U.S. semiconductor companies that think they can escape Japanese competition by selling "custom-made" chips are kidding themselves, according to a growing number of industry experts.

"The semiconductor industry can run but it's extremely difficult to hide," said venture capitalist William Davidow, a former senior vice president of sales and marketing for Intel Corp. "The old medicine isn't going to work against the new disease: Out-inventing the competition isn't going to work anymore."

Even as U.S. and Japanese negotiators push to conclude a trade agreement this week that would aid the ailing American semiconductor industry, there are ominous signs that the industry is evolving in ways that will further disadvantage U.S. companies.

Conventional wisdom in Silicon Valley holds that, while Japanese companies are superb at mass-producing "commodity" semiconductors such as memory chips for VCRs and computers, U.S. companies are still better when it comes to designing specialty chips -- also known as Application Specific Integrated Circuits (ASICs). ASICs represent the fastest growing segment of the troubled semiconductor business.

Consequently, many U.S. semiconductor firms are now seeking to minimize direct competition with Japan and develop proprietary product "niches" using ASICs. Intel Corp. announced last month that it was creating an ASIC group, and other leading chip companies, such as Texas Instruments and National Semiconductor, have recently moved into the ASIC market.

Davidow and others argue that the conventional wisdom is wrong, however, and that finding profitable niches will prove much more difficult than expected.

"ASICs are not a place to go hide from foreign competition," said Andrew Prophet, a semiconductor industry analyst with Dataquest. "To think that is sheer lunacy."

One key reason, American semiconductor companies are discovering to their chagrin, is that custom chip designs are becoming as much of a commodity as the chips themselves. The computer-aided-design work stations from companies like Daisy Systems and Valid Logic that enable U.S. engineers to design custom circuits are equally available to Japanese engineers. Indeed, many Japanese chip designers hold advanced degrees from top U.S. engineering schools.

The proliferation of such custom chip-design tools and the enrichment of the Japanese technical pool have begun to significantly erode the U.S. lead in certain categories of custom chip design.

In "gate arrays," for example, where engineers "connect the dots" of logic gates on a microchip to customize the circuit, a "design of 1,000 gates is already regarded as a commodity," according to Rick Rasmussen, manager of advanced product development at LSI Logic, a leading gate-array company.

Although U.S. companies such as LSI Logic are capable of customizing chips with up to 50,000 logic gates, Rasmussen contends that the Japanese now dominate the lower end of the technology and are on their way up.

"Our top competitors will be Japanese, not American," he said.

Indeed, Japanese firms seem prepared to do whatever it takes to swiftly design and produce custom chips.

"Someone I was talking with the other day said that Fujitsu was accepting gate-array data from them by satellite," Davidow said. "Apparently, being 8,000 miles away from a customer doesn't make that much of a difference."

The Japanese currently hold a 40 percent share of the $4.5 billion worldwide ASIC market and are making significant inroads into the U.S. market.

For example, while Japanese companies held 9.5 percent of the U.S. market for gate-array ASICs in 1980, they now hold at least 33 percent, according to Dataquest. Similarly, the Japanese had no share in the "standard cell" ASIC market in the United States in 1980, but by last year they had captured 18 percent.

"Japanese market share continues to grow," said Dataquest's Prophet. "What was once an issue that was relegated to RAMs and PROMs memory chips is now an issue for ASICs as well."

In fact, U.S. companies are now accusing the Japanese of unfair trade practices in the ASIC market, just as they have accused the Japanese of dumping chips in the memory market.

LSI Logic, National Semiconductor, Advanced Micro Devices and Intel last month wrote a joint letter to U.S. Trade Representative Clayton Yeutter, asking that ASICs be included in the semiconductor trade agreement now being negotiated with Japan.

"ASIC is very important to the U.S. semiconductor industry," said Bruce Entin, a spokesman for custom chip manufacturer LSI Logic, "and we're very concerned about what can be construed to be predatory pricing in the marketplace."

Prophet notes that prices for gate array custom chips have dropped to 10 percent of their prices of a year ago. While not discounting the possibility of predatory pricing, Prophet points to increased competition in the field as numerous companies struggle to carve out niches.

Still, many in the field believe that the ability to provide service -- not just to design and manufacture -- will be the most important factor in supplier selection.

"Semiconductor companies have to become much more service-oriented," Davidow said. "Their customers want reliability and support as well as quality and price. Too many U.S. companies only pay lip service to service."