Intel retakes lead after sliding

Shaken by foreign onslaught, chipmaker uses tough management

IN the mid-1970s, before Craig Barrett became chief operating officer of Intel Corporation, he visited the company's plant in Manila. It was a jolt.

Paint was peeling and the plant looked so shoddy (as did its productivity numbers) that Mr. Barrett confronted the plant manager. The manager's response: ``Look out the window, Craig. That's where our people live.''

Mr. Barrett was unmoved by the slums he saw, however. ``Let's go down to the InterContinental Hotel,'' he told the manager. ``Its employees have the same housing, same slums as the people you hire.'' Why did the hotel look so good? ``The management of the InterContinental Hotel,'' Barrett stated simply. The plant manager cleaned up his act - and so has Intel.

Unprepared for the onslaught of foreign competition in the 1980s, this premier United States computer chipmaker has refocused, reinvested in new products, and taken a commanding lead over its competitors. If some companies are battling back foreign competitors, Intel looks already to have won.

The secret? Tough management.

``We accept that people are coming after us,'' Barrett says. ``That just permeates our entire management style. If you stop and take three breaths and smell the roses ... what will happen to you?'' He ticks off the failures of once-mighty computer companies such as Wang Laboratories Inc., Digital Equipment Corporation, and IBM. ``Only the paranoid survive,'' he says.

Having lost its lead once, the management is not about to lose it again, Barrett says.

At the moment, Intel is busy battling an alliance of domestic chipmakers who are marketing a rival microprocessor called the PowerPC. Microprocessors are the central chips that run personal computers. Since the PowerPC chip is faster and cheaper to produce than Intel's more complex design, Intel is rushing to slash prices on its newest chip, the Pentium.

The result is a price war that has lowered computer prices far faster than a decade ago. When Intel introduced its 386-class microprocessor in 1985, it took five years before the price of 386-based computers fell below $3,000. Pentium-based systems have cracked that level within a year. One vendor, Dell Computer, is offering a Pentium system for just under $2,000.

Intel's aggressiveness is costly. By slashing prices on its new Pentium, the company is cutting into sales and margins of its previous-generation 486 chip. But Intel says it is willing to sacrifice sales to stay ahead technologically. In fact, it is speeding up the introduction of new chips.

It took Intel four years to replace the 386 with the 486 chip, and another four years to introduce the Pentium. But Intel is now working two generations of chips ahead. It plans to offer its next-generation chip, code-named the P6, next year - only two years after it introduced the Pentium.

Intel's rapid rise is part of a larger renaissance among US chip companies. Last year, the US became the world's leading supplier of semiconductors again, after losing out to Japan in the mid-1980s.

The US is also out front in making the machinery that produces the chips - a position it also lost briefly to the Japanese in the late 1980s.

``The fact is: This industry has recovered,'' says Larry Sumney, chief executive officer of the Semiconductor Research Corporation in Research Triangle Park, N.C. He points to collaborative research carried out by his own research consortium, similar collaboration on the manufacturing end by the Sematech consortium, increased government funding, and the refocusing that has taken place within American corporations.

Even the Japanese are having trouble keeping up with US semiconductor companies. ``Japan doesn't have a quality advantage,'' Barrett says. ``Japan doesn't have a cost-advantage anymore.'' Instead, they are stuck in a difficult middle ground between US companies, which are turning out high-end semiconductors, and South Korean enterprises, which are gobbling up the low end of Japan's market.

The situation is a far cry from what existed a decade ago.

At that time, Japanese chipmakers humiliated Intel, turning out such high-quality, low-cost dynamic random-access memory (DRAM) chips that Intel had to leave the business. That departure was an especially cruel blow to the company, which had invented DRAMs in 1971.

``The DRAM was a call to arms,'' Barrett recalls. ``It woke us up to the realities of competition. You couldn't just do high-tech for high-tech's sake. You had to watch out for people who wanted to buy their way into the market.''

The 1980s jolted the management of many US industries out of their complacency - perhaps for good, Mr. Sumney says. ``We will suffer from other problems in the future, but we will not suffer from that one.''