The Man Behind the Microchip Page 21

  Convincing the Camera and Instrument board to go along with the idea was another matter entirely. Noyce and Richard Hodgson, who also met with Levine, formally proposed a Hong Kong assembly plant at the January 1964 directors’ meeting and were “practically thrown out of the board room,” as Hodgson put it. Hong Kong was undergoing massive development in the early 1960s, and the site proposed for a new semiconductor facility was then completely under water—soon to be reclaimed from the bay by the government. Objections about risk and cost and the untrainability of the women in Hong Kong were aired. Noyce and Hodgson persisted, reiterating the tax benefits and precedents in other industries. The board ultimately agreed to a small-scale experiment.11

  Beginning in mid-1965, Fairchild shipped silicon wafers from Mountain View to a Hong Kong plant that would produce 100,000 planar transistors per week with the help of a staff of about 12 technical and 135 production employees, each of whom was paid one dollar per day—less than their American counterparts earned in an hour. Later, when wages in Hong Kong neared $2 per day, Semiconductor added production facilities in Korea, where the daily wage was 80 cents.12

  The Hong Kong facility was the first in a string of some half-dozen offshore assembly plants for Fairchild. By 1965, Fairchild had facilities in five countries—Italy (SGS), Hong Kong, England (an SGS plant in London), Australia (a small lab near Melbourne), and the United States. By 1968, Fairchild employed some 4,000 people in 145,000 square feet of plant space outside the United States—40 times more people and 11 times more building space than five years earlier. More impressive, production output at Semiconductor’s overseas facilities had jumped some 500 times in five years.13

  Other major semiconductor firms, including Motorola, Philco-Ford, Signetics, Transitron, and Raytheon, quickly imitated the offshore move. In less than half a decade, the American semiconductor industry went multinational. By 1974, the 32 semiconductor firms that together represented 75 percent of American production had 69 assembly plants in other countries.14

  The Hong Kong plant offers a perfect example of how Noyce encouraged innovation and built a culture at Fairchild that welcomed the novel thought or unusual solution. He was not directly responsible for this particular idea, but he gave an employee both the freedom to pursue it and the promise of a thoroughly engaged audience when he wanted to discuss it. Once Noyce believed in the idea himself, he pushed it up the corporate hierarchy with little concern for how foolish it might have sounded or made him appear. Later, the once-crazy idea became standard operating procedure for the entire industry.

  The management culture Noyce inspired provided rich sustenance for the young, bright, self-motivated types that Semiconductor courted so feverishly. For these men, fresh out of school and eager to make their mark, the freedom to do their jobs in the way that they believed best was a fantastic reward. To have Noyce, the head of the company, listen carefully to their ideas was exciting in itself.

  As a manager, Noyce remained calm in the face of potential disasters that had others panicking. “I remember we lost the process at the diode plant,” said one employee. “We simply lost it. I mean, it’s like all of a sudden the bread came out of the oven and it was all flat. It just didn’t work any more…. I said to Bob, ‘My god, this is terrifying. Oh my god, we’re going die.’ He said, ‘Oh no. We’ll figure it out.’ … He was completely relaxed about it; it was wonderful [and] calming to me.” Noyce could also be brutally competitive—he reputedly sought out the Shockley booth at an industry tradeshow so that he could tell his former boss, “We [Semiconductor] are going to bury you”—but for people on his team, that was an asset.15

  Noyce’s greatest strength as a manager was that he gave people confidence in themselves. Partly this came from the undeniable evidence of his own success—a technical man who made it big on the strength of raw intelligence and unusual ideas—and partly this derived from the potent combination of responsibility and support that he offered his employees. For many of the young men at Semiconductor, Noyce was the guiding light he had himself sought in Shockley many years before.

