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Records of the Economic Policy Council (George H. W. Bush Administration)
Olin Lewis Wethington Subject Files
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Originally Processed With FOIA(s):
FOIA Number:
2005-0336-F
2005-0336-F
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
Library Staff.
Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin: Economic Policy Council
Series:
Wethington, Olin, Files
Subseries:
Subject Files
OA/ID Number:
04295
Folder ID Number:
04295-018
Folder Title:
Science & Technology [3]
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G
13
28
4
1
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(George Bush Library)
Document No.
Subject/Title of Document
Date
Restriction
Class.
and Type
01a.
To: Gary Carver From: Peggy Haggert
7/11/90
(b)(3)
Memorandum
Re: US-Owned Worldwide Production of Strategic
Semiconductor Materials [P.L. 100-180, Sec 276(a)] (1 pp.)
Collection:
Record Group:
Bush Presidential Records
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Series:
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Subject Files
WHORM Cat.:
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Science & Technology [3]
Date Closed:
2/2/2010
OA/ID Number:
04295-018
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2005-0336-F
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information [(b)(4) of the FOIA]
and his advisors, or between such advisors [a)(5) of the PRA]
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P-6 Release would constitute a clearly unwarranted invasion of
personal privacy [(b)(6) of the FOIA]
personal privacy [(a)(6) of the PRA]
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C. Closed in accordance with restrictions contained in donor's deed of
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gift.
financial institutions [(b)(8) of the FOIA]
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PRM. Removed as a personal record misfile.
Withdrawal/Redaction Sheet
(George Bush Library)
Document No.
Subject/Title of Document
Date
Restriction
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and Type
01b. Chart
Sematech chart of production of semiconductor materials
(b)(3)
[P.L. 100-180, Sec 276(a)] (2 pp.)
Collection:
Record Group:
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RESTRICTION CODES
Presidential Records Act - [44 U.S.C. 2204(a)]
Freedom of Information Act - [5 U.S.C. 552(b)]
P-1 National Security Classified Information [(a)(1) of the PRA]
(b)(1) National security classified information [(b)(1) of the FOIA]
P-2 Relating to the appointment to Federal office [(a)(2) of the PRA]
(b)(2) Release would disclose internal personnel rules and practices of an
P-3 Release would violate a Federal statute [(a)(3) of the PRA]
agency [(b)(2) of the FOIA]
P-4 Release would disclose trade secrets or confidential commercial or
(b)(3) Release would violate a Federal statute [(b)(3) of the FOIA]
financial information [(a)(4) of the PRA]
(b)(4) Release would disclose trade secrets or confidential or financial
P-5 Release would disclose confidential advice between the President
information [(b)(4) of the FOIA]
and his advisors, or between such advisors [a)(5) of the PRA]
(b)(6) Release would constitute a clearly unwarranted invasion of
P-6 Release would constitute a clearly unwarranted invasion of
personal privacy [(b)(6) of the FOIA]
personal privacy [(a)(6) of the PRA]
(b)(7) Release would disclose information compiled for law enforcement
purposes [(b)(7) of the FOIA]
C. Closed in accordance with restrictions contained in donor's deed of
(b)(8) Release would disclose information concerning the regulation of
gift.
financial institutions [(b)(8) of the FOIA]
(b)(9) Release would disclose geological or geophysical information
PRM. Removed as a personal record misfile.
JUL-12-1990 15:41 FROM UNDER SEC OF TECHNOLOGY
TO
94567739
P.10
NEW TECHNOLOGY WEEK Monday, July 2, 1990
9
Semi-Gas
Japanese Control Liquid Crystal Displays
(Continued from page four)
that it is against the best interests of
TOKYO-Japan's electronics industry, with government help, is pouring
the U.S. semiconductor industry
huge sums into liquid crystal displays and hopes to overcome formidable
and the nation as a whole for Semi-
technical barriers that would allow them to develop large displays. "Techni-
Gas Systems to be sold to a foreign
cally, 40-inch LCDs with quality comparable to today's TVs will be realized
competitor whose apparent inten-
in six or seven years," says Eiji Kaneko, director of the Giant Electronics
tions are worldwide market domina-
Research Laboratory, a government-sponsored consortium of 17 companies.
"We're hopeful they can be commercialized in 10."
tion," wrote Turner Hasty, Se-
matech executive vice president and
Sharp, Hitachi, Hosiden and other Japanese firms this year will invest
chief operating officer, to Hercules
about $1 billion to research, develop and set up plants to make LCDs, which
Chairman David Hollingsworth in
are widely used in watches and laptop computer screens. Sharp, which is con-
April.
sidered the leader of the pack, plans to invest $650 million over the next three
Sematech is concerned the sale
years.
would offer Nippon Sanso insight
The only foreign group that is even close to the Japanese in LCD de-
on the consortium's strategies,
velopment is IBM, which makes LCDs in a joint venture with Toshiba. "This
harming national security and di-
is a Japan-supplies-the-world market," says Steve Myers, an analyst with
Jardine Fleming Securities.
vulging proprietary U.S technology
information.
State-of-the-art production models deliver 16 colors on a laptop display.
Officials from Sematech and the
Samples of 14-inch displays with far better picture quality and color compar-
Semiconductor Equipment and Ma-
able to televisions are due out later this year but will cost about $3,900.
terials International [SEMI] contac-
Prototypes of 20-inch LCD screens are expected next year, though com-
ted Hercules executives and told
mercialization is still three to four years off. Scaling up beyond 25 inches will
them of their concern of the pro-
require technical breakthroughs that many people doubt are possible.
posed sale to a foreign firm.
Although research is costly, strong demand for LCD products is fueling
"We understand that Hercules
R&D spending. Demand is growing rapidly for smaller LCD panels used in
Inc. has refused to consider a lever-
portable TVs and VCRs, video telephones, electronic pocket notebooks, lap-
aged buyout by Semi-Gas Systems
top personal computers and automobile dashboards.
management that would have ena-
By the middle of this decade, LCDs should displace cathode ray tubes as
bled it to remain an American com-
the most valuable display technology. By 2000 the LCD business will have
grown 10 times to some $13 billion.
pany," Hasty wrote Hollingsworth.
Despite SEMI/Sematech offers to
Despite the Japanese blitz, the game is far from over. Active-matrix LCDs
help Hercules find an American
may never be scaled up to large sizes at affordable prices. And Japanese
buyer, the formal offers "did not
companies, along with many in the United States and Europe, continue to
even receive the courtesy of an ac-
explore alternative flat-panel technologies.
knowledgement."
But even if other approaches to LCDs turn out to be the screen technology
The Semi-Gas executive said that
of the future, Japanese firms are likely to dominate. "Whichever way the
Hercules "perceives Sematech as the
market moves, they' have a product," says Myers.
enemy because [Hercules] wants the
-Steven Brull, Reuters
money." And, if the Semi-Gas sale
proceeds, "the ramifications are
Coal Production Hits Record High
that we would become discontinued
Production and consumption of coal is hitting a record pace, according to
from Sematech, which would se-
the National Coal Association. NCA's mid-year forecast says coal produc-
verely hurt our R&D."
tion will hit just over one billion tons by year end, about 22 million tons over
Sam Harrell, president of
Semi/Sematech, told Hercules exec-
the prior record of last year and the first time ever that production will top
the billion-ton mark.
utives in January that "a disassocia-
tion with Semi-Gas at this time or at
Medtronic To Build Lab In Japan
any time in the near future would
Medtronic Inc. of Minneapolis, will soon be breaking ground on a tech-
harm Sematech's long-term stra-
nology center in Chitose, on Hokkaido in northern Japan. The center is a
tegies. As you know, Sematech's
"significant milestone in the evolution of Medtronic as a global company,"
charter, as guided by the Defense
proclaims Winson Wallin, chairman and CEO. The center will manufacture
Department and the U.S. Congress,
cardiac pacemakers. "As the leader in the Japanese pacemaker market,
provides preferential treatment to
Medtronic intends to grow from those roots [and] build closer relationships
U.S. vendors/suppliers of semicon-
with Japanese physicians," says Wallin.
ductor manufacturing equipment
and materials. While our charter al-
lows us to transact with foreign-
Du Pont Receives Thallium SC Patent
owned companies, this may only be
done as a measure of last resort."
