The Code

by Margaret O'Mara

  And that’s what gave Jerry Sanders heartburn. America still made the vast majority of the world’s microchips, but Japanese firms were gaining—fast. Even worse, Japan had started hacking into the most technologically advanced end of the business. Silicon Valley had invented and commoditized 4K RAM memory chips, but now the state of the art was 16K RAM. Japanese firms now accounted for more than forty percent of that market.3

  More ominously, Japan had started a government-funded research consortium a few years earlier to develop the next wave of super-powerful chips, cramming many thousands more integrated circuits on one sliver of silicon to create computers thousands of times more powerful than any seen before. The method they employed to do this was Very Large Scale Integration, or VLSI. Developed in the second half of the 1970s by a group of researchers led by PARC’s Lynn Conway and Cal Tech’s Carver Mead, the methodology simplified and standardized the process Intel had used to build its “computer on a chip,” and—by making design separate from manufacturing—made it scalable. The how-to manual Mead and Conway released on VLSI became simply known as “the book” by a worldwide tribe of computer scientists, and their method had massive ripple effects on the industry. Chip design no longer required the resources and manpower of a large corporation; it now could be executed by small teams. Standardized, complex chip designs increased automation of assembly plants. Making design a stand-alone process gave rise to a whole set of companies that simply manufactured chips of others’ design. Most were in Asia.4

  Sanders had a big personal stake in the new super-chips, having positioned AMD as a merchant supplier to telecommunications companies whose equipment demanded powerful new designs. It frustrated him to no end that technology developed in California—and freely licensed to Japanese companies, he’d admit—now had propelled Japan to a commanding position in the market.5

  Even more frustrating: thanks to the Japanese government, these competitors could seriously undercut the Valley firms on price. It was the latest manifestation of the vaunted “Japanese miracle” that had been giving America and Europe economic heartburn for two decades, and that already had brought the U.S. steel and auto industries to their knees. Long the home of cheap transistorized electronics, Japan had set out to move up the microchip value chain several years earlier using what the American press called “Japan, Inc.”: the immensely powerful Ministry of International Trade and Industry, or MITI. The new VLSI consortium was one example of MITI’s power to jump-start markets by huge investments of R&D dollars.

  Like autos, steel, and textiles before it, semiconductor production became a Japanese “target industry,” pumped up by special programs and trade subsidies designed to increase global market share. Along with creating the semiconductor research consortium, MITI heavily subsidized production and early sales of next-generation chips, enabling “forward pricing”: companies would reduce prices early on, in order to capture a large share of the market. On the U.S. side of the Pacific, the strategy looked like dumping: illegally flooding the market with cheaper chips, then raising prices once a customer base had been established.6

  Ironically, the problem originated in part from the venture-capital crunch of the 1970s, which had prompted many U.S. firms to license their inventions to Japanese companies in exchange for desperately needed cash. That had been fine, of course, when the U.S. commanded the market for sophisticated chips. Now, some of the industry’s most valuable intellectual property was in Japanese hands.

  Adding to the pile-on was a growing problem of theft. As microchips, and the technology behind them, became more valuable, there had been a wave of high-profile chip heists across the Valley, the stolen goods funneling into a growing “gray market” where buyers rarely asked questions about where things came from. The details were as wild as any Hollywood crime caper. Over the Thanksgiving holiday in 1981, thieves managed to get past closed-circuit cameras, motion detectors, and several layers of wire mesh to swipe half a million programmable circuits from the Sunnyvale warehouse of advanced chipmaker Monolithic Memories. Gray-marketers and foreign buyers had covert meetings in the San Francisco airport, where they traded stashes of chips for suitcases stuffed with cash. The leader of one of the Valley’s biggest electronics crime rings was nicknamed “One-Eyed Jack.” Firms in countries under trade embargo restrictions—East Germany, China, South Africa—became particularly eager customers, adding a national security dimension to the problem. Rumors swirled that one of the biggest buyers of stolen Valley chips was the KGB.7

