Staging a Power Surge.

ELECTRONICS SEEKS TO SPARK THE ECONOMY

Calling all inventors! What the U.S. economy needs are really good ideas that can be turned into good products at really good prices that will persuade nervous consumers to open their wallets and nervous corporate purchasing agents to open their checkbooks.

Inventors are out there, trying their best to come up with ideas, and there are others--people and companies--trying to help the inventors. Some of those trying to help may be surprises.

In New Mexico, Sandia National Laboratories, once charged solely with the super-secret job of developing weapons to protect the United States, is now encouraging its scientists to develop ideas that can be turned into private companies. Sandia is not far from Technology Ventures Corp. (TVC), a foundation started by Lockheed Martin to commercialize technology and bring in venture capital to teach scientists and engineers how to run their new companies. In eight years, TVC has helped create 40 businesses and 3,000 jobs and attract nine venture capital firms to a state that had no venture capitalists.

Some of the ideas being suggested sound off the wall. A company in Zurich, Switzerland, called Think Tools has developed software that mimics human thought to help corporate executives evaluate ideas. If the idea fits a corporate culture and capability, the software predicts ease of acceptance by showing the idea revolving contentedly around a corporate universe center. If the idea is too goofy, the software displays a universe careening out of balance.

To understand how a bad idea can be illustrated, imagine consumer electronics manufacturer Sony considering manufacturing an electronic coffee maker.

Keeping the economy rolling

Some ideas could be revolutionary. Cell Robotics International Inc. of Albuquerque, N.M., is a small company that has developed a laser that vaporizes the skin. The Lasette's practical use is to painlessly draw blood, replacing the needles that diabetics use for blood-sugar testing.

These are the kinds of electronics ideas that must succeed if the economy is to recover. Analysts agree that until consumer and corporate spending pick up, most industries, no matter how technical or simple, will either coast along or founder.

Through 2000, the consumer electronics industry was doing its share to keep the economy humming. According to the Consumer Electronics Association (CEA), sales from manufacturers to dealers in 2000 were $90.1 billion, a 10 percent increase from 1999.

CEA has predicted that consumer electronics sales in 2001 will be $95.6 billion, but it remains to be seen how many layoff victims--or people who are frightened of layoffs--will buy new toys.

Some products, however, are catching on with consumers. For instance, Brian O'Rourke, Cahners In-Stat Group senior analyst, predicts a 40 percent growth in the market for "Internet appliances," a segment that includes tablet-like devices that use wireless/cellular connections to surf the Web.

Ascom of Bern, Switzerland, is trying to drum up interest in @Pad, a tablet-size device that downloads at the speed of an ISDN line, uses built-in encryption to fend off hackers and operates only when activated by the owner's "smart card."

As cool as such devices seem, the reality is less exciting, he says.

"Internet appliances have potential, but it is a very small market, so even a 40 or 45 percent growth is on a fairly low base," O'Rourke says. "A couple of the leading manufacturers are already out of business. Consumers have just not been adopting these appliances as readily as the manufacturers expected.

"I think the health of the electronics industry depends on consumer confidence, which has been pretty good even though it seems to be slipping into recession.

"A lot depends on what happens in Japan and Western Europe."

Western Europe seems to be doing its part in trying to use electronics manufacturing to bring back its own and the world's economy. According to location decisions reported for Switzerland, that country's reputation as a competitive place for technology companies to do business is growing. In the last two years, Semtech, Transwitch, ADTRAN, Compaq, Cisco Systems, Ingram Micro, MessageMedia, eBay--major U.S.-based electronics or Internet-related companies--have set up either European headquarters or regional offices in one of Switzerland's 26 cantons (states).

Besides regularly ranking high for business competitiveness, Switzerland is attracting companies seeking a work force accustomed to technology. A recent study found that 66 percent of all Swiss had access to computers. Only the Netherlands had a higher access, with 71 percent of the Dutch having computers in 2000.

And though it appears that the era of every product having its own dot.com commerce site has come and gone, the companies remaining are working to overcome the public's reluctance to share their credit-card numbers over the telephone. Covadis, S.A., a Geneva-based company, is developing inexpensive, at-home secure payment terminals similar to department store credit-card readers and "electronic purses." The purses are credit cards that can be electronically loaded by consumers with cash values transferred from their bank accounts. At least 16 million electronic purses are in use across Europe.

The not-so-good times

Still, for all the good news about U.S. companies opening offices around the world, the bottom-line news for most electronics companies is not good. Companies that regularly reported double-digit increases in sales each quarter in 1999 are reporting single-digit sales increases and sometimes double-digit sales declines for the later quarters of 2000 and the first quarters of 2001.

The EBN Electronics Buyers Index is a monthly gauge of business conditions in the industry, with 50 set as the midpoint between industry expansion and contraction. The index went from 43 in January 2001 to 33 in February 2001. Industry analysts looking at the drop are divided over whether the current conditions are temporary because of oversupply of inventory or a problem that will take months from which to recover.