Du Pont boosted its high temperature superconductivity patent count
last week to seven, making it the leading company in the amount of
But the sale of Semi-Gas to Nip-
pon Sanso is not a done deal. The
patents granted for the new generation of superconductors. The patent
Department of Treasury plans to
is for a thallium-barium-copper-oxygen superconductor. The composi-
conduct an anti-trust investigatory
tion is similar in structure to a thallium-lead superconductor patent Du
review within the next three weeks
Pont received earlier this year, but differs in that the concoction has a
before a deal could be consum-
single copper-oxygen layer instead of multiple layers. It is superconduc-
mated, a source said.
tive at temperatures in the range of 90 degrees Kelvin.
JUL-12-1990
15:40
FROM
UNDER SEC OF TECHNOLOGY
TO
94567739
P.09
Monday, July 2, 1990 NEW TECHNOLOGY WEEK
U.S. Scientists Complain About Employers
Semi-Gas
After polling 4,300 research scientists, R&D Magazine has found that 48
percent of them feel that they are working for organizations that are "not
open to new ideas." This conclusion, says R&D Magazine's editor Robert
Controversy.
Cassidy, "is startling because it indicates that the people most responsible for
(Continued from page one)
making American strong in technology think the idea-creating system isn't
The executive said employees of
working."
the Massachusetts-based Semi-Gas
Two-thirds of the scientists are distressed by the way they are treated by
feel helpless as they sit back and
management, saying their employers "do not offer researchers the same re-
watch the sale of their company to a
wards and opportunities to advance that they offer managers." The poll also
foreign firm unfold. The final sale is
indicates that scientists feel that they are kept in the dark when it comes to
up to parent company Hercules,
their company's long-range plans and that they are burdened with red tape in
who is hungry for the cash.
recommending and carrying out research. Fifty-nine percent said their em-
"We're just pawns on the
ployers failed to effectively communicate their organizational goals.
board," he said.
The survey also found that the scientists love their jobs.
Semi-Gas is the largest supplier of
Top 100 Slow R&D Spending
gas handling equipment to the semi-
conductor industry worldwide, with
The top 100 spenders on research
sales last year of $20 million. Nip-
Japanese way of conducting R&D,
and development among U.S. cor-
says Inside R&D. The top 100 U.S.
pon Sanso plans to acquire the
porations increased R&D funding
company through its American sub-
companies in R&D spent $53 billion
by 8.7 percent last year, down from
sidiary Matheson Gas Products
conducting their research in 1989,
the 10.7 percent increase in 1988,
Inc., and came a step closer last
accounting for 77 percent of the
according to a survey by the publi-
week as officials from the govern-
total industrial R&D spending.
cation Inside R&D. The slowdown
ment's Committee on Foreign In-
R&D spending as a percent of
vestment in the United States
is attributed to a growing emphasis
sales increased, on average, from
on pursuing incremental product
[CFIUS] said they will step aside
3.67 percent in 1988 to 3.82 percent
improvements rather than on basic
and allow the acquisition to occur
in 1989. Research spending per em-
research targeting big break-
ployee increased as well, from an
unless a threat to national security
throughs. This trend is the result of
emerges, sources said.
average of $9,010 per employee in
companies trying to imitate the
In private meetings in Washing-
1988 to $10,500 per employee in
1989.
ton, CFIUS officials met with rep-
resentatives from Nippon Sanso,
Matheson Gas, Hercules and Semi-
Top 10 OD Inside R&D* 100 List
Gas. CFIUS, which has blocked the
1989 R&D
(Increase)
sale of only one U.S. company to a
Rank
Spending
from Previous
foreign firm since its creation
1989
1988
Company
($ Million)
Year (%)
several years ago, is not expected to
1
1
General Motors
stop the Semi-Gas Systems sale be-
5247.5
10.4
2
2
IBM
5201.0
17.7
cause its sale is not regarded as a
3
3
Ford
3167.0
8.1
national security issue.
4
4
AT&T
2652.0
3.1
CFIUS officials declined to con-
5
6
Digital Equipment
1525.1
16.7
6
5
Du Pont
firm whether the sale of Semi-Gas
1387.0
5.2
7
7
General Electric
1334.0
15.5
was under review.
8
9
Hewlett-Packard
1269.0
20.2
But industry sources told New
9
8
Eastman Kodak
1253.0
9.2
10
10
United Technologies
Technology Week that Nippon
956.6
2.6
Sanso intends to finance about half
the cost of the sale through a $10
Source: Inside RED
million cash-loss carryforward re-
corded by its Matheson subsidiary.
Nippon Sanso completed its acquisi-
R&D Spending by Top 100 Companies by Industry
tion of Matheson in 1969.
($ Million)
When Nippon Sanso announced
Industry (number of
%
its intentions to acquire Semi-Gas
companies included)
1989
1988
Increase
last winter, it triggered widespread
Computers (15)
11,510.4
9,840.5
17.0
opposition in U.S. industry among
Motor vehicles (4)
9,491.8
8,664.5
9.5
companies concerned that it was
Pharmaceuticals (13)
5,688.4
5,068.6
12.3
Electronics (15)
another case of a Japanese firm
5,280.0
4,779.7
10.5
Aerospace (10)
4,729.4
4,656.5
profiting off U.S. innovation. One
1.6
Chemicals (9)
4,127.7
3,849.7
7.2
of the most outspoken critics of the
Scientific and
photographic equipment (6)
sale has been the Austin, Texas, semi-
3,917.6
3,264.8
20.0
Telecommunications (2)
2,933.0
2,859.0
conductor manufacturing consor-
2.2
Petroleum (8)
2,055.0
1,918.0
7.1
tium, Sematech. Semi-Gas has col-
Industrial and farm
laborated with Sematech for two
equipment (4)
694.0
597.9
16.1
years on development of its gas dis-
tribution technology.
Source: Inside R&D*
"Sematech feels very strongly
(Continued on page 9)
JUL-12-1990
15:39
FROM
UNDER SEC OF TECHNOLOGY
TO
94567739
P.08
NEW TECHNOLOGY
KING COMMUNICATIONS GROUP, INC.
