from Tokyo, as they build up local production. That's a threat to Europeans and especially to the Americans, who control 44% of the Continent's sales.
But the Americans and Japanese are well-positioned for the global game, having competed against and cooperated with each other for years. Today, they have global scale and strong technologies, plus much experience with alliances and up-close customer relationships. In contrast, the Europeans are only now waking up to the fact that their protective cocoon hasn't worked. "The European Community's efforts to protect the domestic industry are now null and void," declares Dataquest researcher James Eastlake.
That leaves the Europeans with no choice but to keep pushing painful cost-cutting steps while they scramble for the right alliances and strategies. If they are successful, it could help justify billions in research subsidies and, more important, preserve a narrower but still healthy European technology base. With rivals closing in at home, there's no more time to waste.