  THE MID-1960s were a time of feverish work for Noyce. In September and October, 1965, for example, he held separate meetings with representatives from seven electronics companies, one magazine, three brokerage houses, and one military subcontractor. He also spent ten days in Japan and two more in Syosset. He recorded far fewer internal meetings, presumably because several were standing commitments and more were informal unscheduled gatherings in corridors and conference rooms. He did note a staff meeting on alternate Mondays, several meetings with both Bay and Sporck, and two with Moore and Grinich on patent protection issues. Noyce spoke to technical audiences and to financial analysts, at the inaugurations of plant sites—Fairchild opened nine between 1960 and 1967—and to two junior achievement groups.16

  By this time, Noyce was well known within the industry. His children remember him waking them at 6:30 in the morning to watch him in his first television appearance, a debut so fleeting that no one recalls its context. Whatever the audience, Noyce’s demeanor in his talks was invariably calm, benignant, and irreproachably informed. At home, though, he sweated over his speeches, and on the rare occasions when his children saw him speak, they noted their father’s foot tapping or knee jiggling behind the lectern even while, to the audience, he appeared to be casually leaning against it.

  In four years, he made 13 trips out of the country—mainly to Europe for SGS and to Hong Kong and Japan. Roger Borovoy, Noyce’s friend and Fairchild’s lead counsel, asked Noyce to join in any Japanese licensing negotiations. Noyce drove a hard bargain—one note to himself says “ask for 10% [of licensing royalties], settle for 7”—but Borovoy believed Fairchild “could get much more out of the Japanese if I had Noyce with me…. Noyce is God in Japan.” Between 1964 and 1967, Noyce went to Japan every year, most often in connection with NEC, the firm to which Fairchild had granted exclusive Japanese licensing rights to Fairchild planar and integrated circuit patents. In 1963, Noyce and Borovoy negotiated the contract. The 1965 visit seems a goodwill gesture. In 1966, Noyce helped NEC defend its exclusive integrated circuit license. When Fairchild’s Japanese licenses expired in 1981, they had generated in excess of $100 million dollars for the company.17

  Among the most pressing of Noyce’s concerns during the first half of the 1960s was how to keep his employees motivated. The pace of companies spinning off from Fairchild had hardly abated since the horrible year of 1961, when half the founding team left. By 1965, at least seven companies had been started by people who had left Fairchild—so many that people collectively shorthanded the spinout firms the “Fairchildren.” “I’m concerned now with how to copy the original incentive idea that motivated the original eight [of us],” Noyce said in 1964. “We wanted to leave [Shockley] for professional reasons but soon discovered that [we] could become very, very wealthy by leaving, and that became its own motivation.” With management in Syosset still refusing any broad granting of stock options and controlling the overall budget of the semiconductor division, Noyce felt his hands were tied.18

  Noyce also turned his attention again to the integrated circuit, though by now his interest had shifted from the technical aspects of the device to its business implications and its place in the electronics market. An air force experiment had dramatically demonstrated the efficiency and performance capabilities of integrated circuits when the military branch compared two experimental computers from Texas Instruments. One computer contained 8,500 separate discrete components, the other 587 integrated circuits. The integrated-circuit machine performed as well as the discrete model 150 times its size and almost 50 times its weight.19

  Fairchild had introduced its first commercial integrated circuit, a flipflop (the basic storage element in computer logic), at an industry convention in New York in March 1961. Throughout that convention, Fairchild had conducted seminars twice daily in the ballroom of the St. Moritz Hotel, strictly limiting attendance to a select group o
f attendees who had been carefully screened for potential ties to rival firms. Fairchild announced that this circuit was just the beginning; five other members of the “Micrologic family” were in the works, and together the six devices were all anyone would need to build an entire computer logic system.20

  Computers had been an important market for Fairchild ever since its first sale to IBM in 1957. At that time, computers were still a novelty. The general public received its introduction to the computer in 1952, when CBS television used a UNIVAC 1 machine to predict the outcome of the presidential election. In 1954, a corporation bought the first computer to be used for business (rather than purely scientific) applications. Analysts marked the occasion by predicting that only about 100 corporations worldwide would ever need a computer. In the ensuing years, demand for the machines grew rapidly. To take but one example, in 1956, the federal government had a total of 90 computers. Ten years later, it would have 7,575 machines and a computer budget of $115 million.21

  In the earliest years of the 1960s, computers were hulking machines, called “mainframes,” with various tape drives, consoles, 900-pound hard drives (with a measly two megabytes of memory), and storage devices that together took up entire rooms. The invention of the transistor had shown the way to marginally smaller and significantly more reliable machines driven by silicon, not vacuum tubes. The integrated circuit would accelerate this trend.

