A Power Surge In Chips

Unbridled good news: That's something the U.S. semiconductor industry hasn't had much of--until this year. The worldwide market for chips is likely to rise at least 15% in 1993, to about $68 billion, the first double-digit growth since a 31% spurt in 1988. And U.S. companies could do better than the overall average, continuing the trend from last year, when American chip producers managed to edge back ahead of their Japanese archrivals. U.S. chipmakers now command 43.8% of the world market, according to market-watcher vlsi Research Inc., while Japan's share has dropped almost five points, to 43.5%.

The upshot is that the U.S. industry is looking to fatten its revenues by at least 20% this year, to about $30 billion. "The U.S. is doing a fantastic job," says John H. Beedle, president of market researcher In-Stat Inc. The domestic book-to-bill ratio, or proportion of new chip orders to current shipments, remained above 1.0 for all of 1992, the best showing since 1987. This boom stems from healthy demand for U.S. products built with chips--especially personal computers. Last year's raging price wars may have clipped pc makers' profits, but plunging prices sent pc unit sales jumping 25%, according to In-Stat. In contrast, Japan's chipmakers rely more on sales to consumer electronics manufacturers, which remain saddled with lackluster demand.

HIGH RIDE. Even if pc prices drop more slowly this year, they're already low enough to draw in new buyers and allow existing customers to upgrade to more powerful machines. This means increased sales of Intel Corp.'s latest crop of microprocessors, the 486 family. As a result, sales at Intel, now the world's largest merchant chipmaker, are expected to grow some 25% this year, to at least $7 billion.

Not every company will have a great year. Advanced Micro Devices Inc., for one, is off to a bumpy start. Cloning Intel's 386 microprocessor helped the No.5 U.S. chipmaker grow 21%, to nearly $1.5 billion, last year. But AMD was on the short end of recent court rulings in a long-standing dispute with Intel. That means amd will have to revise its 486 clone, delaying the introduction several months until midyear--and that could flatten revenues.

Still, many U.S. companies will ride the PC's coattails to prosperity. Cirrus Logic Inc. and Brooktree Corp., for example, focus on multimedia chips, which pump up a PC's audio, graphics, and video-processing capabilities. Analysts expect Cirrus' revenues to jump about 35% in 1993, to $350 million. Brooktree could post a 24% gain, to $103 million.

Telecommunications chips are also booming. This reflects the growth of networks that link office computers, plus the rising popularity of cellular phones and portable computers with modems. That bodes well for such companies as Motorola Inc. and Zilog Inc. This year, their chip businesses should grow about 22% and 20%, respectively, market researchers say.

New, more powerful software such as Microsoft Corp.'s latest Windows, is also prodding demand for pcs with more memory. While Japanese producers have cornered the lion's share of the market for workhorse memory chips, known as drams, this year's expected surge of 21% won't be enough to offset Japan's sagging chip sales for consumer electronics. But the hike in drams will help U.S. memory makers such as Texas Instruments Inc. and Micron Technology Inc. For example, analysts peg Micron's growth at 45%, to $741 million, in its fiscal year ending in August.

To be sure, no one is ready to count the Japanese out. It's only a matter of time until Japan's economy also recovers--and then watch out. "The ruggedness of the Japanese industrial society is awesome," says Intel CEO Andrew S. Grove. "The Japanese will be back."

BIG SPENDERS. Now that U.S. companies are back on top, though, they won't be so easy to dislodge again. Most U.S. chipmakers are concentrating on proprietary designs. For the Japanese, competing in design skills will be tougher than outgunning rivals in such commodity chips as drams. Indeed, "the Japanese continue to spend most of their r&d on drams and commodity chips rather than innovative designs," says Gene Norrett, chief chip-watcher at Dataquest Inc.

Moreover, U.S. manufacturers are out-investing the Japanese again. Intel, amd, National Semiconductor, and Motorola are all building chip factories. All told, the U.S. semiconductor industry will spend $5.2 billion on plants and equipment this year, compared with $4.6 billion for Japan, predicts vlsi Research. It will be the second consecutive year that U.S. companies have outspent Japanese rivals, after six years of trailing them.

Certainly, the good news can't last forever. But for now, U.S. chipmakers have exchanged roles with the Japanese. "It's hard to see a downside from here," says amd Vice-President Benjamin M. Anixter. "We deserve it," he adds. "It's been a while."

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