These are hard times for California's Silicon Valley, a place that likes to think of itself as the high-tech capital of the world.
"We have gone through the biggest crash in orders in over 10 years," said Ronald J. Whittier, vice president of Intel Corp., who directs business development and marketing communications for the computer chip manufacturer.
For silicon chips, the building blocks of an expanding high-technology economy, the immediate outlook is bleak. Chip supply grossly exceeds chip demand. Layoffs and furloughs are rife throughout the valley's semiconductor companies such as Intel and National Semiconductor Corp. The Semiconductor Industry Association has trimmed its 1985 sales forecasts for the $20-billion-a-year chip business by roughly 10 percent.
Even worse, Japanese and other foreign chip manufacturers are continuing to take sales away from the American companies, some Valley watchers say. Last year, Japanese companies boosted their share of the primary memory-chip market from 13 to 16 percent. This year, their penetration will reach 20 percent for the 64K memory chips, analysts say.
The troubles extend to the products that use the chips. The personal-computer industry, a major silicon consumer, has seen its fast-pace growth cool off. Apple Computer Co. has had to halt production at several key plants for a week, and analysts point to an industrywide shakeout. In 1984, the U.S. electronic industry ran a multibillion-dollar balance-of-trade deficit for the first time ever, as a high-valued dollar added to the industry's troubles.
This litany of bad news has prompted some observers to say there is a "crisis" in American high technology as U.S. companies face ever tougher foreign competition.
The picture is brighter for many of the Silicon Valley high-tech companies that service some of the fastest-growing sectors of demand. For example, Daisy Systems in Sunnyvale is prospering in the fast-growth field of computer engineering work stations. But in the older, more mature technologies -- notably semiconductors and personal computers -- the commodity quality of the business has yielded diminishing margins and an enormous vulnerability to economic cycles.
American technology companies may be turning into little more than design and distribution firms, forced to abandon production to offshore contractors or competitors, some experts fear.
But many within the industry insist that what their companies face is less of a competitive crisis than an identity crisis.
As international competition intensifies and major capital investment decisions have to be made, the Silicon Valley companies have begun to implement the next generation of strategic decisions that will shape their future. In effect, the Valley's top high-tech companies -- most of them not even two decades old -- are in the painful process of deciding what they want to be when they grow up.
"I think it is the American companies that decide what they have to do," said Kenichi Ohmae, a Tokyo-based McKinsey & Co. consultant who works with many of Japan's leading high-technology companies. "American companies, except for a few like IBM, do not develop into a stable shape. The portfolio of the business is typically too narrow. . . ."
Consequently, in subtle but important ways, Silicon Valley companies are trying to emulate many of the key characteristics of their Japanese competitors. This isn't spawned by a "If you can't beat 'em, join 'em" mentality, but rather by a tacit recognition that there is a new global economics of high technology that demands a different kind of American industrial response.
Unlike the American Intel or a National Semiconductor, Japanese chip companies are wholly owned divisions of giant Japanese electronics companies. The multibillion-dollar Hitachi, Fujitsu and Nippon Electric Corp. are all vertically integrated electronics conglomerates that do everything from manufacturing their own chips to building their own computer and telecommunications systems to global marketing and distribution of their products.
This vertical integration gives these companies both economies of scale and marketing clout that independent and unaligned American companies (International Business Machines Corp. is a notable exception) simply can't match.
The chip market "is like farming and cement," McKinsey's Ohmae asserted. "The market goes up and down all over the place, depending on supply and demand. And the American people don't like that.
"Japanese companies, because they are diversified into many [related] businesses, can absorb [the] peaks and valleys. American companies are not so well diversified into other areas; therefore, they have to take hard decisions. Japanese companies can make much softer decisions. They say, 'OK, bad times come, we slow down production and we absorb the losses with other businesses. . .'," Ohmae said.
Most Silicon Valley companies simply aren't in a position to do that.
"That structural point is one of the more formidable barriers to deal with," said Ralph J. Thomson, senior vice president of the American Electronics Association, who added that it also makes it more difficult for American semiconductor companies to sell their chips to the Japanese.