When Dell Computer and Cisco Systems make their first-ever corporate cutbacks, Intel cuts 5,000 workers and pay raises, Phillips Electronics cuts its capital spending by 30 percent and lays off 7,000 workers, and Procter & Gamble cuts 9 percent of its work force because of weak sales, the country is entering a sobering time.

What this means to the electronics industry is reduced spending by their customers on new or upgraded technology. That could translate into reduced, delayed or canceled needs for new electronics facilities and support buildings.

The industry's biggest spenders have always been the semiconductor manufacturers. A chip factory or fabrication plant can cost $3.5 billion to build and equip. Several new fabs were announced in late 2000 and early 2001, though some researchers, such as Lehman Brothers, predict that capital spending by semiconductor companies will be down at least 10 percent for 2001.

"The question is: How many of the projected expansions will be followed through with in light of the economic slowdown? I would call almost every major project into question," says Klaus Rinne, a semiconductor analyst with the Gartner Group market research company.

"Some may just put one line into a fab. Bear in mind that 70 percent of the cost of a fab is in equipment. They may evaluate their positioning to see if there is a strategic reason to bring the plant fully on line."

 15 Top Electronics Job Creators (2000)  Company                      Location                  New Jobs  Marconi Communications       Warrendale, Pa.            1,000 Atmel                        Irving, Texas              1,000 Lucent Technologies          Austin, Texas              1,000 Key Tronic                   McAllen, Texas             1,000 Conexant Systems Inc.        Newport Beach, Calif.        700 Applied Materials Inc.       Austin, Texas                670 JDS Uniphase Corp.           Melbourne, Fla.              600 Dominion Semiconductor       Manassas, Va.                600 GE Power Systems             Maquoketa, Iowa              500 Pelco                        Clovis, Calif.               500 Ortel Corp.                  Irwindale, Calif.            500 Agilent Technologies         Santa Rosa, Calif.           450 Lucent Technologies          Upper Macungie, Pa.          350 Philips Broadband Networks   Manilus, N.Y.                332 Tyco Printed Circuit Group   Austin, Texas                325  SOURCE: Plants Sites & Parks' Bizsites database 

Electronics companies have been taking different routes on whether to expand or cut. For instance, Intel has not officially cut its $7.5 billion capital improvement budget. Intel has slowed expansion on a new semiconductor facility in Ireland and stopped construction on a $124 million, 10-story design center in Austin, Texas.

Some companies are closing existing facilities while bringing others fully online. Texas Instruments announced in April that it would lay off 2,000 employees and close a computer chip factory in Santa Cruz, Calif. The company is also cutting capital spending by 30 percent. But the company is also bringing a 300-millimeter fabrication plant into pilot production in Texas.

Some electronics companies are having fine years--at least so far.

IBM's 2001 first quarter earnings were up 18 percent over the same time period last year, though chairman Louis Gerstner remains cautious.

"We are no better than others in predicting how the current economic uncertainty will play out, and IBM is certainly not immune to broad cutbacks in customer spending. However, with recent results, we expect we will outperform most of our competitors in whatever markets we are in," he says.

IBM is planning ahead. The company signed a contract with Sony to supply nearly $4 billion in chips over three years for Sony PlayStations. The chips will be designed in a $400 million design center that IBM is developing in Texas. Once designed, the chips will be manufactured in a $3 billion chip plant that is being built in East Fishkill, N.Y.

Other semiconductor factories remain under construction, including two big ones in the United States. Intel is still building a 300-millimeter semiconductor fabrication factory in Rio Rancho, N.M. That community, just outside Albuquerque, N.M., has had an Intel presence since the 1980s and is home to a 200-millimeter Intel fab that is yards away from the new construction. Infineon Technologies, based in Germany, is building a 300-millimeter plant next to its 200-millimeter plant east of Richmond, Va.

In the Far East, manufacturers who operate chip "foundries," factories for the contract manufacturing of semiconductors, have seemingly not cut back in their capital budgets. As one of its 300-millimeter fabs is nearing completion in Taiwan, United Microelectronics Corp. (UMC) broke ground in April 2001 on a $3.6 billion, 300-millimeter chip plant in Singapore; Infineon is a minority owner.

Chartered Semiconductor Manufacturing in Singapore is building a $3.5 billion, 300-millimeter fab that will become operational in 2002. Chartered operates five other fabrication plants in Singapore.

John Docherty, senior vice president, manufacturing operations and technology at Chartered, says, "Despite short-term uncertainty around the softening in end-market demand, we feel it is important to invest prudently now for the long-term needs of our customers, while retaining our flexibility to respond to their capacity requirement for other production technologies."

Analysts say is it is natural for the foundries, which sell their chips at lower costs because of lower operating and labor costs, to expand despite current market conditions.

