Semiconductor war with Japan: Silicon Valley's uphill task

AMD CEO Jerry Sanders entered the chip business belligerently, especially against his old rival Intel. But in the 1980s, instead of Intel, Japan became his new and even more formidable rival.

At that time, American companies—such as Fairchild, Intel, and AMD—were regularly suing each other. They would poach their competitors' best engineers, and they had fierce conflicts among them over patents. At that time, Japanese companies like Hitachi, NEC, Toshiba, and Fujitsu were taking over the world's memory chip market by storm.

As chip industry veteran Charlie Spork once said, "We are at war with Japan—no, not with guns. It is an economic war over technology, manufacturing efficiency, and quality." He feared that what had happened to the American television industry (which Japan had destroyed) would happen to the chip industry.

Some of the Americans' fears were indeed based on reality. In 1981, a Hitachi employee tried to secretly buy some business information from a "consultant" of an American company called Glenmar, for which Hitachi had allocated $500,000. Glenmar was actually an FBI trap. In the end, the charges of espionage against Hitachi were proven. Toshiba was also seriously accused of giving the Soviet Union secret submarine technology. Although this incident was not directly related to the chip business, it strengthened the belief in Americans that Japan was not playing "fairly."

However, the reality was much more complex. With the direct support of the Japanese government, the country's companies made it almost impossible for American chips to enter their own market. For example, until 1974, Japan limited the sale of chips to American companies by quotas. Even after the quotas were lifted, Sony and NTT (Japan's state-owned telecom company) would only buy Japanese chips. Another major advantage for Japanese companies was government subsidies. In 1976, the Japanese government launched the VLSI programme as a joint research project, with half of the costs covered. Something like this was not possible in America due to antitrust laws.

Building chip factories was very expensive, and The interest rate on capital or debt played an enormous role in this. In the 1980s, interest rates in America had risen to 20%, but in Japan, it was only 6% to 7%. This was because Japanese banks had large savings deposits and did not hesitate to provide long-term loans. Even if companies were making losses, the banks would not let them sink easily, but would rather keep them afloat by lending them more.

With this cheap capital, Japanese companies continued to build new factories and increase production. Hitachi, Toshiba, and NEC—all invested heavily. In 1985, Japan accounted for 46% of global chip spending, while America accounted for 35%. By 1990, Japan’s capital spending had exceeded 50%. Despite low profits due to tough competition, Japanese companies continued to increase production and cut costs—they could survive longer than the Americans.

Thus, the once-proud Silicon Valley DRAM market quickly became completely in Japan’s hands. Within five years of introducing 64K DRAM, Intel’s market share had fallen to just 1.7%. In contrast, Japanese companies were rapidly gaining market share. Even during this time, Japanese companies were also competing fiercely—but they survived because they had easy access to cheap loans from banks. And many American companies, unable to withstand this unbearable pressure, were forced out of the market.

Japanese companies denied accusations that they were unfairly behaving in the market. They claimed that their chips were of superior quality, and their prices were low, so they easily outcompeted American companies. Yet for many Americans, this was like losing a war. America's war with Japan was an economic one, but for those in Silicon Valley who built the chip industry, it was personally very painful.

{Adapted and abridged from Chapter 16 ('At war with Japan') of Chris Miller's groundbreaking book 'Chip Wars'}


Author: Mahmud Hossain, a BUET graduate, has over three decades of leadership experience in Bangladesh’s telecom and ICT sectors. He played a key role in introducing mobile technologies in the country. He now serves as a Commissioner at BTRC, following senior leadership roles in several national and multinational industry-leading companies.