  Fairchild’s 1961 Micrologic introduction generated enormous interest among computer experts and others. The Fairchild booth was jammed throughout the show. The Micrologic devices graced the cover of the daily paper issued at the conference, the New York Times ran two articles on Micrologic, and the leading semiconductor industry journal ran five more. Within weeks of the introduction, Philco, which had been in discussions with Fairchild about acquiring a license for planar transistors, began lobbying for an integrated circuit patent instead. Noyce and his patent attorney had one word reply: “tough.” It was planar or nothing. Fairchild was not yet ready to permit anyone else to build its newest innovation.22

  The reaction was gratifying but did not translate into widespread adoption. By the end of 1961, Fairchild had sold fewer than $500,000 of its Micrologic devices, which were priced at about $100 apiece. Texas Instruments, the only other major supplier, was having such problems selling integrated circuits that it cut prices from $435 to $76 in 90 days. The move had little effect.23

  Customers’ objections to integrated circuit technology abounded. The devices were extremely expensive relative to discrete components—up to 50 times the cost for comparable performance, albeit in a smaller package. Many engineers, designers, and purchasing agents working for Fairchild’s customers feared that integrated circuits would put them out of work. For decades, these customers had designed the circuits they needed from off-the-shelf transistors, resistors, and capacitors that they bought from manufacturers like Fairchild. Now Noyce wanted to move the Fairchild integrated circuit team into designing and building standard circuits that would be sold to customers as a fait accompli. If the integrated circuit manufacturers designed and built the circuits themselves, what would the engineers at the customer companies do? Moreover, why would a design engineer with a quarter-century’s experience want to buy circuits designed by 30-year-old employee of a semiconductor manufacturing firm? And furthermore, while silicon was ideal for transistors, there were better materials for making the resistors and capacitors that would be built into the integrated circuit. Making these other components out of silicon might degrade the overall performance of the circuits.24

  As late as the spring of 1963, most manufacturers believed that integrated circuits would not be commercially viable for some time, telling visitors to their booths at an industry trade show that “these items would remain on the R&D level until a breakthrough occurs in technology and until designs are vastly perfected.”25

  But Noyce was excited by the prospects for this cutting-edge technology. In October 1961, he called the microcircuit “the most important ‘Fairchild First’ [the in-house term for invention] to date.” One year later, Noyce was asking for “more effort on μckts [microcircuits]” at his staff meetings. The next month, it was “μckts must be here!” A brief flurry of customer interest in 1962 proved little more than a frustration because Fairchild could not build circuits in any real quantity. “Inventory on all [Micrologic] short,” Noyce wrote with great irritation in May 1962, “13K [orders] backlog.” He worried that Signetics, the company started by the former Fairchild integrated circuit team, might be first in line to meet customer demand if it ever materialized in any serious way. He hoped to “find evidence of Signetics infringement [of Fairchild patents],” presumably so Fairchild could send them a nasty “cease and desist” letter and keep the integrated circuits market for itself.26

  By the end of 1962, Noyce had to admit that the integrated circuit had thus far had “less than a 10 percent effect on our conventional sales.” He called his staff together on a weekend to discuss “how to get more effort on micro ckts [circuits].”27

