The World Challenge
The “Chip Wars” are intensifying. Lined up on one side are the Nippon Electric Company (NEP), Fujitsu, Hitachi, Toshiba, Mitsubishi Electric, and their ally, the Japanese Ministry of International Trade and Industry (MITI). On the other side are IBM, Texas Instruments, Intel, National Semiconductor, Motorola, Advanced Micro Devices, Mostek, Signetics, Fairchild, and the United States Department of Defense.
The stakes are high. Because the silicon chip, or semiconductor, can store huge amounts of information on the miniature circuits that are etched onto it, it has emerged as the key element in new computer, telecommunication, and aerospace technology. It has also become essential to making television sets, stereos, radios, automobiles, home appliances, and machine tools. Total world sales for these wafer-thin, fingernail-seized gadgets have more than quadrupled since 1970, to $10.5 billion last year. They will reach $80 billion in 1990. Dominance in chips will provide the same economic strength that the dominance in steel production gave the United States in the first half of this century. The nation that can make them cheaper and better than any other will have a huge advantage in producing and selling the advanced technology of the future. As we shall see, Jean-Jacques Servan-Schreiber believes that a decent world economy depends on the willingness of the rich nations to supply chips to the poor ones.
Success in the Chip Wars depends on volume, experience, and technological innovation. Since the miniature circuits can simply be printed on silicon, the cost of making them declines rapidly with the volume of production—a 25 percent drop every time the volume doubles. With experience in reducing the cost of material and overhead, the cost can drop still further, while quality improves. Indeed, the number of electronic functions enclosed in a single chip has nearly doubled every two years since 1965, while the price for each function has declined over the same period from $50 to one-twentieth of a cent.
In this situation US corporations must aim to set a low price today in anticipation of the very low cost of tomorrow’s production, while assuming that tomorrow’s price will be sufficiently attractive to justify heavy production. It is a gamble. But if it is won, sales will generate enough cash to allow the research and development to produce even more powerful memory circuits, which can be mass produced at a price and quality that will undercut all rivals. In this race the first producer to gain a dominant share of the market can have a permanent lead, so long as it continually reinvests its profits in innovations and sets progressively lower prices in anticipation of a large volume of sales.
United States manufacturers, in partnership with the US government, took an early lead in the Chip Wars. Research in radar and sophisticated communications equipment during World War II led to the invention of the transistor in the late 1940s, and of the integrated circuit a decade later. By 1967, the US government was the largest single purchaser …
Not in the Chips? March 18, 1982