"I think the message is that the foundries are doing relatively better, and the operative word is `relatively,'" says Steve Cullen, a semiconductor analyst with Cahners In-Stat research services.

 Top Capital Investment (2000)  Company                          Location                (U.S.$)  Atmel                            Irving, Calif.          $1 billion Fujitsu Network Communications   Richardson, Calif.      $500 million Ritek Corp./MRT Technology       Ontario, Calif.         $100 million Kingston Technology Co.          Irvine, Calif.          $100 million Digidesign                       Daly City, Calif.       $53 million JDS Uniphase Corp.               Melbourne, Fla.         $43.8 million Ortel Corp.                      Irwindale, Calif.       $35 million Marconi Communications           Warrendale, Pa.         $24 million Lucent Technologies              Upper Macungie, Pa.     $22.7 million CFM Technologies Inc.            Exton, Pa.              $14 million  SOURCE: Plants Sites & Parks' Bizsites database 

"It seems like everyone but the foundries have slowed down. The key is that manufacturing semiconductors is difficult. What the foundries bring to the party is that they focus on the process and look for ways to be competitively priced.

"The traditional semiconductor manufacturers focus on their future markets. They are large enough that they can look for an edge by controlling their own manufacturing."

Cullen expects the electronics industry to start picking up in the second quarter, but not before the semiconductor industry experiences a 15 percent drop in revenues brought on by reduced demand complicated by excess inventory. Computer demand will come back, but communications and networking demands look bad, as evidenced by Cisco's admission that it has a large backlog in inventory.

Cost savings found at the highest technology levels, producing more semiconductors at lower costs, could be the real key to driving the U.S. electronics market back to being a top industry performer.

Saving money on locations

Henry Becker, managing director of Infineon Technologies Richmond, says the 3-year-old, 200-millimeter fab (known as White Oak Semiconductor until January 2001) near Richmond, Va., has driven down costs 30 percent a year.

He attributes the savings to continuous improvements in shrinkage--getting more chips on the same size wafer. He says the decision to locate a new plant next to the existing one was an easy decision. "We looked for three things: quality of life, what the location was able to offer to our employees; an educational infrastructure that supported higher education and with which we could partner in order to produce the technical people we need in order to be successful; and finally we needed a local government that had the attitude, desire, resources and ability to understand our needs." When the new fab opens, 1,000 workers will be added to the 1,750 the company already employs.

 Top Projects by Square Footage (2000)  Company                        Location                   Square Ft.  Atmel                          Irving, Texas               624,000 Intel                          Austin, Texas               600,000 Tyco Printed Circuit Group     Austin, Texas               400,000 Mag Instruments                Ontario, Calif.             300,172 East Penn Manufacturing Co.    Richmond Township, Pa.      300,000 Cooper Lighting                Ontario, Calif.             250,000 Philips Communication & Security Systems             East Lampeter Twp., Pa.     213,000 JDS Uniphase Corp.             Melbourne, Fla.             200,000 Lucent Technologies            Upper Macungie, Pa.         143,000  SOURCE: Plants Sites & Parks' Bizsites database 

Becker also says that the infrastructure needs of the plant were carefully considered. Thanks to water coming from the city, from the nearby James River, supply was never an issue. Natural gas lines also run into Infineon's park. Virginia Power feeds the plant through two different substations to reduce chances of power bumps.

The Commonwealth of Virginia recognized the need for highly trained computer engineers, so it authorized Virginia Commonwealth University (VCU) to develop a microelectronics program in its engineering school. Backed by a multimillion-dollar gift from a private donor interested in helping Richmond get the fab, VCU created the school with the blessings of the other engineering schools in the state university system. In addition to providing graduates for Infineon to recruit, the school also trains existing employees. Becker estimates that he has 150 employees at VCU.

VCU feeds 20 area high-tech companies with graduates, and those companies--such as Infineon, Applied Materials and Cisco Systems--reciprocate by donating equipment and adjunct professors to show the students how the equipment is used in the real world of semiconductor processing.

Out in Rio Rancho, N.M., Intel is spending $2 billion on Fab 11, the third fab plant the company will have built on its property. Intel has about 5,000 employees there, with another 1,000 expected to be hired once the fab goes on line in 2002.

The availability of water in Rio Rancho was one factor that persuaded Intel to build there. Before moving to New Mexico, the company made sure that its future site sat over an adequate aquifer.

"Water was one key. If there hadn't been enough water or if we hadn't been able to conserve and reuse it, that would have been a deal breaker," says Terry McDermott, Intel's media relations manager.

Intel has invested $15 million in water conversation over the last six years and expects to use no more water once the third fab comes on line than it does today.

About 85 percent of the water is pre-treated on site and then returned to the Rio Grande River.

Electronics--whether they come from multibillion-dollar factories or small workshops--will be one of the major engines to pull the economy back into line.