  Ever since creating the Semiconductor Industry Association (SIA) in 1977, the chipmakers had been trying to get Washington to pay attention to their problems. As had Regis McKenna, whose Pittsburgh roots had given him a keen understanding of how a place could be hugely successful in one generation and in sharp decline in the next. The Californians testified before Congress, supplied industry data to federal regulators, and even bent the ear of Washington Post publisher Katherine Graham when she came out to one of McKenna’s carefully curated industry dinners with key journalists. Noyce, who had decided to step back from the day-to-day running of Intel, turned over the bulk of his time to the cause, commencing a perpetual shuttle to D.C. to plead the case to lawmakers. It was the hyperkinetic inventor’s version of “retirement.”8

  At first, even the dash and charisma of Bob Noyce had a hard time breaking through. Politicians didn’t know RAM from ROM, and it was hard to convince them to care about jobs that might be lost in the future when so many American jobs were disappearing right now. Detroit had cut 30 percent of its production. More than 200,000 autoworkers were unemployed. In October 1979, Chrysler CEO Lee Iaccoca had come, hat in hand, to Congress to plead for over a billion dollars in federal loan guarantees to keep his beleaguered company in business. Despite some reluctance—this is a “con job on Congress!” railed Florida Republican Richard Kelly—lawmakers gave Chrysler what it wanted by Christmas.9

  In contrast, Silicon Valley was a boomtown, from the bustling assembly lines at the chip fabrication plants to the overflowing cubicles at growing personal-computer companies. It was a landscape of factories without smokestacks, without unemployment, with sunshine and opportunity. Life was so good that people had the luxury of not paying much attention to the national news. Many didn’t even bother to subscribe to a newspaper. “Everyone was on a high-tech surfboard,” quipped Larry Stone, a councilman in prosperous Sunnyvale, a city that had such a huge budget surplus that its leaders contemplated giving $1 million in tax revenues back to its residents.10

  High stock valuations reflected Wall Street’s assessment that Valley chipmakers presented a case of how to do American manufacturing right. Detroit’s Big Three had been slow to wake up to overseas competition, and they had balance sheets weighed down by pensions and benefits for a large and aging workforce. Not in the Valley. Firms like National and Intel had offshored production early, setting up factories in East Asia more than a decade earlier. Nearly half of the industry’s employee base already was overseas. High labor costs at home weren’t an issue, either, as the chipmakers had unwaveringly opposed worker unionization. A bad deal for blue-collar workers made for a great deal for the chip companies, enabling them to upsize and downsize their manufacturing workforce as demand shifted.

  Plus, not every American chip company felt the same way about the looming threat. Japan’s surge opened up a rift between Silicon Valley and the rest—reflecting fundamentally different ecosystems and ways of doing business that separated the Californians from their competitors in other parts of the country.

  The leading Valley firms had never strayed far from their stripped-down start-up roots. The idea that technology would stay within one company went against the grain. When talented engineers job-hopped, aided by those California non-compete laws, technology often came with them. It was “a structure that allows a hundred flowers to bloom,” as Intel’s Andy Grove put it: entrepreneurs leaving bigger firms to start their own co
mpanies. But start-ups didn’t have the bandwidth to do next-generation research. The region’s de facto industrial research lab had federally funded operations at Lockheed and NASA Ames and Stanford and SRI—and the government wasn’t making the kind of research investments it used to.11

  In contrast, deep-pocketed, diversified companies like IBM, RCA, and Texas Instruments had the cash to pour into research and into new plants. TI also had established a formidable market advantage after catching Japanese firms violating one of its patents in the late 1960s: in exchange for letting Japan license the technology, TI had wrangled permission to make chips there—the only American company allowed to do so. By 1980, it had three wholly owned factories in Japan.