Consequently, many of Silicon Valley's high-technology companies are trying through strategic partnerships, alliances and licensing agreements to create a "virtual" vertical integration structure. Special arrangements with key suppliers and customers may let American high-tech companies capture some of the benefits of vertical integration while letting the companies effectively retain their individuality.
A classic example of this would be IBM's equity stake in Intel. IBM is a major customer for Intel chips. Despite the volatility of the semiconductor market, Intel's customers are calm about the company's prospects because, in the words of one large Intel customer, "IBM won't let one of its investments go down the drain."
Ohmae and other Silicon Valley observers contend that there will be similar investments throughout the industry as major vendors, suppliers and customers forge formal ties that can cushion the industry's cyclical swings.
The same concern for vertical integration holds for Silicon Valley's increasing emphasis on manufacturing. The valley companies want their manufacturing expertise to match their historic flair for innovation and marketing.
"Remember what Silicon Valley companies were good at to begin with: sensing new market opportunities, new market development and product prototype development," Intel's Whittier said. "The industry was pouring the bulk of its intellectual and marketing capabilities into those parts of the business. That philosophy was inconsistent with manufacturing emphasis."
He pointed out that "the GNP [gross national product] of Silicon Valley was all new products," and it's only been the last few years that the industry has shifted away from an emphasis on new products to the production of large volumes of the same products that characterizes the "commodity" nature of the semiconductor business today.
"Silicon Valley simply hasn't been well-positioned to handle the commodity market," Whittier said. In the past few years, the semiconductor companies in particular have taken major steps to improve chip production quantity and quality yields.
"With approximately the same floor space, we have improved our ability to ship by at least 100 percent over the last two years," said George Scalise, a vice president at Advanced Micro Devices Inc.
Scalise stressed that his company has been making major investments in "process technology" equipment necessary to match Japanese expertise in manufacturing.
Indeed, Intel's Whittier said that Intel has started "shifting its internal resources from classic research and development to process engineering" and that "at least a third" of the old research and development budget is now devoted to manufacturing research.
Another strategic approach followed by many leading technology companies is to subcontract the manufacture of commodity components of their systems to low-cost overseas suppliers rather than produce the items internally.
About 18 months ago, Hewlett-Packard Co. established an international procurement organization to evaluate subcontractors making parts for its array of computers and technical test equipment.
"The question is, where do you draw the line between manufacturing and procurement?" asked Malcolm Smith, who oversees HP's procurement efforts. "It's a gray area."
HP does not regard this as a sign of weakness or decline, however. Smith pointed out that his company sees a greater cost-effectiveness in going to overseas suppliers for many kinds of commodity electronic supplies rather than developing them inhouse. In effect, the strategic decision to go outside better positions HP as a global competitor, according to Smith.
The most striking tactic, however, is that Silicon Valley chip companies now are swapping technological know-how with their Japanese counterparts in a way that would have been unthinkable even three years ago.
Historically, American companies have licensed the design of their chips to Japanese companies in exchange for royalties and the opportunity to establish the chip as a standard. Now, Intel is licensing its chip designs not just for cash but also for Japanese skill and expertise in manufacturing technology. AMD's Scalise reported that his company is negotiating a transfer of technology with unnamed Japanese companies for their manufacturing know-how.
"The approach will be technology for technology," he said. "From an international standpoint, it's a new trend." But it is also a trend that underscores the urgency American semiconductor companies feel about matching their design and distribution prowess with the ability to manufacture cost-effectively in volume.
There's a certain irony to this, the AEA's Thomson noted. The semiconductor industry has become seriously concerned about an overcapacity in chip production. This could keep chip prices depressed through the end of the decade unless demand radically increases. Should that happen, it would make recovery of investments in manufacturing improvements that much more difficult for all industry participants, including the Japanese.
But unless American companies develop a more resilient industry structure, Silicon Valley participants concede, it will be that much more difficult for them to succeed.