TWO years ago the National Security Agency decided to reduce its dependence on semiconductors from Japan, and asked the National Semiconductor Corporation to construct a special chip plant near the agency's Ft. Mead, Md., headquarters. But the plant exposed another problem - the weak state of United States firms that supply materials and equipment used to manufacture semiconductors. To turn out the best chips, National Semiconductor had to use imported microlithography machines. During the 1980s, American leadership in the semiconductor industry steadily eroded. Most attention in government and industry has focused on the plight of US chip producers, which have lost ground to Japanese competitors. But the consequences of these setbacks for US equipment suppliers have been severe.
Just 10 years ago the world's top 10 equipment and materials makers were all American. US firms dominated the American market, and held 70 percent of Japan's market as well.
Today the picture is radically different. Four of the top 10 spots, including the first three, are now occupied by Japanese firms. In 1989, Japanese companies garnered 42 percent of the world market for semiconductor equipment, just behind the 47 percent won by American firms, according to VLSI Research, a Silicon Valley market research firm. In the critical field of microlithography, in which precision machines known as ``wafer steppers'' etch integrated circuits onto silicon, Japan's Nikon has eclipsed Perkin-Elmer and other American firms as the industry leader.
The US has also lost ground in critical materials used to make semiconductors. The bulk of high purity silicon used in the US is now supplied by Japanese and West German firms. Japanese companies also dominate the market for quartz plates, which are used to make the ``masks'' used when circuits are ``printed'' on to silicon, and ceramic packages, which house semiconductor devices.
The leadership shift in these fields to Japan could have big consequences for the world computer, electronics, and telecommunications industries, all of which depend on semiconductor devices.
Improvements in equipment and materials can help make chips faster and more powerful, and improve the performance of electronic products. Japanese advantages
In Japan, semiconductor producers have close corporate ties to equipment and materials suppliers, and thus have easy access to new production techniques. And, since big Japanese chipmakers like Hitachi and Fujitsu also make electronics products, they can quickly incorporate improved chips into final products like computers and stereos, winning customers before their American competitors can bring similar products to the market.
Several factors have worked in favor of Japanese equipment firms. Japan, with its huge auto and electronics industries, is now the largest market for semiconductor devices. Since both Japanese and American chipmakers tend to procure equipment from nearby suppliers, the growing market share for Fujitsu, NEC, and other Japanese chipmakers has meant a steady market for Japanese equipment. Moreover, since Japanese electronics firms are integrated, they can use profits from other business sectors to maintain capital investment in semiconductors despite volatility in the industry. Links with electronics firms also enables Japanese equipment suppliers to maintain large research budgets, which is crucial because innovative equipment is emerging every few years, rendering older product lines obsolete.
American firms, by contrast, suffer from a host of structural problems. Most of the 800 US semiconductor materials and equipment makers are small, with annual sales below $20 million. That makes it difficult to survive the ups and downs of investment by chipmakers. Big budgets for research and customer service, crucial to survival, are hard to maintain because they reduce profits, which makes it hard to raise additional capital. ``US equipment makers are destitute,'' says Sheldon Weinig, chairman of Materials Research Corporation (MRC), a leading equipment supplier recently acquired by Sony.
In 1989 alone, in addition to the MRC-Sony deal, Monsanto's subsidiary producing silicon wafers was acquired by Huels A.G. of West Germany, Osaka Titanium purchased the epitaxial wafer business of Cincinnati Milicron, and Hoya of Japan acquired Micro Mask. Perkin-Elmer is also trying to sell its semiconductor equipment division.
Despite their rapid rise, Japanese equipment makers have not been accused of unfair trade practices. ``They have simply done a good job,'' says Dan Hutcheson, president of VLSI Research. US firms are surprisingly frank in acknowledging that low product reliability and poor customer relations have contributed to their problems. ``We produced leading edge technology that didn't work very well,'' says MRC's Dr. Weinig. ``But it didn't have to because it was unique, we had no challengers, and everyone was making money.'' Poor relations between chipmakers and equipment suppliers compounded the problem by limiting information exchanges and slowing manufacturing innovations.
Nikon, by contrast was the first firm to guarantee uptime for its machines, which was a key marketing tool with US firms. In 1981, the company shipped only 20 wafer steppers, but by 1988 shipments had grown to over 500. Though best known for its cameras, Nikon's lithography machines are now its biggest source of revenue.
The past is no guarantee of future success, however. Because the pace of innovation is so fast, new market leaders can emerge unexpectedly. Since the 1960s, no firm has stayed on top of the microlithography market for more than five years, and market leadership has changed three times in the last 10 years. VLSI's Hutcheson says servicing and support problems are already causing cracks in Nikon's armor. Canon has replaced Nikon as No. 1 in customer satisfaction in the Japanese market, according to a recent VLSI survey.
Moreover, Dataquest, another Silicon Valley research firm, expects the world market for wafer fabrication equipment to double over the next five years, from $5.8 billion in 1989 to $12.3 billion in 1994, so sales opportunities will abound.
But some experts say that for US firms to compete a shakeout may be inevitable. ``This is a period of consolidation,'' says Dataquest's Krishna Shankar. ``Many American firms will either be weeded out or merged.'' With half the world market for equipment in Japan, and demand growing fast in other Asian countries and Europe, US firms must have a global sales and service presence. However, most are too small to shoulder the costs.
New US technologies
Sematech, the government-industry consortium formed to improve US manufacturing of semiconductors, should provide some new technologies to US firms. But the consortium has recently been forced to divert part of its own research funds to bolster R&D programs of some equipment suppliers. And a recent recommendation by the National Advisory Committee on Semiconductors that Sematech's budget be doubled to help equipment suppliers was not welcomed by the White House.
Given their capital shortages and needs for a global presence, many US firms will probably look to Japan for joint ventures, says Dataquest's Mr. Shankar. Weinig of MRC agrees, arguing that joint ventures will help both nations maintain strong equipment industries, and forge corporate ``partnerships'' that ensure Japanese equipment is available to American chipmakers.