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The crude oil of the 1980’s

On a chilly spring evening in Palo Alto, Bob Noyce, Jerry Sanders, and Charlie Sporck met under a sloping, pagoda-style roof. Ming's Chinese Restaurant was a staple of the Silicon Valley lunch circuit. But America's tech titans weren't at Ming's for its famous Chinese chicken salad. Noyce, Sanders, and Sporck had all started their careers at Fairchild: Noyce the technological visionary; Sanders the marketing showman: Sporck the manufacturing boss barking at his employees to build faster, cheaper, better. A decade later they'd become competitors as CEOs of three of America's biggest chipmakers. But as Japan's market share grew, they decided it was time to band together again. At stake was the future of America's semiconductor industry. Huddled over a table in a private dining room at Ming's, they devised a new strategy to save it. After a decade of ignoring the government, they were turning to Washington for help.

Semiconductors are the "crude oil of the 1980s," Jerry Sanders declared, "and the people who control the crude oil will control the electronics industry." As CEO of AMD, one of America's biggest chipmakers, Sanders had plenty of self- interested reasons to describe his main product as strategically crucial. But was he wrong? Throughout the 1980s, America's computer industry expanded rapidly, as PCs were made small enough and cheap enough for an individual home or office. Every business was coming to rely on them. Computers couldn't work without integrated circuits. Nor, by the 1980s, could planes, automobiles, camcorders, microwaves, or the Sony Walkman. Every American now had semiconductors in their houses and cars; many used dozens of chips daily. Like oil, they were impossible to live without. Didn't this make them "strategic"? Shouldn't America be worried Japan was becoming the Saudi Arabia of semiconductors"?

The oil embargoes of 1973 and 1979 had demonstrated to many Americans the risks of relying on foreign production. When Arab governments cut oil exports to punish America for supporting Israel, the US economy plunged into a painful recession. A decade of stagflation and political crises followed. American foreign policy fixated on the Persian Gulf and securing its oil supplies President Jimmy Carter declared the region one of "The vital interests of the United States of America Ronald Resin deployed the US Navy to escort oil tankers in and out of the Gulf George H. W. Bush went to war with Iraq in part to liberate Kuwait's oil fields. When America said that oil was a "strategic" commodity, it backed the claim with military force.

Sanders wasn't asking for the US, to send the Navy halfway across the world to secure supplies of silicon. But shouldn't the government find a way to help its struggling semiconductor firms? In the 1970s, Silicon Valley firms had forgotten about the government as they replaced defense contracts with civilian computer and calculator markets. In the 1980s, they crawled sheepishly back to Washington. After their dinner at Ming's, Sanders, Noyce, and Sporck joined other CEOs to create the Semiconductor Industry Association to lobby Washington to support the industry.

When Jerry Sanders described chips as "crude oil," the Pentagon knew exactly what he meant. In fact, chips were even more strategic than petroleum. Pentagon officials knew just how important semiconductors were to American military primacy. Using semiconductor technology to "offset" the Soviet conventional advantage in the Cold War had been an American strategy since the mid-1970s, when Bob Noyce's singing partner Bill Perry ran the Pentagon's research and engineering division. American defense firms had been instructed to pick their newest planes, tanks, and rockets with as many chips as possible, enabling better guidance, communication, and command and control. In terms of producing military power, the strategy was working better than anyone except Bill Perry had thought possible.

There was only one problem. Perry had assumed that Noyce and his other Silicon Valley neighbors would remain on top of the industry. But in 1986, Japan had overtaken America in the number of chips produced. By the end of the 1980% Japan was supplying 70 percent of the world's lithography equipment. America's share-in an industry invented by lay Lathrop in a US military lab- had fallen to 21 percent. Lithography is simply something we can't lose, or we will find ourselves completely dependent on overseas manufacturers to make our most sensitive stuff, one Defense Department official told the New York Timus. But if the trends of the mid-1980s continued. Japan would dominate the DRAM industry and drive major US producers out of business. The US might find itself even more reliant on foreign chips and semiconductor manufacturing equipment than it was on oil, even at the depths of the Arab embargo. Suddenly Japan's subsidies for its chip industry, widely blamed for undermining American firms like Intel and GCA, seemed like a national security issue.

The Defense Department recruited lack Killy, Bob Noyce, and other industry luminaries to prepare a report on how to revitalize America's semiconductor industry, Noyce and Killy spent hours at brainstorming sessions in the Washington suburbs working with defense industrial experts and Pentagon officials Killy had long worked closely with the Defense Department, given Texas Instruments role as a maior supplier of electronics for weapons systems IBM and Bell Labs also had deep connections with Washington that Intel's leaders had previously portrayed themselves as "Silicon Valley cowboys who didn't need anybody's help," an one defense official put it. The fact that Noyce was willing to spend time at the Defense Department was a sign of how serious a threat the semiconductor industry faced-and how dim the Impact on the US military could be.

The US military was more dependent on electronics-and thus on chips- than ever before. By the 1980s, the report found, around 17 percent of military spending went toward electronics, compared to 6 percent at the end of World War II. Everything from satellites to early warning radars to self-guided missiles depended on advanced chips The Pentagon's task force summarized the ramifications in four bullet points, underlining the key conclusions

  • US military forces depend heavily on technological superiority to win.

  • Electronics is the technology that can be leveraged most highly

  • Semiconductors are the key to leadership in electronics.

  • US defense will soon depend on foreign sources for state-of-the-art technology in semiconductors.

Of course, Japan was officially a Cold War ally-at least for now. When the US had occupied Japan in the years immediately after World War II. it had written Japan's constitution to make militarism impossible. But after the two countries had signed a mutual defense pact in 1951, the US began cautiously to encourage Japanese rearmament, seeking military support against the Soviet Union. Tokyo agreed, but it capped its military spending around 1 percent of Japan's GDP. This was intended to reassure Japan's neighbors, who viscerally remembered the country's wartime expansionism. However, because Japan didn't spend heavily on arms, it had more funds to invest elsewhere. The US spent five to ten times more on defense relative to the size of its economy. Japan focused on growing its economy, while America shouldered the burden of defending it.

The results were more spectacular than anyone had expected. Once derided as a country of transistor salesmen, Japan was now the world's second-largest economy. It was challenging American industrial dominance in areas that were crucial to US military power. Washington had long urged Tokyo to let the United States contain the Communists while Japan expanded its foreign trade, but this division of labor no longer seemed very favorable to the United States Japan's economy had grown at unprecedented speed, while Tokyo's success in high-tech manufacturing was now threatening America's military edge Japan's advance had caught everyone by surprise. You don't want the same thing to happen to semiconductors as happened to the TV industry, to the camera Industry, Sporck told the Pentagon. Without semiconductors you're in nowheresville."

This tidbit is from the book Chip War by Chris Miller

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