Week
627 NATIONAL PRESS BUILDING, WASHINGTON, D.C. 20045
Telephone: (202) 638-4260
Telefax: (202) 662-9744
From the Editors of The Energy Daily and Defense Week
Monday, July 2, 1990
Volume 4, Number 27
Grumman
MITI's New
Controversy
Pulls Together
Quest For
Erupts Over
**
Maglev Team
Gigabit Chips
Semi-Gas
BY RICHARD McCORMACK
BY SHERIDAN TATSUNO
BY LUCY REILLY
Grumman Aerospace Corp. has
Japan's Ministry of International
Japanese company Nippon Sanso
put together a team to pursue mag-
Trade and Industry (MITI) has an-
plans to use several million in U.S.
netic levitation trains. The Grum-
nounced plans to begin a 10-year
tax dollars to finance its controver-
man team includes Parsons, Brinck-
R&D project to develop gigabit (bil-
sial, $23 million acquisition of Semi-
erhoff, Quade & Douglas of New
lion bits) memory chips. Slated to
Gas Systems Inc., a subsidiary of
York City: General Electric
begin next March, the proposed
Wilmington, Del.-based Hercules
Research and Development Center
project will develop quantum tech-
Inc., industry and government
in Schenectady, GE's Transporta-
nologies that will allow Japanese
sources said.
tion Systems in Erie, Pa., and Inter-
chipmakers to produce extremely
"Here we have a successful U.S.
magnetics General Corp. of Guilder-
fine-line memory chips for use in
handheld workstations, laptop
company-10 years old-that now
land, N.Y.
supercomputers, HDTVs, tele-
has a major share of the industry in
The New York State Energy
phones and other memory-intensive
the United States and is a key player
Research and Development Au-
products.
in the world," said a senior execu-
thority has selected the Grumman
MITI hopes to develop quantum
tive of Semi-Gas.
team to look into a magnetic levita-
function devices-super-dense,
"Comes along a foreign company
tion system for the state of New
highly functional devices that will
with money, some of which is taken
York. The project "will support
go far beyond the one-gigabit level.
from U.S. taxpayers, and they're us-
New York State's efforts to become
The project will focus on fine-line
ing that to buy our technology and
a leader in the application of maglev
quantum devices, quantum dot
take the profit and the technology
technology in the upcoming federal-
memories and quantum wave inter-
overseas. That says to me that the
ly supported maglev research and
ference devices. MITI will initially
taxpayers are paying, in part, for
development programs," says the
develop a fine-line quantum device
the acquisition," the Semi-Gas ex-
Authority.
that connects a source electrode to a
ecutive said.
(Continued on page 12)
(Continued on next page)
(Continued on page 4)
Japan adopts the new process, while the U.S. lags behind.
Plastic Refining: Solid Waste Solution?
BY KIMBERLY DOZIER
Government Industrial Laboratory in Hokkaido, Japan,
since 1973, was licensed jointly to Fuji Recycle, Mobil
Fuji Recycle Industry K.K. of Tokyo is using
Chemical Industries Ltd. and the Japanese Ministry of
government-developed technology to turn plastic
International Trade and Industry (MITI) in 1987, Fuji
waste into petroleum products, freeing up incin-
Recycle chief executive officer Toshio Hirota told New
erators, and making a profit out of a growing waste
Technology Week.
disposal problem. Japanese and Korean governments
Fuji Recycle has spent $5.1 million to commercial-
are lined up to buy the process, which joint patent
ize the process and build a pilot-scale facility with an
owner Mobil Corp. has dismissed as problematic and
annual capacity of 400 kilograms. An additional $4
unprofitable.
million has been promised from MITI for further
The Fuji process is described as a simple one, in
research. Mobil and Japan-based Tosoh Corp. are
which crushed polyethylene plastic-the low-grade
supplying the primary catalyst used in the petroleum
plastic used for milk and soda bottles-is heated and
reclamation, but have little or no involvement in the
broken down into a vapor. A catalyst then reacts with
commercialization process.
the vapor to break it into naphtha, kerosene and gas
While Mobil is convinced the technology works, the
oil. The products are condensed into liquids in a cooler
company remains skeptical about the commercial
and refined.
practicality of plastics recycling. "[Fuji Recycling) still
The technology, under development by the
(Continued on page 8)
07/12/90
16:47
NO. 109
P004
confidential
Table 1
Determined NOT to be
Japanese Share of World Semiconductor
Materials,
National Security Classified Marking
Manufacturing Equipment and Device
Markets
By CAP (NLGB) on 1/5/10
(Percent of Value)
1980
1988
Semiconductor Materials
N.A.
69
Electrodeposited copper foil
N.A.
92
Photomask blanks
N.A.
90 (U.S. mkt)
Photoresists
N.A.
59
Ceramic packages
N.A.
90+
Silicon wafers
N.A.
70
1984
1988
Semiconductor Manufacturing
Equipment
26
42 (1989)
Lithography equipment
N.A.
64
Stepping aligners
38
71
E-beam direct exposure
72
52
Ion beam direct exposure
91
100
Wafer fabrication equipment
N.A.
44
1980
1988
Semiconductor Devices
27
51
DRAMS
39
76
Fast SRAMS ( 70 ns)
N.A.
69
Microcontrollers
31
68
ASICs
N.A.
42
Gate arrays
N.A.
60
EEPROME
N.A.
40
Microprocessors
10
23
N.A.-Not available.
Sources: Dataquest, Rose Associates and VLSI Research. Also,
"Increasing Sales of Japanese and Western European
Lithography Equipment", International Economic and
Energy Weekly, January 5, 1990 and Japan's
Semiconductor Industry: Attaining Global Leadership,
March 1990, Directorate of Intelligence, CIA
(NF/NC/PR/ORC).
06/21/19
16:47
NO. 109
P001
FORM CD-403
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TAbles
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RECIPIENT TELEPHONE NO
FACSIMILE TELEPHONE NO
Mr. Olin Wethington
202-456-7739
TO
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The White House
COMMENTS
NAME AND BUILDING ADDRESS OF SENDER
TELEPHONE NO
Jack McPhee
377-
FROM
USDOC
Room 1104
0571
USCOMM-DC 86 2159
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Restriction
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and Type
02. Graph
Sematech graphs [P.L. 100-180, Sec 276(a)] (9 pp.)
7/10/90
(b)(3)
Collection:
Record Group:
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Office:
Economic Policy Council (EPC)
Series:
Wethington, Olin, Files
Subseries:
Subject Files
WHORM Cat.:
File Location:
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Date Closed:
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OA/ID Number:
04295-018
FOIA/SYS Case #:
2005-0336-F
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RESTRICTION CODES
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Freedom of Information Act - [5 U.S.C. 552(b)]
P-1 National Security Classified Information [(a)(1) of the PRA]
(b)(1) National security classified information [(b)(1) of the FOIA]
P-2 Relating to the appointment to Federal office [(a)(2) of the PRA]
(b)(2) Release would disclose internal personnel rules and practices of an
P-3 Release would violate a Federal statute [(a)(3) of the PRA]
agency [(b)(2) of the FOIA]
P-4 Release would disclose trade secrets or confidential commercial or
(b)(3) Release would violate a Federal statute [(b)(3) of the FOIA]
financial information [(a)(4) of the PRA]
(b)(4) Release would disclose trade secrets or confidential or financial
P-5 Release would disclose confidential advice between the President
information [(b)(4) of the FOIA]
and his advisors, or between such advisors [a)(5) of the PRA]
(b)(6) Release would constitute a clearly unwarranted invasion of
P-6 Release would constitute a clearly unwarranted invasion of
personal privacy [(b)(6) of the FOIA]
personal privacy [(a)(6) of the PRA]
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purposes [(b)(7) of the FOIA]
C. Closed in accordance with restrictions contained in donor's deed of
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gift.
financial institutions [(b)(8) of the FOIA]
(b)(9) Release would disclose geological or geophysical information
PRM. Removed as a personal record misfile.
