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T A B L E _ T A L K The Freudian send: Share your woeful tales of mis-sent e-mail in the Digital Culture area of Table Talk R E C E N T L Y The future is now -- and then Let's Get This Straight The paperless book Do loose lips sink chips? Paul is live - - - - - - - - - - BROWSE THE - - - - - - - - - -
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end Silicon Valley's boom? When the chips are down in Asia, the U.S. economy has a hard time escaping the pain. BY ANDREW LEONARD | In July, Taiwanese chip manufacturers slashed their spending on future expansion. So what? Amid the steady drumbeat of bad economic tidings from Asia -- nations plunging into recession, banks closing, currencies imploding -- the news failed to generate banner headlines in the United States beyond the ever-attentive semiconductor trade press. When prime ministers are resigning and unemployment is skyrocketing, what does one more glum data point of economic distress signify? Quite a lot, actually. Taiwan's high-tech sector is Asia's most faithful copy of Silicon Valley -- endlessly flexible, nimble, innovative and successful. A nation of only 21 million people, Taiwan is nevertheless the third-largest producer of high-tech products in the world, behind only the United States and Japan. Taiwan has also been one of the lone economic bright spots in Asia over the past year -- a poster advertising the vigor of Silicon Valley-style capitalism. But now Taiwan is finally feeling the pinch, and anyone who cares about the future performance of the U.S. economy should take heed. Many economic observers scoff at the notion that the Asian financial crisis will end the economic good times of the roaring '90s. Some even go so far as to claim that the high tech-spawned "new economy" has abolished the old boom/bust business cycle. Even now, as U.S. economic growth finally begins to slow, the true believers cite the current rock-bottom levels of both unemployment and inflation as evidence that a recession is nowhere in sight. But if the news from Taiwan proves anything, it is that in today's world, it doesn't matter how sound your own economy is. A seemingly insignificant event halfway around the world can wreak havoc right in your own backyard, in less time than it takes to say the word "globalization." Through no fault of its own, Taiwan's prize possession -- its silicon chip manufacturing industry -- is faltering. The "Asian flu" is spreading. Silicon Valley and, by extension, the entire U.S. economy, is next. Consider this sequence of events: The Korean distributor for the Oregon-based chip design company Lattice Semiconductor goes belly up late last fall, leaving Lattice with a backlog of unpaid-for inventory. Lattice is hurt; its earnings fall. But Lattice is a "fabless" semiconductor company -- it has no fabrication plant for actually manufacturing chips. Instead, Lattice contracts with a "pure-play foundry" in Taiwan that specializes in manufacturing chips for a horde of similar companies. Lattice -- along with a flock of other fabless design houses both in the United States and Asia -- cuts back on orders from the Taiwanese foundry operator, United Microelectronics Corp. (UMC). In turn, UMC decides to slow down its rate of expansion, to decrease the amount of capital spending allocated to building new "fabs." Next stop on the food chain is a return to the United States -- to the corporations that build the machines necessary to manufacture chips. Some of these companies (such as Applied Materials and Novellus) are Silicon Valley's biggest mainstays. But now they're in trouble: Taiwan is one of their biggest markets. The chain reaction doesn't stop there. In the semiconductor business, often every step of the production process is handled by a different independent entity -- the ultimate demonstration of successful outsourcing. There are enterprises that test chips fresh from the foundry for flaws, as well as companies that build equipment for diagnosing programming bugs in the chip-making machines. Now they're all suffering. From Korea to Oregon to Taiwan to Silicon Valley and back: Never before has high-tech manufacturing been as flexible, as international, as interconnected -- and as vulnerable. Says Michael Borrus, an economist at the University of California at Berkeley and co-director of the Berkeley Roundtable on the International Economy: "While most of [the Asian financial crisis] was driven by the withdrawal of financial flows and the move by investors to scrutinize their loans more closely, nonetheless the speed with which it was transmitted -- the reason this contagion spread as fast as it did -- is a function of how deeply these economies have become interconnected at the level of production." N E X T _ P A G E .|. Nobody saw the chip industry's "worst year ever" coming |
