As appeared in U.S.News and World Report, March 25, 1996 (1004words)

Why the Chip is Still the Economy's Champ

After 25 years, microchips generate more growth than ever

BY WARREN COHEN

In the history of technology, new inventions have always ushered in new economic and political eras. The steam engine gave rise to railroads and the birth of the Industrial Revolution, while the automobile brought forth the age of mass production. But the mighty microprocessor, America's latest cutting-edge invention, is invisible to most people. It does very little on its own, yet when harnessed properly, it has the ability to manipulate and store vast amounts of information, allowing consumers and companies to communicate in ways never before imaginable. And all this power, which is rippling throughout the economy today, comes from a tiny device no bigger than a human fingernail.

This chip was created 25 years ago by engineers at Intel, then a small California start-up. A type of semiconductor, the microprocessor was originally designed to be the brains for simple pocket calculators. But it wasn't long before engineers and software programmers began using the chip in computers and a growing number of electronic items and other products--from cellular phones to stereos to automobiles. The semiconductor market, which grew 41.7 percent last year, has cooled a bit in recent months, but its long-term strength is unmistakable. The $144 billion industry hasn't suffered a sales decline since 1985, and the worldwide spread of chips has enabled the market to double in size every five years. Analysts estimate that there are now more than 10 billion microprocessors in use around the world, two for every living person. Declares Michael Malone, author of The Microprocessor--A Biography: "No product in history has ever penetrated society that fast."

Microprocessors are vital engines of growth in the new information-based economy. In the past 25 years, computers and semiconductors have become America's fourth-largest manufacturing industry. Vladi Catto, chief economist at Texas Instruments, predicts that semiconductors alone will generate 5 percent of total economic growth between now and the end of the decade. And technology-equipment spending, which encompasses semiconductors, instrumentation, computers and telecommunications equipment, accounts for a record 3 percent of gross domestic product today. One reason for this sales boom: information technology boosts productivity.

In some cases, however, these productivity gains can result in layoffs. During the current expansion, companies have invested in technology rather than workers. Orders for high-tech equipment increased 20.5 percent last year, while demand for industrial machinery grew just 7.1 percent. The proliferation of new technology, such as robotics, has already contributed to the loss of 378,000 manufacturing production jobs over the past decade. And computers are expected to help eliminate at least 200,000 office positions over the next 10 years.

Jobs. Despite the corporate downsizing and diminished job prospects in traditional sectors of the economy, microprocessors have helped create significant employment opportunities. A quick survey of some industries shows just how rapid this technology-driven job growth has been. Semiconductor companies, for example, employ nearly 300,000 workers, while payrolls at computer and software firms now total about 1 million people. Cellular-phone companies have hired 60,000 workers over the past decade, and Internet service firms are growing at a blistering pace. Meanwhile, to satisfy global demand, 22 major chip factories are under construction in the United States. Each project employs about 2,000 construction workers. In the long run, says Toronto-based economist Nuala Beck, high-wage, technology-related job creation will outpace technology-related job destruction. Beck estimates that the new positions, which are being filled by knowledge workers, now represent one third of total U.S. employment.

One of the most dramatic benefits of the new technology may be the way it is changing the production of goods. Collecting customer data allows companies to deviate from the mass-production model, where a standard, assembly-line item is supposed to satisfy all consumers. With the new "mass customization," products can be efficiently made for a single person. At 19 Levi Strauss stores, for example, shoppers don't have to pick bluejeans off the shelf. Instead, customers can be measured for an exact fit and choose options, such as the color of the jeans. The data are then sent via modem to the Levi's factory in Tennessee, where the custom jeans are stitched. Approximately three weeks later, the perfect-fitting jeans are mailed to the consumer. The measurements are also kept on computer for future orders. Analysts believe that many goods will soon be delivered in a similar fashion because customized production cuts overhead. There is little waste, for instance, and inventory and transportation costs decline dramatically.

The auto industry provides another example of how semiconductors have infiltrated factories today. In 1984, the average car contained $60 worth of semiconductors; today, that figure is $170, and it is expected to hit $400 by decade's end. Chips reduce emissions flow from a car's engine, improve fuel economy and control features such as antilock brakes. They also improve engineering. In the new Lincoln Continental, for instance, advanced engine microprocessors have replaced 150 wires and reduced the car's weight by 8 pounds.

Power. Chips will continue to alter the manufacturing process as they become even more powerful. This property has been dubbed "Moore's Law," after Intel cofounder Gordon Moore, who accurately predicted that microprocessors would double in performance every 18 months. In the real world, this means that a modern workstation has the equivalent power of all computers that existed in the 1960s. Another factor behind the surge of microprocessors in manufacturing is price. Today's potent chips are quickly becoming cheaper as each new and improved version is introduced.

With four of the top 10 chip companies, America should expand its lead in semiconductors in the coming years. The nation's trade deficit swelled to $110 billion in 1995, but trade in high-tech goods ran a $13 billion surplus. This strength will help U.S. enterprises sell these advanced products to rapidly modernizing countries around the world. Analysts predict that within the next decade, Asia, Latin America and Eastern Europe will consume $100 billion worth of chips. The Renaissance lasted 200 years and the Industrial Revolution for 150 years, but the microprocessor will still be going strong long after the millennium.