IBM’s Industrial Policy : Competitiveness: Big Blue is extending a helping hand to the nation’s besieged semiconductor industry--providing vital support for America’s technological base.

ARMONK, N.Y. —  The waning days of 1989, a year that generated more than its share of disappointment and frustration for International Business Machines, brought yet more bad news to the world’s largest electronics maker.

Perkin-Elmer, a Connecticut company that is sole supplier of a sophisticated semiconductor-manufacturing machine critical to future generations of practically every IBM product, was entertaining an attractive bid to sell the division making that machine to a Japanese company.

The potential sale of such vital technology to Nikon Corp. of Japan triggered alarms in California and Washington but perhaps nowhere louder than here at IBM’s pastoral Hudson Valley headquarters. Within weeks, IBM--which had already committed nearly $100 million to help Perkin-Elmer develop the equipment sought by Nikon--moved to back the efforts of a small and virtually unknown California company, Silicon Valley Group, to buy the Perkin-Elmer unit.

That sale is expected to be completed later this month. And IBM, in perhaps its most aggressive effort yet on behalf of a valued U.S. supplier, has been behind the deal every step of the way. According to several sources familiar with the still-confidential agreement, IBM has agreed to become a minority partner in the company purchasing the Perkin-Elmer unit. Further, IBM is said to have made future purchase commitments as well as promises to underwrite future development efforts of the new venture.

The Perkin-Elmer deal is the freshest and most dramatic example yet of an unprecedented IBM crusade that, if successful, could help to revitalize the embattled U.S. semiconductor industry, respond to Japanese competition and, not incidentally, help Big Blue build better and more competitive computers.

IBM’s goal is to bolster the technological base, manufacturing expertise and overall competitiveness of its key semiconductor suppliers in the United States. Some call it IBM’s private “industrial policy.”

In contrast to previous years--when the computer maker and world’s largest user of semiconductors preferred to chart a course independent of its suppliers, competitors and industry counterparts--the IBM of today is actively forging joint ventures, research and development deals and other arrangements with a variety of U.S. and European companies to promote and spread technological innovation and competition.

The deals focus on the semiconductor industry because, as a basic component of all computers, chips are “technology drivers,” the most important ingredients of electronic devices. Further, semiconductor makers have been the hardest hit by Japanese manufacturers who targeted the chip industry nearly two decades ago as a strategic market to master.

Over the past decade, the U.S. share of the worldwide semiconductor market has steadily eroded from virtual domination to the point where the Japanese are predicted to become the world’s biggest suppliers of all types of chips by 1992.

IBM’s initiative, never before seen by U.S. semiconductor makers, includes deals that range from licensing technology to memory chip makers to thwarting undesirable acquisitions of key technology. These deals are being made fast and furiously, almost at the rate of one every six weeks during the past six months.

“This is a radical departure for IBM,” acknowledged company President Jack D. Kuehler. “Traditionally we don’t even talk about our competitors and our industry. But we are now because it’s a necessary part of the process. And we’re doing it because of our increasing awareness of what we need to do to remain competitive.”

Added another IBM executive: “It’s a new way of thinking for IBM. We recognize today that we can’t be a success in a vacuum.”

Although alliances and joint research, development and sales ventures are commonplace in many industries these days, they are becoming increasingly important and prevalent among high-technology companies because of the rapidly escalating costs and competition to make the latest breakthroughs at submicron distances and in speeds recorded in billionths of a second.

“IBM used to pride itself on its self-sufficiency, and the borders around the company were high and secure,” explained Robert B. Reich, professor of political economy at the Kennedy School of Government at Harvard University. “But that’s all breaking down under the pressure of global competition. IBM is actually a newcomer to the alliance game.”

In addition to representing a major break from traditional IBM behavior, the new strategy is forcing IBM executives into a delicate, global balancing act. On one hand the company, whose name is synonymous with the toniest of Wall Street’s blue chip crowd, wants to pump up a beleaguered and slumping U.S. semiconductor industry. But those efforts cannot undermine its own highly profitable and fast-growing $9-billion-a-year Japanese subsidiary, or provoke retaliatory measures abroad. It’s a high-wire trick of no small proportions.

But if successful, analysts say, the strategy can have effects far beyond IBM and the U.S. semiconductor industry by providing an example for other global industries of what can be accomplished when the largest player in an industry decides to take a lead and actively serve as an umbrella to protect suppliers and other partners.

Though IBM executives publicly disavow such pronouncements, analysts--unconstrained by the need to remain politic--say the real, unvarnished intent of IBM’s policy is to ensure that it will not become a victim or hostage to the growing abilities of its huge Japanese competitors.