SILICON AND WAFER PRODUCTION
Corporate Rankings
(millions of dollars)
1988
1. Shin-Etsu
JA $597
2.
Mitsubishi Metal
JA
$295
3.
Osaka Titanium
JA
$277
4.
Komatsu Electric
JA
$257
5. Monsanto*
US $254
6. Wacker
WE $193
7.
Toshiba Ceramics JA $ 95
8. DNS
US $ 74
9. Cin. Milicron**
US $ 37
*NOW owned by Huels (Veba) of West Germany.
Now owned by Osaka Titanium of Japan.
WAFER FABRICATION EQUIPMENT
Corporate Rankings
(millions of dollars)
1988
1982
1. Nikon
JA
$486
1.
Perkin Elmer
US
$152
2.
Applied Materials
US
$360
2.
General Rad
US
$150
3.
General Signal
US
$248
3.
Varian
US
$ 90
4.
Tokyo Electron
JA
$239
4.
Applied Materials
US
$ 69
5.
Canon
JA
$225
5. GCA*
US
$ 64
6.
Varian
US
$160
6.
Canon
JA
$ 59
7.
Eaton
US
$147
7.
LTX
US
$ 40
8.
Perkin Elmer
US
$141
8.
Hewlett-Packard
US
$ 40
9.
Anelva
JA
$129
9.
General Signal
US
$ 32
10. Hitachi
JA
$113
10.
Nikon
JA
$ 29
*GCA was purchased by General Signal in 1988.
Wafer Fabrication Equipment
Market Share
70
60
50
Percent of Market
40
30
C
20
10
0
1982
1983
1984
1985
1986
1987
1988
US Companies
Japanese Companies
European Companies
Figure 4
Worldwide Lithography Equipment Market
Sales by Country of Origin
($ in Millions)
US Co.'s
US Co.'s
$335M
$341M
60%
28%
5%
West European Co.'s
8%
$26M
64%
West European Co.'s
35%
Japanese Co.'s
$97M
Japanese Co.'s
$781M
$195M
1983 Worldwide Sales
1988 Worldwide Sales
of $556 Million
of $1,219 Million
This figure is UNCLASSIFIED
Regional Shares of Worldwide Automatic
Test Equipment Sales
1981
1986
Japan
26.1%
Japan
46.2%
*
West Europe
40.5%
West Europe * 21.3%
United States 33.4%
United States 32.5%
*
40.0% and 21.2% of 1981 and 1986 sales, respectively, were of equipment produced
by a US subsidiary of a West German firm, Schlumberger. Theremainder of West
European sales come from the West German firm Siemens.
06
08:55
FORM CD 403
US DEPARTMENT OF COMMITTEE
INSTRUCTIONS
NO. 128
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11
NAME AND MAILING ADDRESS OF RECIPIENT
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Olin Wethington
456.7739
TO:
PROJECT APPROPRIATION NUMBER
COMMENTS
Documents on the senscondlustor equipment
industry
NAME AND BUILDING ADDRESS OF SENDER
TELEPHONE NO
FROM
Jack McPhee
377-
0572
USCOMM DC 86 2159
07/13/90
08:55
NO. 128
P002
SENT BY:Xerox Telecopier 7021 ; 7-13-90 ; 7:05AM ;
5123563195-
912023772706:0 2
1989 Prime Materials Supplier
Production by Region (SM)
Produced by
Produced in
Silicon Wafers
Japan
68.7%
57.9%
($1.709 B)
U.S.
0.0%
29.0%
Europe
-
11.1%
Austria
#
-
France
-
4.
Germany
31.3%
+
Great Britain
-
*
Holland
-
*
Switzerland
-
-
ROW
-
2.6%
Hong Kong
.
+
Korea
-
.
Singapore
*
.
Photoblanks
Japan
98.5%
98.5%
($134 M)
U.S.
1.5%
1.5%
Europe
-
-
Austria
.
-
France
-
.
Germany
-
a
Great Britain
-
,
Holland
-
.
Switzerland
.
.
ROW
$
.
Hong Kong
.
.
Korea
.
.
Singapore
.
.
Wet Chemicals
Japan
48.9%
48.9%
($374 M)
U.S.
37.2%
38.0%
Europe
-
13.1%
Austria
up
-
France
@
-
Germany
10.4%
-
Great Britain
3.5%
#
Holland
-
-
-
Switzerland
-
-
ROW
&
.
Hong Kong
-
.
Korea
-
-
Singapore
-
.
Source: Dan Rose & Associates
07/13/90
08:55
NO. 128
P003
SENT BY:Xerox Telecopier 7021 : 7-13-90 : 7:05AM ;
5123563185-
912023772706:0 8
Produced by
Produced in
Gases
Japan
39.9%
29.9%
U.S.
39.2%
48.6%
($451 M)
Europe
-
16.0%
Austria
-
-
France
7.3%
.
Germany
7.5%
#
Great Britain
6.0%
+
Holland
#
-
Switzerland
*
-
ROW
-
4.0%
Hong Kong
-
+
Korea
-
.
Singapore
*
,
Sputtering Targets
Japan
81.0%
41.1%
($163 M)
U.S.
3.7%
47.9%
Europe
.
10.4%
Austria
a
1
France
-
.
Germany
12.9%
Great Britain
2.5%
&
Holland
,
.
Switzerland
-
,
ROW
-
0.6%
Hong Kong
+
,
Korea
.
#
Singapore
.
B
Ceramic Packages
Japan
93.6%
88.3%
($1.221 B)
U.S.
5.9%
8.6%
Europe
.
0.3%
Austria
.
-
France
.
-
Germany
#
.
Great Britain
-
-
Holland
-
-
Switzerland
*
#
ROW
-
2.8%
Hong Kong
-
-
Korea
+
0.5
Singapore
&
2.3%
PhotoResist
tapan
46.1%
50%
($ ($310m)
U.S.
41.9%
A2.9%
Source: Dan Rose & Associates
Europe
6.5%
11.90/0
Row
-
0.7%
07/13/90
10:38
NO. 148
P002
July 13, 1990
TO: Olin Wethington (FAX: 456-7739)
FROM: Jack McPhee
SUBJECT: Japanese Investment Questions.
This is a recap of material sent to you in answer to your three
questions.
1. Japanese purchases from 1980 to 1989 of U.S. semiconductor
materials and production equipment firms? The tables
detailing Japanese investments in selected U.S. electronics
industries: while this may not be the whole story, we are
confident that this is a reasonably complete picture.
2. Breakout of ownership by type of production equipment? The
charts sent this morning showed ownership by nationality of
firm for semiconductor manufacturing equipment overall from
VLSI Research and Semi/Semitech. The U.S. "universe" of
firms was 340 companies in 1989, corresponding to 46.8
percent. These 340 firms are a very broad group, from
those who supply fairly unique components and parts to
those who supply complete production equipment systems.
3. Confirm or deny that Japanese firms have bought 33 U.S.
semiconductor materials and production equipment firms out
of 200 total firms in the last 18 months. We find it
impossible to duplicate this ratio from our statistics.
Semi/Semitech says that they know of 18 U.S. firms
purchased over the last 18 months out of what they feel is
the "core" universe of about 150 total. The universe of
firms is obviously a matter of definition, the largest of
which would appear to be VLSI Research's 340 firms.