  TI President Fred Bucy, a sharp-tongued Texan, had little patience for the Californians’ whining about Japanese competition. “Those fellows on the West Coast sort of have schizophrenia,” he chided. Everyone had the same opportunity to get ahead of the Japanese competition. The Californians were just too slow on the uptake. “To say we shot our way into Japan is hokum.” If Silicon Valley wanted to complain to Washington, it was on its own.12

  For the semiconductor CEOs, the first months of the Reagan Administration were no better than they’d been under Carter. In fact, things seemed to get worse. “Washington was really a disaster,” remembered Regis McKenna. Instead of asking questions about how and why the Japan problem might be fixed, tetchy congressmen only wanted to know “why we don’t get any money out of people” in Silicon Valley when it came time to fundraise. The chipmakers couldn’t believe that their corporate star power hadn’t been enough to change lawmakers’ minds.13

  The more time the Valley executives spent in Washington, the more they realized what a heavy lift it was going to be to change lawmakers’ minds on the issue. “The Japanese challenge the traditional politics of this country,” observed one. “The Republicans are confounded by this new breed of international competitor and don’t realize we need a new kind of private enterprise system where government points the way to the future. The Democrats don’t know how to deal with an industry like ours that is non-union.” Tax cuts weren’t going to be enough. Nor were blanket subsidies for all industries, regardless of whether they were growing or shrinking—an approach gaining currency in some Rust Belt Democratic circles.

  “We all believe in motherhood and the open market,” an exasperated Charlie Sporck told a reporter. “I dig the laissez faire, free market approach myself but the world isn’t going along with it.” It was time for America to pick “target industries” just like Japan had done with MITI, providing research support and some carefully applied trade protection. It was time to have an industrial policy.14

  AS GOES CALIFORNIA

  Jerry Brown had problems too. The bids for space satellites and dalliances with Eastern philosophy had left him with a kooky reputation, amplified when he adopted a vegetarian diet and started dating pop singer Linda Ronstadt. His parsimony when it came to public spending had put him too far to the right of many Democrats on policy, and his personal image had put him too far to the left for most anyone else. The man one reporter called “a 41-year-old oddity” returned to dusty Sacramento after his defeat in the 1980 presidential primaries, in search of a new issue to define him, increase his approval ratings, and—please oh please—help him shake that “Governor Moonbeam” label.15

  Enter, once again, Regis McKenna. Coming off another inconclusive lobbying jaunt back East, he decided to make a call on the governor to explain the dire situation of the Silicon Valley chipmakers—a problem that put all of California’s high-tech miracle in a precarious state. You don’t need to hear this just from me, McKenna insisted as he sat amid the plush carpet and wood paneling of the governor’s office. You need to come down for dinner with the industry people.

  Soon enough, all were gathered around the comfortable dinner table at McKenna’s Sunnyvale farmhouse, telling the governor what he should do. It was a blending of high-tech generations, linked by the marketing guru who had made all of them into business-world celebrities: Bob Noyce next to Steve Jobs, Charlie Sporck across from Jerry Sanders, and, down the table, a rising-star software-company CEO named Sandra Kurtzig, one of the few female founders in the Valley. No surprise that Noyce and Sporck would clear space on their calendars, but only Regis McKenna could persuade the Valley’s apolitical personal-computer crowd to take an evening out of their lives for dinner with the governor. Things went well. “Jerry was very smart,” remembered McKenna, “and he really bought into it.”16

  It didn’t take long for signs of the tech titans’ influence to appear. “We can’t be complacent,” Brown said in his January 1981 State of the State address. “Other states are trying to persuade many of our high technology companies to expand outside California and the industries themselves face aggressive competition.” Amid cutbacks and flatlined spending, he proposed a $10 million microelectronics research center at UC Berkeley, to be paid for jointly by state and corporate funds. As if to underscore Brown’s warnings about interstate rivalry, Massachusetts and North Carolina soon followed with plans for similar research projects.17

  In the autumn of 1981, right on the heels of Reagan’s signing of his game-changing economic package, Jerry Brown formed a “California Commission on Industrial Innovation,” appointing a Regis-curated list of bigwigs to come up with how California could get ahead of D.C. on economic policy. The commission was a curious mix: joining luminaries like Dave Packard, Sporck, and Jobs were university chancellors and labor union representatives. No Southern California aerospace moguls or Inland Empire fruit kings. Silicon Valley, it seemed, would be the place from whence all of California’s future industrial innovation would spring.

