The Chips Are Down for Industry That Has Become Vital to Exports
FOR three years, the United States semiconductor industry - one of the nation's most strategically important businesses - has roared through hyper growth and expanding profits. Then, late last fall, its circuits overheated. The industry has suddenly slowed.
This deceleration threatens to damage important US regional economies and might even influence trade relations with Japan. Quietly, computer chips have become one of the nation's critical exports, along with aircraft, grain, and automobiles.
The subject is likely to be on the agenda when President Clinton travels to Tokyo next week to discuss, among other things, the continued opening of Japanese markets to American goods.
"The amount of tension over the numbers doesn't exist the way it did five years ago," says Jeff Weir of the Semiconductor Industry Association (SIA) in San Jose, Calif. But "if that [sales debacle] happens, our side would get much more vociferous.... And it would probably put a lot more pressure on the Japanese."
What cooled the semiconductor market is the same force that heated it up: personal computers. American consumers are no longer buying home computers in the volumes they did last year. Since personal computers use some 40 percent of all chips made, the slowdown is rippling through the industry.
The deceleration affects not only high-value microprocessors, which run personal computers, but also a whole host of memory, video-related, and other chips scattered throughout the machines.
Thus, the pinch felt by American microprocessor manufacturers, such as Intel and Advanced Micro Devices, is also hurting Japanese and Korean makers of memory chips.
American consumers can already see the effect in plunging prices for memory chips. A year ago, each megabit of memory cost $40 or more; today, the price is roughly half that. The falling prices have caused several Japanese and Korean firms to cut back production of older four-megabit memory chips in favor of higher-capacity 16-megabit chips.
Even specialty chipmakers are affected. Last week, National Semiconductor Corp. announced it would lay off some 400 people - 2 percent of its worldwide work force - and take a related $20 million charge against earnings because of a slowdown in orders. The Santa Clara, Calif., company makes specialty chips for the computer, telecommunications, and other markets. Along with falling computer sales, the company has seen a drop off in US sales of analog cellular phones.
"Those are the two big pieces that we feel are affecting the company," says Alan Bernheimer, spokesman for National Semiconductor. But "we don't expect this to be a decline like in the late '80s." Growing demand for digital cellular phones in Europe is helping to ease the slump.
So far, the signs point only to a decline in growth, not a contraction. The SIA reports that for every $100 that American chipmakers shipped in February, they only got $90 in new orders.
February was the second straight month that this ratio - known as the book-to-bill ratio - fell below the break-even point. The SIA will release this week, perhaps as early as today, its figures for March. Because the book-to-bill ratio actually represents a three-month average, the March ratio is also expected to remain below break-even.
But the SIA still expects the industry to post solid growth for the year. After last year's torrid rise of 43.7 percent, the organization believes worldwide sales will rise roughly 20 percent. In many industries, 20 percent growth would be considered a boom. In semiconductors, which historically have averaged some 15 percent growth per year, it is considered so-so.
'Back to normal'
"The markets are returning back to normal," says Gary Grandbois, vice president and chief analyst for semiconductors at Dataquest in San Jose, a Gartner Group company. Less sanguine than the industry group, he expects worldwide sales of semiconductors to grow by 15 percent or less.
So far, the slump in personal-computer sales is strictly US-based. Continued strong sales in Europe and, especially, in Asia should help offset the weak American market, analysts say. It should also help ease talks between President Clinton and Japanese Prime Minister Ryutaro Hashimoto.
At the moment, other trade issues, especially US charges that Japan is blocking access to its photographic film market, are far more contentious than semiconductors, analysts say.
"The semiconductor problem is infinitely more solvable now than it was in '86 or '91," says Greg Mastel, vice president of the Economic Strategy Institute, a public-policy group based in Washington.
In both those years, with chip sales slow, the US and Japan struggled to negotiate a chip agreement aimed at opening the Japanese market to semiconductors. The current agreement, which calls for Japan to open 20 percent of its domestic-chip market to foreign-made chips, is set to expire at the end of July.
Although the US and Japan agree the 20 percent target has been met, the US wants to extend the agreement, while Japan argues it is unnecessary.
Many US analysts side with the Clinton administration, saying a chip deal should be negotiated. "We have learned one thing about Japan: You have to keep the pressure on," says Erich Bloch, a senior ellow at the Council on Competitiveness, a Washington-based group of chief executives.
As long as the chip market doesn't plunge unexpectedly, both sides have the wriggle room to reach an agreement, says Mr. Mastel of the Economic Strategy Institute. "I think it's very doable," he adds.