4. If you have any other questions, give us a call.
(377-0572)
JUL-12-1990 15:36 FROM UNDER SEC OF TECHNOLOGY TO
94567739 P.01
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Loose in original folder
International Trade Administration
DEPARTMENT OF COMMERCE
Science & Electronics Unit
UNITED STATES OF AMERICA
SARAH COOPER HALL
Industry Analyst
U.S. Department of Commerce
Room H-1015
(202) 377-2846
Washington, DC 20230
Fax # (202) 377-2706
"AN AMERICA THAT CAN COMPETE AND WIN"
by Malcoim R. Currie
Chairman and CEO
Hughes Aircraft Company
Electronic Industries Association
Keynote Address
Washington, D.C.
March 27, 1990
A NEW DECADE
Well, ladies and gentlemen WC, the U.S. electronics industry - finally made it
through the 1980's. And today we stand at the threshold of the brave new decade of
the 1990's and in fact, a new century. What will it bring?
The world around us has changed so abruptly, in even onc year, that WC are still
reeling from its possible implications. Certainly our thinking has changed from one year
ago. We also know our industry must respond and change. But in what directions?
And how can we begin to control our own long-term destiny -- and our vitality - in a
world suddenly overturned? New forces arc at work which we scarcely understand.
Today we search for positive new policies which can deal effectively with these forces.
We face new realitics. A new outlook. New industrial structures.
Some would say that, rather than standing at the threshold of a glorious new decade
-- our electronics industry actually may be teetering at the edge of a bottomless chasm.
I personally prefer to think we're at the bottom of a mountain trail, that we need to
patiently climb to get back on top in terms of our industrial leadership, our
confidence, and our winning.
UNCERTAIN RULES
In any case, I'd say we're just a little punch-drunk coming out of the 1980's - with
some tough fighters still facing us in the ring. One certainly looks like a 500 pound sumo
wrestler. Another is a suave but tough European giant. Other young newly developing
tigers are standing in line. There is also much confusion on our part on just what the
rules of the game we're playing really are. And we have in our corner sponsors who are
nice guys but who often seem rather ambivalent whether we win or lose.
But then, by nature, I'm an optimist!
It kind of reminds me of a basketball game we played in Navy flight training many
years ago. Ten or twelve players on each side - 6 or 7 basketballs - whichever side
scored the most baskets in 1/2 hour got liberty that weekend. The only rules were no
deliberate eye gouging or kicking in the groin while down. The pure traditionally trained
basketball players among us who didn't adapt, who insisted on no double-dribbling or
elbowing, came out rather bloody in this new form of basketball. They continually got
beat up and lost weekend liberty while complaining that the new basketball rules were
unfair.
The theme of this conference -- "Balancing National Security With the Realities of
the 1990's" is very appropriate and timely. I believe, for reasons that I'll mention
later, we have ahead of us the toughest and most complex challenge we've ever faced
as an industry.
THE CHALLENGE: TO COMPETE AND WIN
In thinking about what to talk about on this occasion, it's obvious that a number
of topics could be included all of current and great importance to the defense
electronics industry. They involve the impact of a declining defense budget the
2
changing threat our international competitiveness rapidly changing technology and
so on.
So it's fair to tell you where I'm coming from in this talk:
First, with respect to national security - I believe that "national
security" must inevitably - and even primarily -- involve our economic
security as well as military security. Economic security involves our
ability to compete as a nation and to lead in the new kind of world of
instant communications where economic boundaries are replacing
national ones, and with new rules of the game.
National security must involve technology, which has indeed replaced
territory as the coinage of national power with electronics technology
and a powerful electronics industry having an indispensable role in
maintaining - or perhaps recapturing our industrial leadership. The
health of the defense electronics segment and the electronics industry as
a whole will be increasingly intimately related in the future.
Second, with respect to attitude I don't know about you, but I'm
getting a little impatient with the defeatist and almost fatalistic attitudes
that seem to be gaining in some circles. I'm getting a little tired of
listening to the litany of our financial disadvantages. Our cultural
disadvantages. About competitors who have created new rules of the
game involving insidious government-industry partnerships. About
foreign ownership and our economic colonization. About how it doesn't
really matter as long as we have jobs. About an increasingly arrogant
"Japan that can say no". And about unfair protectionism .... when the
constant litany of all these points leads to a seeming acceptance of an
inevitable decline in our own industry, especially electronics -- and to the
decline and fall of America.
Now these factors and more may all be more-or-less true. But all of our
bitching and moaning, our Japan-bashing and now even
Europe-bashing don't seem to be helping very much. We're on the
defensive while the world around us is changing rapidly and charging
along its own path.
In fact, we are the ones who must change!
It's time to get our own act together both nationally and internationally,
to recognize and build on our own strength, to get our juices flowing.
It's time to address:
"AN AMERICA THAT CAN COMPETE AND WIN"
We must find a way to go from a defensive patchwork mode to a mode
that is aggressive and innovative - to a mode that will permit us to win.
We all know that talking about problems is much easier than
constructing solutions. But we must start up that steep mountain trail
-- or the consequences for our nation, and for our national security in
the broadest sense -- could be disastrous.
3
At any rate, that's where I'm coming from. I believe WC can define a future that lets
us compete and win. But we won't get there if we do not face squarely the realities of
the 1990's.
REALITIES FOR DEFENSE ELECTRONICS
Let me comment on a few of the realities we are certain to face:
First, as they affect defense:
Declining Defense Budget
One reality certainly is a declining defense budget that will further add
to today's already significant defense industrial overcapacity. I expect
DOD's investment account (R&D and procurement), in real terms, to
drop to almost one-half its 1985 peak in several years. We must deal
with that reality.
Changing Threat
Another reality that the nature of the threat to our national security will
most likely change drastically in magnitude and character. But at the
same time we will have to hedge for a while against interim
uncertainties; we have no historical precedent for the self-liquidation of
a vast empire with its attendant instabilities and potential dangers. We
must also actually secure the arms reductions we all hope can happen.
Greater Importance of Technology
It also seems clear, at least in my view, that technological leadership in
defense will assume even greater importance in the future as
disarmament agreements drive us toward numerical parity at much
reduced force levels. This at a time when our foreign technological
dependency is increasing. When it is clear that dual-purpose
technologies will increasingly dominate and drive defense capabilities.
And when the rate of technological change is faster now than ever. This
will certainly be a major challenge for the decade ahead, both in defense
and in a general worldwide competitive race. I'll come back to this
point.
Phase-down Carefully
Another very serious reality is the terrible shape the defense industry
will be in in a few years unless the phase-down is executed very
thoughtfully and very carefully.
Let me explain --
Part of this situation is duc 10 the accumulated layers of oversight and
over-management which have added enormously to costs without
commensurate value-added. We've witnessed its impact. The stifling
of risk and innovation. The tremendous inefficiencies which add at least
30 percent, probably much more. to the costs of development and
production. We can no longer afford this today. We can no longer
4
At any rate, that's where I'm coming from. I believe WC can define a future that lets
us compete and win. But we won't get there if we do not face squarely the realities of
the 1990's.
REALITIES FOR DEFENSE ELECTRONICS
Let me comment on a few of the realitics we are certain to face:
First, as they affect defense:
Declining Defense Budget
One reality certainly is a declining defense budget that will further add
to today's already significant defense industrial overcapacity. I expect
DOD's investment account (R&D and procurement), in real terms, to
drop to almost one-half its 1985 peak in several years. We must deal
with that reality.
