Foreign Competition Clouds Silicon Valley's Future

SILICON Valley basks in the glory of a perpetual High Noon. It rolls out dazzling technology like clockwork. It drives a large share of the American economy. Its ethic of innovation is so strong, so individualistic, that a frontier mentality still reigns.

Joel Shurkin, author of a history of computers, calls it "cowboy capitalism."

"Silicon Valley got created from an almost OK Corral-type competition," adds T. J. Rodgers, founder of Cypress Semiconductor Corporation. "It made Dodge City look like Boston."

So, it is especially distressing that dark clouds have appeared on the horizon of one of America's most watched, most emulated business centers.

Like older industrial areas in the United States, Silicon Valley faces growing foreign competition. In the amazingly short span of 30 years, it has gone from young upstart to technological powerhouse to industrial giant with a furrowed brow.

While many newer companies continue to thrive and grow in the best tradition of the valley, some sectors, such as software firms, see virtually no foreign competition. But in older industries, especially semiconductors, some of the region's most venerable heroes wonder whether the time has come to pack away the six-shooter and circle the wagons.

On the desk of Andrew Grove, one of the legendary founders of Intel Corporation, is a small booklet with graphs of American industries.

"Where are machine tools? Where is steel? Autos?" he asks, pointing to each graph with a pencil. In each case, the US has lost or nearly lost its preeminent position in the world market to the Far East.

Then he points to Silicon Valley's products: semiconductors, semiconductor equipment, and computers. The graphs are the same. Japan took over America's premiere position in the first two industries and, by next year, will grab the lead in computers, too.

Only in microprocessors has US industry bounced back. If government does not step in and help, Mr. Grove says, Silicon Valley's technology will be nearly irrelevant by the mid-1990s. "Largely it will become an R&D outpost for foreign corporations," he says.

The threat of foreign competition is not new. Several Silicon Valley executives warned about Japan's emergence in the late 1970s. What has changed is the nature of the threat.

"Trade was how this was fought in the '80s," says Grove. "Investment is how it must be fought in the '90s."

Instead of limiting access to their markets, foreign competitors are now investing heavily in small US companies with leading-edge technology. "They buy them so cheap that it's the equivalent of stealing," says Ben Anixter, vice president of external affairs at Advanced Micro Devices, a large semiconductor manufacturer in Sunnyvale.

Mr. Rodgers of Cypress, one of the new heroes of Silicon Valley, disagrees with these old-line manufacturers on many issues. But not on this one. "I am very concerned about that right now," he says. One example: The Japanese steelmaker NKK Corporation in January announced it would acquire a 10 percent stake in Paradigm Corporation, a four-year-old start-up specializing in static random-access memory.

The problem is that the valley's dynamism relies on a continuous flow of domestic and foreign investment, says Bill Schroeder, vice-chairman of Connor Peripherals, a disk-drive maker in San Jose. "The one thing our government can do is demand reciprocity."

If foreign competitors don't allow US companies to make investments abroad, then the US should take action, he adds.

The issue is partly one of foreign policy; it is also a question about the continued resilience of Silicon Valley. Can its fiercely competitive ways hold off foreign competitors? Or must US companies join forces to keep from losing its place in the market?

SILICON Valley is not only a huge business engine, it is also a place. Its heart is in Santa Clara County, Calif., just northwest of San Jose in towns like Santa Clara, Sunnyvale, and Cupertino.

Technological innovation started early here, thanks in large part to the efforts of Stanford University. In 1938, a university professor helped William Hewlett and David Packard start building audio oscillators in a Palo Alto garage. The two ended up building the giant Hewlett-Packard computer company. The university created the Stanford Industrial Park, which encouraged small start-up firms and attracted other large technology companies to set up shop.

In 1954, one of the inventors of the transistor - William Shockley - started Shockley Semiconductor in Palo Alto. Three years later, eight Shockley employees left to form Fairchild, which capitalized on the integrated circuit. Fairchild spawned many of the semiconductor firms that compete today - National Semiconductor, Advanced Micro Devices, and Intel.

The valley's entrepreneurs became modern heroes. They affirmed the American ideal of the rugged individualist, who strikes out on his own and comes up with the unorthodox solution that wins the day.

In 1975, the ideal was reaffirmed when two young techno-whizzes named Steve Jobs and Steve Wozniak set up shop in a garage and created a world-beating, revolutionary machine called the personal computer. Apple Computer Inc. came to symbolize the valley's hard-driving, unorthodox culture.

Apple chairman John Sculley recalls the ambiance of Apple's development center: Pointer Sisters' music was blasting out of speakers; someone played a concert B 154>sendorfer piano in the corner. Mr. Jobs' motorcycle was parked against the wall, and a toy robot moved along the hallway.

