As the explosive growth of the computer industry began in the early 1990s, Spencer Michels reported on how one of the core parts of that growth, the microchip industry, overtook its Japanese rivals with some help from the federal government.

JIM LEHRER: We turn now to a story about an American industry that managed to regain the advantage over its Japanese competitors. Correspondent Spencer Michels explains how.

SPENCER MICHELS: To go to work in the immaculate microchip factories of California's Silicon Valley, thousands of men and women must don specially cleaned clothing called "bunny suits" and pass through an air shower.

The product they make, the silicon microchip, is as sensitive to dust and impurities as the semiconductor industry is to competition from Japan. The chip, itself, is a thing fingernail- sized rectangle covered with layers of elaborate electric circuitry. Invented in America, chips are the sophisticated brains in the autos we drive, in the missiles and aircraft used in Desert Storm and in millions of personal and industrial computers that are increasingly part of our lives.

ANDY GROVE, CEO, Intel: The American semiconductor industry was very very successful in the '70s. It grew very rapidly. It became more and more important, and success always attracts competition.

SPENCER MICHELS: Andy Grove, on the left here, is president and chief executive officer of Intel, America's largest microchip maker. It supplies many of the chips used in the computers made by its main customer, IBM. Intel racks up annual sales of about $5 billion.

ANDY GROVE: We're introducing a revolutionary concept, something brand new in its powerfulness. It's a wonderful idea, and we know that when you can demonstrate this to somebody they love it.

SPENCER MICHELS: In the mid '80s, Grove's company and other American chip makers ran into trouble. While the Americans excelled at designing new and complex chips, manufacturing hadn't kept up with innovation. The Japanese began producing the American inventions faster and cheaper, eventually capturing most of the world market.

ANDY GROVE: Practically all American producers were losing money in the mid '80s. Certainly Intel was losing a lot of money. We shut down eight factories. We laid off about a third of our total staff in the mid '80s, so it was very, very painful.

SPENCER MICHELS: Grove believes American firms did well on their own at first, but they needed government help after huge Japanese electronics firms began competing with the aid of their government.

ANDY GROVE: We didn't need this help when we started because there were no Japanese on the scene. It is not possible to expect relatively in industry to be able to fight back when the competition is not only other companies but those companies are substantially bigger, and they are coordinated and funded and subsidized by a government.

SPENCER MICHELS: With the Japanese selling chips below their cost in the early '80s, U.S. chip makers demanded Washington act on several fronts. Silicon Valley lobbied for enforcement of anti-dumping laws, and that worked, according to Michael Borrus, political economist at the University of California at Berkeley.

MICHAEL BORRUS, Economist: The U.S. talked tough and did back it up when the Japanese were continuing to so-called "dump," sell below their production costs, President Reagan backed up his own trade negotiators and the American industry by, if you'll recall, slapping sanctions, tariffs on certain Japanese products coming into the U.S., and it was the first case of significance in which the Japanese had really experienced retaliation on the part of an American president. It sent, I think, a very strong message.

SPENCER MICHELS: America also forced the Japanese to allow U.S. chip makers to sell some of their product into the vast previously closed Japanese market. That's helped some, but recently the American industry has complained anew that the Japanese still maintain a market that's inhospitable to U.S. chips.

The most dramatic U.S. Government intervention came five years ago with the founding of Sematech in Austin, Texas. Sematech is a consortium of semiconductor and electronics companies working together to design and test state of the art chip making equipment. The U.S. Government through the Defense Department contributes $100 million a year, an amount matched by the members who get the benefit.

BILL SPENCER, CEO, Sematech: We focused in the past on military supremacy, and we had one particular enemy, and that was the threat of worldwide communism.

SPENCER MICHELS: Bill Spencer, the CEO, says the original justification for Sematech was to ensure that the U.S. would lead in the development of advanced weaponry using computer chips.

BILL SPENCER: The military decided about six or seven years ago that being dependent on foreign sources for those chips was an untenable situation, and so they participated for that reason.

SPENCER MICHELS: In an extremely fast moving industry, Sematech developed machinery that was immediately profitable for U.S. chip makers and machinery suppliers. A company called Applied Materials is the largest equipment maker. The firm's president believes that by providing technology for companies like his, Sematech will keep the whole semiconductor industry on shore. Applied Materials Jim Bagley.

JIM BAGLEY, President, Applied Materials: If you continue to lose the infrastructure for your industry, ultimately it affects the industry. The industry become the non-competitive. And I think that's what would have happened to the semiconductor industry. As the equipment industry disappeared, the semiconductor industry in the United States would have gotten their manufacturing equipment at best second to their leading competitors, which would have been the Japanese.