Changing Threat
Another reality that the nature of the threat to our national security will
most likely change drastically in magnitude and character. But at the
same time we will have to hedge for a while against interim
uncertainties; we have no historical precedent for the self-liquidation of
a vast empire with its attendant instabilities and potential dangers. We
must also actually secure the arms reductions we all hope can happen.
Greater Importance of Technology
It also seems clear, at least in my view, that technological leadership in
defense will assume even greater importance in the future as
disarmament agreements drive us toward numerical parity at much
reduced force levels. This at a time when our foreign technological
dependency is increasing. When it is clear that dual-purpose
technologies will increasingly dominate and drive defense capabilities.
And when the rate of technological change is faster now than ever. This
will certainly be a major challenge for the decade ahead, both in defense
and in a general worldwide competitive race. I'll come back to this
point.
Phase-down Carefully
Another very serious reality is the terrible shape the defense industry
will be in in a few years unless the phase-down is executed very
thoughtfully and very carefully.
Let me explain
Part of this situation is duc to the accumulated layers of oversight and
over-management which have added enormously to costs without
commensurate value-added. We've witnessed its impact. The stifling
of risk and innovation. The tremendous inefficiencies which add at least
30 percent, probably much more, to the costs of development and
production. We can no longer afford this today. We can no longer
4
afford to replicate, within the defense industry, the enormous overhead
of government. Nor to tolcrate projects that often require 3 to 5 times
their non-DOD equivalents to execute. To maintain this level of
over-management during a phase-down adds an untenable burden to an
already costly system.
We also have a now archaic acquisition system which has operated in
practice to cause industry to losc money on R&D and then hopefully to
gencrate a reasonable profit on production.
Now you can see that as production levels decline because of the
reduced needs of smaller forces, and unless these widely accepted
acquisition practices are radically changed, industry will be left in a
financially untenable position.
I believe there is a real growing acceptance of the need for a strong and
even increased R&D program in the years ahead to help maintain the
vital technical leadership in defense I referred to earlier. This
acceptance in DOD, and even in Congress, is certainly extremely
important and encouraging. However, without acquisition policies and
practices which once again allow reasonable earnings on industry's
R&D efforts and which turn around the current stifling environment,
we will simply be left without the vitality and means to serve the real
security needs of the nation looking forward to the decade of the 1990's
and beyond.
In this connection also, I'd urge caution against too easily accepting the
thesis that we can gointo an R&D-only mode in which programs are
stopped after prototype feasibility demonstrations and then put on the
shelf to create a so-called "ready R&D reserve". As we have repeatedly
learned, transition to production and at least limited production itself,
is an essential part of the technology development process. The fact is
that R&D results have a short shelf half-life; they can't simply bc
bottled up to be opened at some future date.
As they say, "Use it or lose it".
Another serious concern is the continued loss of our strong and
innovative supplier base which makes up the infrastructure crucial to a
vital defense industry.
Let me mention also one other fact of life related to the defense industry
and acquisition, namely the occurrence of a sudden and drastic
overcapacity which will leave industry with a large financial overhang
which cannot be instantly accommodated. Large investments that were
made in expectation of previously planned defense requirements will go
unused. This will present continuing fixed costs which must be written
off over a suddenly smaller production base, thus increasing the costs
of future business. In fact, those firms which were most responsive to
DOD's needs and invested the most to reduce costs, could well end up
the least competitive in the anticipated phase-down. They could bc the
5
least able to support DOD's needs in the future. An ironic turn of
events and a potentially serious problem for the nation.
Now all of these problems can at least be alleviated by thoughtful and
strong leadership and we should view the period ahead as a tremendous
opportunity for constructive change. I want to make it clear that I
believe a smaller defense industry is perfectly acceptable as long as it is
vital technically and profitable. Certainly an artificial maintenance of
the industrial base would not be the right answer. And I want to make
it clear that no one is looking for hand-outs. But it will require
leadership to navigate through the transition period ahead without
crippling our industrial and technology base as we phase down,
hopefully to a soft landing.
U.S. Companies Competing Against Foreign Governments
Still another of the many new defense "realities" WC must recognize and
deal with is the greatly increased international competition in the
defense industry. U.S. policies of the past have aimed at strengthening
the industrial and defense capabilities of our allies and friends to counter
a perceived massive common threat. U.S. policies have encouraged the
build-up of increasingly self-sufficient defense industries in NATO and
Japan. These policies were successful in achieving their original
purpose. Much technical leveling has taken place in this process. A fact
of life is that much defense equipment in Europe and, for that matter,
in Japan is now competitive with U.S. industry.
The ruies of the game are changing -- even in defense procurement. Our
industry is increasingly having to compete against governments in terms
of subsidies and guarantees rather than against companies. Maybe I'm
just a slow learner but I've been in several so-called open competitions
recently in which the final outcome has absolutely nothing to do with
better price, performance and schedule. Changing rules of the game!
European competitors are entering the still-large and important U.S.
market as their own markets attenuate with the impending decline of
NATO. Competition for third world business is often directly between
governments and this comes at a time when our own governmental
approval processes often impede rather than help our industry.
Again, this could be helped tremendously by understanding its
consequences and by explicit policy changes.
As an aside, my own strong feeling is that we have been too long under
the illusion that, in this day and age, we can protect technology and
maintain leadership by restrictive protection alone. This simply won't
work. Current overly restrictive technology transfer policies don't
accomplish much except to damage U.S. industry.
Our ultimate real protection will always rest on investing in
technology and innovation and in simply running faster than the other
guys, not on trying to hold close something as ephemeral and transitory
as technology. But I'll admit that I'm an engineer and may not have the
more cosmic perspectives of the economists and lawyers.
6
Electronic Upgrades For Completely New Capabilities
Another what I'd call a "reality", at least for defense electronics, is that
advanced electronics can be used to tremendously upgrade many current
systems, often creating completely new generations of capability to meet
new kinds of threats, very efficiently at relatively low cost. I hope this
is not lost on our defense planners .. so far, I don't believe it has
received enough attention.
SOME POSITIVES FOR DEFENSE
Finally, as we look forward let us remind ourselves of some very positive
"realities" of defense:
The Best Industry
For example, on the positive side, we have a defense industry that
innovates, develops and produces the finest cquipment in the world. I
assert that it does this very efficiently if looked at on a comparative
absolute basis, even in spite of the tremendous inefficiencies imposed by
our acquisition system. Our nation should recognize and be proud of
this.
DOD, A Prime Force
Further, since World War II, our Department of Defense really has
been a prime force in advancing U.S. technology. This unique role, that
evolved as a result of our particular history, should be understood and
built on, as I'll discuss.
DOD Develops Large Complex Systems
And our DOD, together with its related industry, has developed the
capacity to envision and to design enormously large and complex
integrated systems. We have vaulted to a position of clear world
pre-eminence in this. This capability can be a vital link in our future if
we properly capitalize on it. World leadership in the creation and
management of complexity, of increasingly complex and capable
systems, and in a world that will increasingly demand it. An arca of
tremendous strength.
Well, so far, I've talked about a few of the realities which will affect our defense
industry in the 1990's. These realities, or problems, if you will, can be made into
opportunities if we are willing to address them head-on and wisely. Certainly they
should have profound impact on DOD thinking and planning.
