How the Chips were Won Intel CEO Craig Barrett has a stern warning for his industry and his country: Those who don't invest will perish.
By Brent Schlender; Craig Barrett

(Business 2.0) – Talk about a tough lineage to live up to. Craig Barrett, the laconic metallurgist who is the fourth CEO in Intel's 35-year history, follows in the footsteps of three semiconductor demigods. First was the late Robert Noyce, one of the inventors of the integrated circuit; next was Gordon Moore, who gave his name to the chip industry's key business principle; and then came Andy Grove, the charismatic executive who in 1997 was named TIME magazine's "Man of the Year."Once, when asked how he stacks up alongside his predecessors, the 6-foot-2 former Stanford University professor wisecracked, "I'm taller."

That's quintessential Barrett. He comes across as the strong, silent type with a wry wit that cracks like a bullwhip when you least expect it. Never one to court the spotlight, Barrett usually prefers to let Intel's performance speak for itself. And from the looks of things, Barrett, who since becoming CEO in 1998 has led Intel through some of its rockiest years, will wind up as his predecessors' equal, in his own quiet way. That's because during his tenure Intel not only has reinforced its dominance in the PC microprocessor business but also has broadened into making chips for cell phones, PDAs, and data-networking gear. Moreover, Barrett pushed the company to invest $10 billion in state-of-the-art chipmaking plants amid one of the worst slumps ever to hit the IT and telecom industries, a Darwinian wager that gives Intel new capacity as demand picks up, coupled with manufacturing efficiencies that no competitor can touch.

We caught up with Barrett in early December in a drab, utilitarian conference room down the hall from his corner cubicle at Intel's Robert M. Noyce Building in Santa Clara, Calif. He had just returned from a Thanksgiving weekend trip with his wife to the Galapagos Islands and had some big ideas on his mind.

I'm curious about how you feel right now regarding your five-year tenure as CEO at Intel. You had some tough years, but things seem to be looking up, both for Intel and for the larger IT industry.

It's been a roller coaster, of course. I actually feel pretty good about Intel today. But there's a dichotomy, because I feel much less good about the United States for a whole variety of reasons. There's been a massive change in the world's economic environment. In the space of five years, India, China, Russia, and some of the Russian satellite countries--close to 3 billion people--have been brought into the mainstream capitalist economic infrastructure.

And, you know, this is not the classic example of developed economies dealing with underdeveloped economies that slowly siphon off jobs. Nor do we have a gentlemanly competition like between the U.S., Japan, and Western Europe, where the standard of living everywhere is about the same. This is bringing 3 billion people into the system at substantially lower wage rates when a reasonable fraction of them have pretty good educations and a long history of respect for education.

When you ask an Alan Greenspan or someone like him, "What's the end game?," they basically say, "Well, you know, we are just going to move up to the next level of the value creation chain." OK, but the difference now is that the rest of the world can move up to the next level of the food chain just as we can, because we helped them. We laid all this glass fiber under the ocean and we made Moore's Law happen, so they can have computational and communications capability as easily and as cheaply as we can, and so they can do anything we can do. And unless you're my auto mechanic or my plumber, I don't care where the hell you're located.

I think you've actually got a pretty good road map of how this transition goes if we don't do something different: namely, old Europe. France and Germany have already started getting frozen in place in terms of their social infrastructure and societal laws and just accepting rising unemployment. Once you get on this slippery slope, it's tough to get back onto firm footing.

What should the United States be doing that it isn't?

Invest more in basic R&D because, as you move up the food chain, you then move up the R&D investment cycle. We're doing a good job in the health sciences. But how much does the United States invest annually in basic R&D in the physical sciences? About $5 billion. Now, how much do we invest in agriculture subsidies each year? It's $35 billion or $40 billion. And what else do we subsidize? Aside from agriculture, there's steel, soft lumber, catfish, shrimp, and textiles. The U.S. is protecting the industries of the 19th century.

Another responsibility of government is to "do no harm." California is a great example of how you do harm to the economy and people finally throw out the established politicians and put in a guy named Arnold. That sends a message of how frustrated people are. One of my particular pet peeves is this notion that we ought to expense stock options. The Chinese communists, for crying out loud, are extolling the usage of stock options to motivate employees. It's right there in their latest five-year plan, and of course, they won't be required to expense them. In this country, options could well go away.

So what does a company like Intel, which is an influential institution, do? You aren't just wringing your hands, are you?

Well, we speak out on things like the importance of education. We directly support research in universities. We obviously promote broadband. But our message seems to be heard a lot more clearly outside the United States than here at home.

At the same time, we continue to chase the smartest people in the world, wherever and whoever they are. Sure, they may cost less to hire in India or China or Russia, but the main thing is we're looking for the best.

Let's change the subject to something closer to home. Intel always tinkered around with consumer products, ever since it introduced the world's first digital watch, but without much success. Do you think IT companies can now begin to transform consumer electronics?

So far, this whole digital home convergence thing is a top-down-driven phenomenon, because the Intels and the Samsungs and the Sonys and the Microsofts want our stuff to play together. But Wi-Fi didn't happen because Microsoft and Intel and Cisco said it was going to happen; it happened because a bunch of grassroots folks just said, "Hey, this is a cool thing." The PC emerged the same way. Consumers like to find something that's useful to solve a real problem, and when they get it, they run like hell with it. So, no offense to Bill Gates and his vision thing. Technology assimilation is more of a bottom-up process.

You have vaguely mentioned that Intel might one day get into "health sciences." What exactly do you mean by that?

The dimensions that we operate at today in building transistors are precisely the dimensions of DNA structures and proteins. So if I just let my imagination run wild for a minute, what I'm really interested in is bringing the economics and microscopic accuracy of what we do to integrate a billion transistors into a microprocessor to the health sciences side. Imagine if we could do almost instantaneous analysis to determine if you have an increase of some protein level in your bloodstream that indicates you are susceptible to a particular disease. Or imagine we could monitor how a peptide in one of your cells responds to the drug treatment you're getting. There are some very rudimentary examples of people doing this today, and huge research dollars are being poured into it. I would bet my next paycheck that this is the next big industry semiconductors will spawn, although I can't tell you exactly how it's going to work.

One final question: Intel has a policy of mandatory retirement at age 65, which for you is only a year away. Have you started thinking at all about your legacy as CEO?

What I hope to be my legacy is very simple, and it's something that Bob Noyce and Gordon Moore and Andy Grove all espoused, which is you can only be successful in this business by investing. You can't save your way out of a recession, and you can't save your way to prosperity. The offshoring of jobs and the outsourcing of manufacturing are tactical moves to control expenses, but they don't guarantee you a position in the future. You only get a position in the future by investing, creating something new, and staying ahead of the competition. So it's simple: Invest or die.