Computers: Why the Party's Over: Higher Sales of More Powerful Computers Propelled the Industry's Success in the Late 1990s. but the Tide May Have Turned for the Worse-At Least for Computer Manufacturers

The computer- and semiconductor-manufacturing industries are central to any inquiry into the reason for the acceleration of US productivity after 1995, since together they account for roughly one-quarter of the national productivity growth jump (0.3 out of 1.33 percentage points). (1) Both sectors already had very high productivity levels and growth rates. Productivity growth in computer manufacturing accelerated from an annual rate of 27 percent (1987-95) to 60 percent (1995-99); in semiconductors, it rose to 66 percent, from 43 percent. More powerful computers Nearly all of the productivity acceleration in computer manufacturing stems from the industry's success in selling more powerful computers, a phenomenon reflected in labor productivity data, not higher prices, since powerful computers become cheaper as technology develops. (2) More powerful computers resulted from technological advances in inputs, such as microprocessors, memory, and storage devices, and from the integration of new components, such as CD-ROMs and modems, rather than from operational changes undertaken by computer manufacturers. Even so, they were credited with much of the gain in productivity. Productivity growth rates, though very high when measured by units per employee, accelerated only slightly after 1995. The improvement was due mainly to the simplification of computer architectures and the standardization of components. In every generation of computers, the number of semiconductor chips per computer has decreased. That decline, together with the integration of many analog and digital components into a few standardized semiconductors, reduced the time required to build a computer and thus made labor more productive. So did the outsourcing of many of the industry's lower-productivity manufacturing activities to overseas manufacturers. Competition upstream But the more fundamental question is what made it possible for the upstream component industries, and in particular the semiconductor industry (which includes microprocessors), to accelerate their performance improvement? In semiconductors, the bulk of the labor productivity jump resulted from an acceleration in the performance of the mix of chips sold (Exhibit 1). (3) That acceleration could be attributed to a shortening in the time cycle of Moore's Law, (4) but our research indicates that the increasingly frequent release of new chips is the prime explanation: as the interval between generations of chips shortened, the average performance of a mixed basket of chips moved closer to that of the most cutting-edge ones. Reinforcing this trend, consumers increasingly favored cutting-edge chips. The decision to increase the frequency of new-chip releases was a strategic response by Intel, primarily to stronger competition from Advanced Micro Devices. Before 1996, AMD had produced several Intel chip designs under a disputed contract. In January 1996, the dispute was settled, and each company's strategy evolved in its own way. Intel concentrated on Pentium designs, which AMD had no legal right to produce, and AMD upgraded its microprocessor design capabilities by purchasing NexGen. By 1999, AMD had reduced--from over 18 months (in 1995) to almost nothing--the lag time between Intel's release of a new design and the release of AMD's competing chip (Exhibit 2). That prompted Intel to schedule more frequent releases, bringing the market closer to the cutting edge. Intel's decision was partly facilitated by improvements in the economics of producing new chips. The production of microprocessors is highly sensitive to environmental disruptions (from dust, for example), flaws in chip design, and mistakes in the fabrication process. These factors can strongly affect the yield of usable chips. For a new design to be economically viable, 70 to 90 percent of the chips produced must be of marketable quality. …