"The scene looked much more like a college rec room than a corporate development center," he wrote in his recent book. Yet that center created Apple's best-selling MacIntosh computer.

"We are a culture that is very passionate about ideas and about business," says Gordon Eubanks Jr., who heads Symantec Corporation, a Cupertino software firm. "The challenge is to balance the passion and the process."

The supergrowth of Silicon Valley creates a contradiction. As the valley's successful innovative companies get bigger, they find it harder to sustain innovation.

Apple still retains some of the trappings of its unorthodox culture. Conference rooms carry names like "Aspire" and "Dream." (One is named after the Alfred Hitchcock thriller, "Dial M for Murder.") But Jobs and Mr. Wozniak have left the company. Critics say Apple hasn't created a startling new product in years.

"You have to work harder at it" to retain the innovative spirit, says Al Eisenstat, executive vice president of corporate development for Apple. "The problem [new Apple chairman] Sculley had 201> was to bring some semblance of discipline into what was really a pretty anarchistic society but still retain the things that made Apple a different company."

"The company has matured in that it looks at its strengths and its weaknesses today," Mr. Eisenstat adds. "But the excitement hasn't left the company."

Silicon Valley has grown so rapidly that it has spilled over into surrounding counties: Alameda and San Mateo counties to the north; Santa Cruz County to the west. Although it now begins just 25 miles south of San Francisco, Silicon Valley looks and feels more like southern California. There's the same flat, arid land, crisscrossed with traffic-laden highways and hemmed in by mountains often shrouded in smog.

In many sectors, the valley's traditional intensity and supergrowth still prevail. Even in relatively mature industries, such as semiconductors, the best Silicon Valley firms have found ways to continue innovating.

"Intel is the company that has worked very hard its entire history to take innovations from the laboratory to the factory floor," says Claudia Bird Schoonhoven, coauthor of a new book on five high-tech firms called "The Innovation Marathon." "The companies are absolute masters at that."

Start-up firms continue to pop up. Between 1978 and 1985, Dr. Schoonhoven found 102 new US start-ups in semiconductors alone. Of those, 70 percent were based in Silicon Valley. It took an average of only 17.5 months for the valley's firms to reach the point of shipping their first product, compared with 25 to 26 months in other regions.

The valley's boom years are over, however.

"There's always the potential for bright developers to come up with some technology that's very valuable," says Spencer Leyton, senior vice president of development for Borland International, a software firm in Scotts Valley.

"But 99 percent of the time, they are not going to have what it takes to create a company. The barrier to entry has gone like that," he says, drawing a sharp upward line on a bulletin board beside him.

In Santa Clara County, the heart of the valley, nonfarm employment grew a whopping 66 percent between 1972 and 1980, but grew at only 23 percent from 1980 to 1989. In manufacturing, the change is even more stark. Employment almost doubled from 130,000 to 248,000 during the 1970s and reached a peak of 288,000 in 1984. By 1989, however, it was down to 269,000.

"Silicon Valley will continue to be a headquarters center for the high-tech industry and an R&D center for a long time," says Philip Kohlenberg, labor market analyst for the California Employment Development Department. "But manufacturing will continue to move out."

For one thing, housing is so expensive here that manufacturing employees find it difficult to find a place to live. For another, the valley is so crowded and land so expensive that there's less incentive to build.

So the valley faces a tough challenge: how to maintain its manufacturing base, which almost everyone here considers crucial to its future competitiveness.

Grove of Intel wants a new kind of Silicon Valley. He thinks the US government needs to step in, encourage a base of companies in key electronics industries, and allow them to collaborate in order to battle foreign competitors.

Rodgers of Cypress disagrees, citing Silicon Valley's traditional ability to innovate. He blames the old-line semiconductor firms for letting quality slip and allowing the Japanese to take over in the early 1980s.

He dismisses the doom-and-gloom scenario of the valley as an R&D outpost. Indeed, US companies are closing the quality gap with the Japanese, and he predicts they will increase their share of the semiconductor market in the next few years.

Moreover, in a new era of many varied products, American nimbleness will defeat Japanese discipline, he says.

"In World War II, the Japanese built three battleships - the Yamato class." They had the biggest guns and the farthest range, but they were sunk before they could engage US battleships by a better US technology - the air bomber. Japan's Shinano, a huge aircraft carrier, was no match for the US submarine that sunk it.

"It's just stupid to let the Japanese pick the war and define it on their own terms," Rodgers says.

Silicon Valley will be a key test of whether American innovation is enough to win this time around.