  Fairchild worked hard in the early years following the integrated circuit’s introduction to overcome customers’ objections to the device. To give customers some sense of control, the company (as well as others, such as Motorola) permitted buyers essentially to custom design the circuits using methods very similar to what had been standard operating procedure for discrete components. To counter concern about reliability, Fairchild stepped up its in-house testing methods and advertised the strenuous conditions under which the integrated circuits had already been proven to perform. The company also participated in several widely publicized reliability tests sponsored by the federal government, including experiments for the Apollo project. Fairchild advertised that the high up-front costs of integrated circuits might be recouped in reduced costs for space (up to a 95 percent reduction), design and assembly (up to a 90 percent reduction), and power (up to 75 percent reduction). Fairchild even designed its integrated circuit packages to make the devices look and feel like discrete components.28

  The need to crack the commercial market became more acute after 1962, when Defense Secretary Robert McNamara instituted changes in military procurement and cost-cutting measures that began shrinking the defense market for integrated circuits. (The military would move from buying 100 percent of integrated circuits produced in 1962 to 55 percent of those made in 1965.) Meanwhile, Signetics, the early Fairchild spinoff, began to have some success in the high-end commercial market, which provided equal doses of hope and fear to Fairchild.29

  “The selling of new ideas is really an engineering problem,” Noyce once said. To him it was obvious that despite their other purported concerns about the integrated circuit, customers’ primary objection to the new technology was its cost. Had not every other issue been handled? Nor would a glitzier marketing program turn more customers to the integrated circuit. The buyers were extremely technically sophisticated. If their technical objections had been met and they still were not buying, the problem had to be the price tag.30

  Accordingly, in the spring of 1964, Noyce made a little-discussed but absolutely critical decision. Fairchild would sell its low-end flip-flop integrated circuits for less than it would cost a customer to buy the individual components and connect them himself, and less than it was costing Fairchild to build the device. Gordon Moore calls this move “Bob’s unheralded contribution to the semiconductor industry,” and it shocked most competitors into a frigid “no comment” until they made the decision to match prices. When a Fairchild distributor asked Noyce if combining the function of several transistors on one integrated circuit and then selling that integrated circuit for less than any one of the individual transistors was a sure path to corporate suicide, Noyce simply smiled in a way that made it clear he did not think so.31

  In effect, Noyce was betting Fairchild’s bottom line against two hunches. He suspected that if integrated circuits could make their way into the market, customers would prefe
r them to discrete components and would begin designing their products around the new devices. He also calculated that as Fairchild built more and more circuits, experience curves and economies of scale would enable the company eventually to build the circuits for so little that it would be possible to make a profit even on the seemingly ridiculously low price. Gordon Moore has said that Noyce’s decision to lower prices to stimulate demand so that the production volumes could grow and the cost of production be decreased accordingly was as important an “invention” for the industry as the integrated circuit itself. “It established a new technology for the semiconductor industry [that holds true] to today,” he explained. “Whenever there’s a problem, you lower the price. That was as revolutionary a concept to people within Fairchild as it was to the customers.”32

  To explain how volume can more than make up for price cuts, Noyce liked to use a book-printing analogy. The first copy of a book, taken by itself, is extremely expensive because the printer must buy equipment, typeset, proof, and otherwise ready the document for printing. Once the process is in place, however, every additional copy is relatively cheap because the investment in materials and equipment for the original printing is fixed. Moreover, the more copies made, the lower the per-copy price, since the original investment can be amortized over more items. Noyce was betting that once Fairchild artificially lowered the price for integrated circuits, the resulting demand would be so high that his “per-copy price” would actually fall below the price they charged.33

  “I doubt if Noyce was very sure [price cuts were] the best way,” Gordon Moore says, but Noyce was never one to shy away from a calculated risk. Fairchild was already infamous for its aggressive pricing, and integrated circuit prices were already falling in the spring of 1964. Noyce had an intimate familiarity with the realities of the experience curve. Between 1959 and 1962, for example, Fairchild’s production of its LPHF transistor line increased 660-fold, with costs only quintupling. The price of the transistor fell by 90 percent, yet revenue grew ten-fold and profits tripled. Noyce suspected something similar could happen with integrated circuits if only he could convince customers to buy them.34