“IBM clearly fears that the Japanese are going to eat our lunch,” says Ulrich Weil, a Washington high-technology industry analyst. “They have a clear business policy to hold the Japanese at bay. In fact, IBM is saying that if the U.S. government can’t or won’t stop the continuing erosion of the U.S. semiconductor and technology industry, then it will stop it.”

That view of IBM’s strategy is gaining momentum throughout the semiconductor and electronics industries. In some quarters, it is even being spoken of as an industrial policy that stands in place of one the industry has been unsuccessful at persuading the Bush Administration to adopt.

“IBM perceives a problem and realizes that if it doesn’t act, no one will,” says Kenneth Flamm, an economist and senior fellow at the Brookings Institution, a Washington public policy think tank. “It knows that if it doesn’t act now, by the time the U.S. government gets off its derriere, it will be too late.”

Unlike previous years when Big Blue was openly feared and distrusted by competitors, suppliers and industry colleagues who worried that its moves could easily crush smaller companies, the giant is now scoring points with some of the most unlikely judges.

Rep. Thomas Campbell (R-Palo Alto), a former Stanford University law and economics professor, calls IBM “Benign Big Blue” and praises the company as a “champion of American technology . . . and corporate cooperation.”

“IBM is doing a lot to help all of us,” says T. J. Rodgers, chief executive of tiny Cypress Semiconductor and an outspoken critic of government intervention in industry. “In a way they are playing Big Brother to the industry. And it’s a helpful Big Brother, not the ‘1984’ kind.”

Besides, adds Rodgers: “We need our Goliaths to fight the Japanese Goliaths.”

Back here in Armonk, such notions don’t play well. For its part, IBM says it remains content to view its strategy narrowly, and to focus on its immediate targets: ensuring that it has a steady source of the most advanced technology available anywhere on the planet and to balance the distribution of technological prowess among the United States, Europe and Japan.

“We want a nice balance and we want a healthy source of suppliers wherever we do business,” Kuehler said. “It’s not a nationalistic issue and it’s not a nationalism issue. It’s an issue of suppliers. We help them wherever they are.”

And right now, even Kuehler acknowledged, help is needed in the United States.

Kuehler said IBM fully recognized the precarious position of the U.S. semiconductor industry in 1986 after comparing the technology capabilities of American companies to those in Japan. That assessment, he said, became the basis for the company’s strong push to create Sematech, the semiconductor research and manufacturing consortium in Austin, Tex.

But even after Sematech opened its doors in 1988, Kuehler added, IBM realized “we had to do much more.”

The result has been a recent spate of activity, including the failed attempt last year to launch U.S. Memories, a cooperative designed to provide another U.S. source of dynamic random access memory (DRAM) chips, a product category where Japanese manufacturers hold 80% of the world market.

At the same time IBM was pushing U.S. Memories--its former executive Sanford Kane spearheaded the unsuccessful effort--the company was negotiating at least three key semiconductor deals.

In October, 1989, the company opened its new advanced semiconductor research facility in East Fishkill, N.Y., and announced that Motorola would be a partner in the center, the first time the company had accepted a competitor as a collaborator in its research labs.

The following month, the company stunned the semiconductor industry by announcing that it had licensed its state-of-the-art design and manufacturing technology for 4-megabit DRAMs to Micron Technology, a small semiconductor manufacturer and IBM supplier in Boise, Ida. Four-megabit DRAMs are the next generation of advanced memory chips, currently available in prototype form and expected to reach peak commercial production within two years.

And in January, IBM and Siemens, the huge West German electronics maker, announced that they would jointly develop a 64-megabit DRAM, a chip two generations removed from the most advanced currently available.

“We would like to see a healthier U.S. semiconductor industry and we want to work to maintain the health of the European electronics market,” Kuehler said. “We want a global balance.”

Who benefits from this strategy?

Clearly, if IBM is able to strike the balance it so desires, it wins valuable sources of supplies and accomplishes the primary goal of its entire effort.

And to the extent that its business partners win additional business from IBM or others, they stand to win. But at least some IBM partners aren’t being Pollyannas about their relationships.

“IBM is less interested in helping us become a world-class chip player than in helping themselves have a more diverse supply of chips,” says a Micron spokesman. “This is strictly business. There is no altruism here.”

And, analysts caution, IBM’s strategy shouldn’t be accepted as a real substitute for a U.S. industrial policy for the semiconductor industry.

“You can’t let the industry, and particularly one company, run the show,” said Flamm of Brookings. “It sees only its perspective. The government needs to take the big view.”

Added Steven Cohen, an analyst with SoundView Financial in Stamford, Conn.: “Without casting aspersions on IBM’s patriotism, the decisions the company is making are being made for sound business reasons. That they will increase U.S. competitiveness is a nice fall-out.”

IBM JOINS FORCES WITH . . .