DEFENSE ELECTRONICS DEPENDS ON THE HEALTH OF ELECTRONICS
AS A WHOLE
Now I'd like to turn to the broader picture of electronics in general. I've already
asserted that, long term, our defense position is dependent on maintaining leadership in
electronics and that the strength of defense electronics is, in turn, directly dependent on
the health of our electronics industry as a whole. This includes the critical underpinning
of basic dual-purpose technologies. We should remind ourselves that in size and volume,
defense electronics is a tiny fraction of the total industry. Further, that our national
7
security in the broader economic as well as in the military sense depends on
technological leadership, with electronics arguably as the key factor.
We therefore cannot avoid the issue: How do we climb back on top and compete
and win? As I mentioned earlier, this represents perhaps the toughest and most complex
challenge we have ever faced.
REALITIES IN A BROADER CONTEXT
Let me start with a few "realities" of the 1990's in this broader context:
One reality is that we're being massively out-invested. For example, a
new wave of Japanese corporate investments this year will add up to
over 22 percent of its gross national product, or three times the total
U.S. capital investments on a per capita basis. This is in pursuit of a
global strategy based on technology leadership including production
technology and training.
The level of investment in improved processes has given Japan the
ability to shift quickly and maintain leadership in areas when costs and
quality improvements become the key to success.
Can we continue to underspend in non-defense R&D? France,
Germany, Japan and the United Kingdom will spend 56 percent more
than the U.S. for commercial R&D this year. The spending gap
increased over the 1980's and continues to grow as we enter the 1990's.
And for the first time in 14 years, spending by U.S. companies for
corporate R&D has not kept pace with inflation.
Another reality is that we are being massively out-planned. both in the
European and Japanese economic blocs. In the case of Japan, the
government has laid out a clear blueprint or vision for the next twenty
to thirty years in exquisite detail including critical milestones and
initiatives. The plans encompass telecommunications, computers,
semiconductors and other critical technologies, as well as conceptual
new applications. They also include what to do about education,
supporting research, declining industries and even demographics. More
importantly, they invest along with industry to reach their ambitious
goals.
In Europe, the EC, recognizing the crucial importance of the
information technology industry to its future, has already initiated
several specific long-range programs such as the 10-year "European
Strategy Program for Research and Development in Information
Technology" or ESPRIT_I and II, for which over $5.6 billion has been
committed. They've developed the idea of cooperation and resource
sharing for pre-competitive R&D and for the creation of standards to
allow a cohesive European industry to compete in the world market..
They are beginning to achieve some impressive results. Another
EC-funded program is the "Joint European Submicron Silicon
Initiative", or JESSI, funded at $600 million per year, or three times_
Sematech. It is aimed at 64 Megabit DRAM's employing
quarter-micron technology. Other EC programs include RACE,
8
"Research in Advanced Communications for Europe", and BRITE,
"Basic Research in Industry Techology for Europe". All- in-all, pretty
forward looking!
Stiil another reality for us is a technical education system which simply
will not support our national requirements in the years ahead.
A shortage of 700,000 scientific professionals by the end of the decade.
Today vacancy rates in college engineering faculty of 10 percent or
more. And one-third of college faculty will retire by the end of the
1990's. A 50 percent drop in U.S. college freshmen majoring in the
physical sciences, and engineering. And more than half of the science
and engineering graduate students in our great research universities are
foreign nationals, most of whom will not remain in the U.S. to enrich
our cultural and technical base.
Although we're all aware of this impending crisis, we are far from
reaching out for aggressive and realistic solutions.
Another reality is the so-called globalization of technology. We've heard
a lot about this recently. It is facilitated by instant world
communications and by changing economic forces which our electronics
industry is necessarily trying to respond to. It's following its instincts for
survival - even though some of these may often be short sighted. And
it is happening with a swiftness not generally perceived.
I would just comment that in an cΓa when new concepts become
globalized almost instantaneously, the premium for reducing concepts
and fundamental technology to practice in terms of products and new
applications becomes even more important. So we must define
technology in a much broader context to include the processes of
transformation from concept to fielded applications. Further, this
globalization of technology mcans that many nations can now acquire
very advanced weapons.
Still other "realities" include many continuing forms of protectionism
that are a fact of life and will exist in the decade ahead. These
protectionist measures, already present in commercial electronics, are
spreading to defense. The realities also include the virtual
disappearance in the U.S. of many of the basic component industries
and technologies on which 3 vital electronic industry depends, including
defense. Further, the realities include the continued fragmentation of
our fundamentally important semiconductor and semiconductor-related
industries and their lack of critical mass, particularly in light of the
escalating costs of research and process development.
THE NEED FOR NATIONAL STRATEGIES
Well what does all this add up to? Certainly II'C can't hide from these realities. If
we really believe that our future security and cconomic vitality do indeed depend
critically on leadership in the broad electronics and information industry then, in light
of these realities -- in my. view we urgently need a set of strong national policies and
9
actions which can meet these issues head-on and can facilitate positive change. Defense
can help play an important role in this process.
This brings up what appears to be a very sensitive issue these days, namely, the total
aversion of many Administration officials to discuss anything smacking of the dread
term "industrial policy." So let me go ahead and discuss it anyway.
Whether we like it or not, other nations or economic blocs with which wc compete
in our own markets and worldwide, do have industrial policies both in terms of well
articulated competitive strategics and in terms of practices. These include planning,
emphasis in critical areas and close government-industry relationships in the form of
cnabling programs. These nations find our lack of such strategies very perplexing and,
for them, comfortable.
Our free-market ideology, without such a national strategy, places us at an
enormous disadvantage. The fact is, we're finding out that capitalism and so-called free
trade, like ice cream, is coming in 31 different flavors in today's world. The old vanilla
flavor we're accustomed to involves a hands-off laissez-faire attitude in free trade and
free market forces. It involves governmental policies which abhor choices between
industrial sectors and technologies and in providing differential incentives. This vanilla
flavor is quite distinct from the many forms of "managed capitalism" and even
"managed free trade" versus our "free free trade". Much of the world seems very
comfortable with these other flavors and I doubt if we can successfully ram vanilla down
their throats.
I would only point out that a determined hands-off policy on some of these issues.
in itself, constitutes a powerful form of industrial policy whether we like to call it that
or not.
This reminds me of a discussion between some policy makers here in Washington
and a Defense Science Board Task Force which I chaired on defense industrial
cooperation with the Pacific Rim. This policy group argued philosophically that "it
doesn't really matter if Japan has all the electronics in the world the U.S. can
concentrate on building the best automobile tires in the world and free-markets, in the
long run, will take care of everything and even things out". As I recall, this was about
the time Bridgestone of Japan took over the Firestone Tire Company.
SOME TECHNOLOGIES ARE MORE CRITICAL
Now I'll admit that I'm not an economist, but I can't quite get interested in a set of
theories that tell us there's nothing to worry about. In fact, I think its crazy to think
that we can't spell out some of the technologies and industries critical to our future and
then to find ways to enable them, to enhance them and to help us compete.
We know what some of these basic technologies are and we know that the industries
based on these technologies will be the basis of much of our future national security and
economic prosperity but we seem reluctant to make hard choices. For example, I'd like
to think that we can choose
between integrated circuit chips and buggy whips,
between computers and fast foods, or even
10
between complex software and mashed potatoes.
Is it perhaps just possible that the comfortable total free-market economic theories
which purportedly explain the past are no longer entirely appropriate to the new realities
of instant worldwide communication and technological globalization, of tremendously
shortened product life cycles and of the escalation of development and
commercialization costs? Perhaps these need some re-cxamination. And perhaps we
should bc more willing to experiment and change.