SPENCER MICHELS: The industry has engineered a significant business turnaround. In the eyes of many observers, the U.S. strategy of Sematech and tough trade policy appears to have worked, along with a concentration on making highly profitable microprocessor chips. Industry analyst Michael Borrus.

MICHAEL BORRUS: I wouldn't say out of the woods, but the industry is in an obviously stronger position. It's far more competitive than it was five years ago, even three years ago when you've got the recipe for, really for the first time a significant American industry coming way back from very far down against the best competitors in the world, their Japanese counterparts.

SPENCER MICHELS: New data shows that for the first time since 1985, the semiconductor industry has captured a larger share of the chip market than Japan. Today Intel alone employs 25,000 workers worldwide, equal to its earlier high, and some sources say the firm will make a profit of a billion dollars this year. Several other chip firms in this $60 billion industry are also rebounding, including Advanced Micro Devices.

JERRY SANDERS, CEO, Advanced Micro Devices: We needed to get parity there. Sematech has enabled us to get parity so the Japanese could no longer out invest us, because they're not awash in capital. They can't out produce us because their productivities are no better than ours, and that means we now fight on a global basis on innovation.

SPENCER MICHELS: Jerry Sanders, the CEO of Advanced Micro Devices, is one of the most outspoken leaders in Silicon Valley.

JERRY SANDERS: I'm a Republican by persuasion and an entrepreneur by experience. I don't favor a lot of government involvement. I think the only reason that Sematech made sense was the fact that our external trading partners were basically pummeling us by using their government's capital in an unfair way. And we have to respond to that.

T.J. RODGERS, CEO, Cypress Semiconductor: I got to get us off this premise that we sit here, that somehow high-tech guys like me need government is wrong.

SPENCER MICHELS: T.J. Rodgers, the head of Cypress Semiconductor, is a lonely voice in the semiconductor industry. Here he's settling a lawsuit with a competitor. His firm recently announced 400 layoffs at this plant. Rodgers doesn't believe Sematech should get credit for the industry turnaround. He believes the consortium discriminates against small companies like his using taxpayer money to fund private research to benefit big firms.

T.J. RODGERS: We have people start, why should we be giving suckers to 300-pound kids?

SPENCER MICHELS: Rodgers says that two of the original fourteen members of Sematech quit because it wasn't worth their money.

T.J. RODGERS: The 12 that are left, you know, went for the pork, and they got it. Now they want some more. The government isn't supposed to take care of us. We're supposed to take care of ourselves. And to think that we're going to solve all these intricate problems by having government, you know, running the economy like a puppet on strings is absurd.

JERRY SANDERS: I disagree with T.J. that it's pork. I think that it's a reasonably efficiently run activity because half the money is ours. And I think that when you have half the money that's your own, you tend to pay very close attention.

SPENCER MICHELS: Government help to the chip industry constitutes what could be called a U.S. industrial policy. That's a phrase much avoided by the Bush and Reagan administrations for ideological reasons. But in Bill Clinton's Washington, industrial policy may be accepted and practiced. During the campaign, Clinton gained the support of Silicon Valley executives by pledging aid to high-tech.

BILL CLINTON: More funds for research and development; more funds for new technologies, more funds to train scientists and engineers.

SPENCER MICHELS: And in the New Mexico speech, Clinton praised Sematech's partnership between industry and government, citing a favorable government report.

BILL CLINTON: People have recommended a 20 percent cut in the overall federal contribution for Sematech, which I think would be a terrible mistake, given the plain and evident benefits that the GAO chronicled just one month ago in its report. And what I want to do is to see us do more of that.

T.J. RODGERS: The Clinton administration scares me witless.

SPENCER MICHELS: T.J. Rodgers fears that Clinton's industrial policy means government will mettle in private business with disastrous results.

T.J. RODGERS: If industrial policy means you get in and mettle with the nitty gritty semiconductors, the answer is, I don't want an industrial policy there bad. If industrial policy means you start making America's government friendly toward business, that you make the environment here as it is in Japan favorable to grow and invest and create jobs across-the-board and then let competitors compete, then I love industrial policy.

SPENCER MICHELS: In the semiconductor industry, the question being asked is how much and what kind of control government will exert in return for its financial support.

ANDY GROVE: Nobody questions the government having a role and putting traffic lights in place and regulating the flow of cars. That doesn't mean you want the government to drive your cars. I think that analogy applies absolutely in the case of business. The government has a role in setting the rules under which countries and companies decide to contribute, the economies compete. Then we'll do the driving.

MICHAEL BORRUS: What we want is limited government response at a critical time when it's necessary to maintain an important industrial capability in the United States. What we don't want is permanent subsidy to industry. That's a recipe for long-term failure.

SPENCER MICHELS: The new administration will have to decide if support to the semiconductor industry is warranted and, if so, whether such a policy is a useful model for other important American industries needing help in the world economy.