U.S. CHIP MAKERS - GET REAL

You Cannot Have it Both Ways

The U.S. Semiconductor Industry Association has recently announced that it will not voluntarily cooperate with the Biden administration’s call for limiting sales of some kinds of chips to China.

This is outrageous. Having just been gifted $50 billion or more by the U.S. government to help them stay technologically ahead of China, are these rich darlings of Silicon Valley truly saying they won’t cooperate with U.S. government China policy? They like to pretend they are all independent entrepreneurs who disdain government assistance and who are hard nosed independent business people. This is total nonsense. I know the industry and its history well. Let me tell you the true story.

I was appointed Counselor to Secretary of Commerce Malcolm Baldrige in the first Reagan administration. At the time, the Japanese were making mincemeat of a wide variety of U.S. industries. You name it, autos, steel, textiles, machine tools, motor cycles, and on and on. The Japanese were making mincemeat of them. The U.S. trade deficit was soaring as the Japanese began to attack the U.S. high tech industries including particularly semiconductors. Indeed, by 1984 they were making big inroads and about 84,000 workers in Silicon Valley lost their jobs.

Baldrige had hired me because he knew that I had studied and worked in Japan and spoke and read Japanese. He told me that my job was to somehow reduce the trade deficit with Japan and to safeguard high tech U.S. industry.

There were two key elements to the problem. On the one hand, Japan had long been conducting an aggressive industrial policy aimed at catching up with the U.S. This meant protection of Japan’s home market by a wide variety of tariffs and complex exclusionary measures. Particularly powerful in the semiconductor industry was the injunction to Japanese users of semiconductors to “buy Japanese”. This wasn’t just a request. It carried the full power of the Japanese government with it.

The way it worked for the U.S. semiconductor makers was that if a certain kind of chip was not made in Japan, the Americans could sell it there. But as soon as there was a Japanese maker in the market, the American sales fell dramatically. Intel CEO Andy Grove kept what he called the waterfall chart in his office. It demonstrated the dramatic decline in U.S. chip sales each time the Japanese came up with a chip previously supplied from the U.S.

The second part of the problem was that the Japanese makers were “dumping” there products in the U.S. market. Dumping means that they were selling either below the cost of production or below the price for the same product in the Japanese market. This practice is illegal under international trade law, but, of course, it can be very attractive to customers. Moreover, proving that it is occurring is no easy task and can well take a year or two and a lot of lawyers and accountants to accomplish. Often, by the time the infraction is proven, the market has moved on to some other product.

Usually, the U.S. government does not act on a possible dumping case until it receives a formal complaint and request from a U.S. organization. But, the law does allow for the Secretary of Commerce, him or her self, to initiate an investigation and legal case against the suspected dumper. It had never been done before, but I and my colleagues Bill Finan along with Undersecretary of Commerce for International Affairs Lionel Olmer explained it to Baldrige who kind of liked the idea.

Before moving ahead, however, he arranged a conference call with several CEOs from different industries to get their reaction. As it turned out, they all approved. Indeed, the Executive Vice President of IBM said: “not only should you do it, you MUST do it.

Thus, Baldrige moved ahead to threaten the Japanese semiconductor industry with potentially ruinous tariff impositions on their chip exports if they did not halt the dumping. In the end, not only did the Japanese stop the dumping, but they also expressed their agreement that the U.S. makers should obtain at least 25 percent of the Japanese market.

But, that wasn’t all. U.S. government also put up $500 million to match the $500 million from the industry for the purpose of establishing a joint venture known as the Semiconductor Equipment and Materials Institute aimed at improving U.S. performance in those critical areas.

In the course of all this I got to know many of the key people in the chip industry. I formed friendships with Intel’s Gordon Moore, Bob Noyce, and Andy Grove as well as AMD’s Jerry Sanders, National Semiconductor’s Floyd Kwame, Motorola’s Bob Galvin, and Texas Instruments Morris Chang who eventually founded today’s Taiwan Semiconductor Manufacturing Company.

From them I learned much about the real history of the industry as opposed to the Silicon Valley myths of rugged, individualist entrepreneurs who invented themselves and their companies. It is important to note that the transistor was the key invention that led to semiconductors. It was not invented in the Valley. Rather it was three researchers at Bell Labs, the unique laboratory of the government controlled AT&T. Initial funders of Intel included the U.S. government Small Business Bureau. The major customer without which there would have been almost no market was, surprise, the U.S. Department of Defense whose Defense Advanced Research Projects Agency contributed immensely to the ongoing development of semiconductors.

Thus, the opposition of the semiconductor leaders now to some limited government restrictions on sales to China, a country that they cannot avoid knowing is building an immense military machine as part of its effort to displace the United States and its values of free speech and rule of law with despotism, is simply unacceptable to full blooded Americans.

As a young man, I was mentored by Tom McCabe, the builder of Scott Paper Company. He sometimes said that “if you want to crop for a year grow flowers. If you want to crop for twenty years grow trees. But if you want to crop for a lifetime grow men and women. McCabe himself left Scott as a young man in 1915 to drive ambulances in France during WWI. In 1941, he again left Scott to work on the U.S. War Production Board. Despite being Republican national committee man from Pennsylvania, he responded in 1948 to President Truman’s call for him to take the job of Chairman of the Federal Reserve.

Tom McCabe was a real man and a genuine, unselfish patriot. We now need some Tom McCabes in Silicon Valley,