  It seemed like a pretty logical strategy. After all, the places that weren’t Silicon Valley already were trying to figure out how to become Silicon Valley. State and local politicians’ quest to replicate the region’s sun-dappled magic had continued nearly unabated ever since Charles de Gaulle’s tricolor-festooned limousine cruised through Palo Alto twenty years earlier. The booming fortunes of companies like Apple, combined with the increasingly desperate state of U.S. manufacturing, spurred a raft of fresh efforts to turn crumbling Rust Belt cities and foreclosure-wracked farmland into gleaming Silicon Somethings.

  Across the nation, state funds were tight, but leaders eked out budgetary room to fund research parks and high-tech campuses, which mushroomed up in nearly every state. Everyone assumed that if you built it, tech would come. And that it would save the day—even if, as HP CEO John Young observed, tech was merely the nation’s ninth-largest industry. “If the eight above are sick, it obviously isn’t going to offset the aggregate of all of them. It isn’t magic.” Never mind Young’s dour observations. State and local officials were ready for some magical thinking. “We’re the Brooke Shields of the economy,” chuckled Howard Foley, chief lobbyist for the Massachusetts High Technology Council.18

  The comparison to America’s favorite teenage supermodel was an apt one. Politicians might not know a microchip from a motherboard, but they began shifting spending priorities toward an industry that was glamorous, young, and seemed to be brimming with economic potential. And as state initiatives surged, officials started realizing that microchips were the fuel that kept the whole thing going. Now that Japan had 40 percent of the 16K RAM chip market and a staggering 70 percent of the 64K market, its threat to the American electronics industry was no longer a hypothetical.

  So, when the members of the California Commission on Industrial Innovation issued their final report in September 1982, politicians had started listening.

  The commission members strongly endorsed a “picking winners” approach—one based on the presumption that America’s winners were, unquestionably, high tech companies. In keeping with the complicated relationship Silicon Valley had with the government that had helped create it, their language mixed celebrations of free enterprise with p
leas for more-aggressive state planning and subsidy. “California shows that the spirit of risk-taking is alive and well in America,” the report proclaimed, and government “must do whatever is necessary to guarantee that our cutting-edge industries—like semiconductors, computers, telecommunications, robotics, and biotechnology—retain their competitive lead.” The need for action didn’t stop at the state border: “This California experience must become America’s experience in the 1980s. The United States must set out on a conscious path of fostering technological innovation and creativity if we are to foster increased economic growth.”

  Having pegged the stakes this high, the commission delivered an eye-popping list of fifty policy recommendations necessary to make this entrepreneurial juju happen, ranging from doing away with capital gains taxes to renegotiation of international trade agreements. There wasn’t unanimity in the ranks—rumbles of laissez-faire dissatisfaction from conservatives like Packard tempered the more expansive calls for new spending and protectionism. But the overarching tone and ambition were clear: Jerry Brown and the Californians had decided to write a blueprint for a national industrial policy.19

  Brown’s blueprint was perfectly timed. The recession lingered; Reaganomics’ big tax breaks and spending cuts hadn’t delivered the boost the White House promised. The new-breed Democrats were enjoying increased airtime and attention from party elders. For pols like Paul Tsongas, Gary Hart, and Tim Wirth, an agenda that blended free-market principles with education and training strategies was an unquestioned political winner: they represented places filled with college-educated constituents, who had Apples in their family rooms and copies of Japan as Number One on their bedside tables. Industries such as semiconductors and personal computing presented themselves as just the kind of business enterprise this small-is-beautiful crowd wanted to see: entrepreneurial, meritocratic, and without a smokestack in sight.