Santa Clara Valley Historical Association

The Seeds of Regenerative Growth

Clouds cast dark shadows over Silicon Valley in the mid-'80s, prompting fear its heyday had passed. But beneath the surface gloom, seeds of regenerative growth sprouted.

A slump struck the U.S. semiconductor industry in 1985, and in 1986 it worsened. In the same era, U.S. minicomputer makers, largely based in Massachusetts, began to reel under the impact of workstations and powerful personal computers.

Such U.S. semiconductor leaders as Intel, AMD, and National Semiconductor withdrew from memory chip production in 1985. Beset by a glutted market, signs of formidable Japanese manufacturing prowess, and alleged Japanese dumping of standard chips, they conceded defeat in commodity manufacturing. They lost heavily, but not so heavily as Japanese firms remaining in the field.

U.S. executives' pleas for government protection against dumping culminated in the U.S.-Japan Semiconductor Trade Agreement of 1986, which set floor prices on memory devices and encouraged opening of Japanese markets to U.S. products. In hindsight, this pact has been widely regarded as too little, too late -- or entirely ill-founded. It caused a DRAM shortage that hurt U.S. computer firms. Some observers saw the U.S. semiconductor industry as facing extinction by the Japanese, much as the U.S. automobile, steel, and consumer electronics industries had been eclipsed.

Another cloud dimmed the space frontier. By the end of 1985, the U.S. space shuttle fleet -- boasting four orbiters after Atlantis made its 1985 maiden flight -- had logged 21 missions. Then on January 28, 1986, disaster befell the program when Challenger exploded shortly after launch, killing six astronauts and teacher Christa McAuliffe. The tragedy rocked public confidence in NASA and caused a two-year hold while the manned flight program was overhauled.

IBM was nibbled by swarms of clone PC manufacturers, but Big Blue and other U.S. systems firms brought lustrous new entries of their own to the marketplace. In 1985, Hewlett-Packard introduced what was destined to become its most successful single product: the HP Laser Jet printer.

In 1986, IBM announced the first commercial RISC (reduced instruction set computer), the RT/PC workstation. A year later, IBM introduced its PS/2 personal computer with 3.5-inch disk drives, which would soon supplant 5.25-inch floppy disks as the industry standard.

Intel's 80386 microprocessor, a high-speed 32-bit chip announced in 1985, was brought to market first in 1986 by Compaq Computer, which beat IBM to the punch. Earlier, Intel had licensed AMD as a second source for its microprocessors, but in the case of the 80386, Intel sought to remain the sole supplier -- a stand that resulted in protracted litigation.

Apple Computer continued to ride high with the popular Macintosh. In software, desktop publishing came to the fore. Aldus Corp.'s PageMaker for the Mac became a top seller.

Meanwhile, Silicon Valley start-ups grew in mass. SynOptics Communications, a company commercializing Xerox PARC technology, was founded in 1985 by Andrew Ludwick, Ronald Schmidt and Shelby Carter. Its fiber-optics local area networks enabled computers to talk on the telephone.

Early '80s start-ups were making their competitive impact felt. Within five years, the collective revenues of the new CMOS firms exceeded Intel and AMD CMOS revenues put together and afforded the United States a large base of advanced CMOS production skills. Such innovations prompted William J. Perry -- engineer, venture capitalist and future Secretary of Defense -- to predict a hundredfold drop in the cost of computing over the next decade.

Along with new products and technology, changes were afoot in the way Silicon Valley worked. Drawing lessons from the giant semiconductor firms era of sterile isolation, companies began to return to the close collaboration that marked the Valley in the 1960s and '70s. For example, in 1987, Hewlett-Packard opened its foundry for the first time to an outside firm, Weitek, a design specialist supplier.

At about the same time, some recent start-ups were building minifabs designed for short runs at modest cost. Contract manufacturer Flextronics completed its evolution from consignment to turnkey operations. Solectron developed surface-mount technology, enabling the use of smaller, two-sided circuit boards. Apple advanced desktop technology.

Sematech formed in 1987 as an industry-government partnership to share the cost of developing new micro-electronic devices such as ASIC and RISC chips. A decision to locate this semiconductor manufacturing institute in Austin, Texas, disappointed Silicon Valley. Foes of a U.S. industrial policy decried big federal investments in it.

Globally, change was also evident. In a breakthrough stemming partly from Mikhail Gorbachev's rise to power, the Soviet Union and the United States agreed in 1987 to dismantle ballistic missiles with ranges of 300 to 4,000 miles. The long Cold War showed promise of winding down.

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