NEED FOR NATIONAL VISION
Well, what should we be doing about all this? From a pragmatic viewpoint, there
are a number of things which will help.
First and most importantly I believe it is extremely important and timely that
a coherent technology strategy or vision for the future be articulated at the highest
national level. It should state explicitly the importance of technological preeminence,
including production technologies, to our national health and security and as a critical
national goal. It should constitute a top-level policy direction which can catalyze and
guide the many enabling processes and fiscal policies which can then follow.
In my mind, if this constitutes so-called industrial policy, then so be it. We must, it
seems to me, have a common forward vision and basis for action.
A BROADER ROLE FOR GOVERNMENT
DOD's leadership in the decades since World War-1 has, in effect, constituted much
of our U.S. technology policy. The U.S. Government role should now be broadened
and be made appropriate for inclusion of worldwide commercial markets and dual
purpose technologies versus the monopsonistic government market per se.
I believe, in the 1990's, that the U.S. Government does have a responsibility to
become a more powerful catalyst and enabler than in the past. And the DOD can play
an important role model in much of this.
Specific enablers for us to compete and win both in national security and in world
economic competition include:
First, fixing our technical education. I will not belabor a subject that
hopefully is receiving much attention, except to point out the
commitment to education of other nations and that industry has a
strong responsibility and role. I think it's time that industry step up and
more fully meet these responsibilities in it's own self-interest. We must
become more involved.
Second. while the government admittedly is not equipped to choose and
support development of specific products per se, that is, to pick final
so-called winners and losers, the support of important generic enabling
technologies should be encouraged. Certainly we can define the broad
areas of technological importance which, if emphasized, can have an
enormous multiplier or domino effect on our future economy.
11
This support can be achieved, for example, through tax credits, through
encouragement of competitive consortia involving both industrial and
government contributions, through expanded R&D tax incentives and
through credits for technological capital investments in order to achieve
the reasonable costs of capital -- low cost patient capital -- that our
competitors enjoy. The Electronic Industries Association has made
other promising suggestions.
Third, I would again stress the importance of consciously stimulating
true conceptual innovation as well as linear extrapolation of current
technologies. One example is in the dimension of complex systems.
There are many others revolutionary in nature. We need to
continuously look for and encourage imaginative leaps forward in
applying technology. This has been and must continue to be a bedrock
basis for America's competitive leadership.
And this one doesn't even require direct government investment, only
as improved education and a motivational climate and reward for
innovation can be helped by government.
We must continually build and retain design capability. Jobs under
foreign ownership are not enough.
DOD programs such as MMIC and Mantech can be expanded and used
as models. These have been very successful .. they involve the element
of collaboration between companies to achieve critical mass, the element
of competition and the element of significant private industrial
investment. The Senate will shortly begin hearings on extending the
1984 National Cooperative Research Act and to consider the possibility
of joint manufacturing ventures as well. It is a much needed discussion.
TIME FOR HARD CHOICES
In short, it is time that some hard choices be made. Making choices is the nature
of life. We can't duck them or we are, in reality, choosing to become losers by default.
These kinds of activities, conducted and catalyzed under the banner of a top-down,
national technology vision which is articulated at the highest national level, can attack
the realities facing us in the 1990's and get us back on a clear winning track. We have
the industrial strength, the culture, the innovative adaptability, and the tradition to
come back in force I believe it is our government's responsibility to help lead the way.
So, Mr. U.S. Government - including you, Mr. Department of Defense -- we have
much to accomplish together as partners rather than as adversaries. Let's join forces
creatively in this new world environment which has been thrust on us. Let's find new
modes of cooperation new strategic partnerships -- appropriate to us rather than
copies of others'.
We need you, not as a micro-manager, but as an enabler. And then just get out of
the way and see what happens I think you'll be surprised!
Summing up, I'm a technologist and an electroniker and am perhaps somewhat
biased and I thank you for your patience. There is no point in giving a keynote speech
12
like this without a therapeutic unloading of some frustrations and personal beliefs. But
I believe strongly we are in a most critical period. We're in a window of great
vulnerability for the defense industry, for our electronics industry at large and for our
collective national future. We should project ourselves in our mind's eye to the year
2010 and look back and try to imagine in history's perspective what decisions and
what actions in 1990 - or lack of them -- affected the future of a great nation positively
or even disastrously at this critical junction.
---
Let's find new models. And let's not drive into the future just looking through our
rear view mirror.
There is no question in my mind that we can compete and win.
Simply stated, it's once again time for enlightened leadership.
13
JUL-11-1990 08:30 FROM UNDER SEC OF TECHNOLOGY TO
94567739 P.01
TRANSMITTAL SHEET
TECHNOLOGY ADMINISTRATION
U.S. DEPARTMENT OF COMMERCE
Room 4818 Hoover Building
Washington, DC 20230
Tele: (202) 377-1581
(202) 377-5687
Panafax: (202) 377-4817
DATE:
July 11, 1990
TO:
Olin Wellington
AGENCY:
The White House
TELE:
456.7968
FAX NO.
456.7739
FROM:
a/s Deborah L. Wince - Smith
AGENCY/DIVISION: O.O.S.T.P.
TELE:
377.1581
NUMBER OF PAGES INCLUDING COVER SHEET: of
SPECIAL INSTRUCTIONS/MESSAGE:
article on Sumi- Jan
JUL-11'-1990
08:30
FROM
UNDER SEC OF TECHNOLOGY
TO
94567739
P.02
NEW TECHNOLOGY
KING COMMUNICATIONS GROUP, INC.
Week
627 NATIONAL PRESS BUILDING, WASHINGTON, D.C. 20045
Telephone: (202) 638-4260
Telefax: (202) 662-9744
From the Editors of The Energy Daily and Defense Week
Monday, July 2, 1990
Volume 4, Number 27
Grumman
MITI's New
Controversy
Pulls Together
Quest For
Erupts Over
Maglev Team
Gigabit Chips
Semi-Gas
BY RICHARD McCORMACK
BY SHERIDAN TATSUNO
BY LUCY REILLY
Grumman Aerospace Corp. has
Japan's Ministry of International
Japanese company Nippon Sanso
put together a team to pursue mag-
Trade and Industry (MITI) has an-
plans to use several million in U.S.
netic levitation trains. The Grum-
nounced plans to begin a 10-year
tax dollars to finance its controver-
man team includes Parsons, Brinck-
R&D project to develop gigabit (bil-
sial, $23 million acquisition of Semi-
erhoff, Quade & Douglas of New
lion bits) memory chips. Slated to
Gas Systems Inc., a subsidiary of
York City: General Electric
begin next March, the proposed
Wilmington, Del.-based Hercules
Research and Development Center
project will develop quantum tech-
Inc., industry and government
in Schenectady, GE's Transporta-
nologies that will allow Japanese
sources said.
tion Systems in Eric, Pa., and Inter-
chipmakers to produce extremely
magnetics General Corp. of Guilder-
fine-line memory chips for use in
"Here we have a successful U.S.
land, N.Y.
handheld workstations, laptop
company-10 years old-that now
supercomputers, HDTVs, tele-
has a major share of the industry in
The New York State Energy
phones and other memory-intensive
the United States and is a key player
Research and Development Au-
thority has selected the Grumman
products.
in the world," said a senior execu-
tive of Semi-Gas.
team to look into a magnetic levita-
MITI hopes to develop quantum
tion system for the state of New
function devices-super-dense,
"Comes along a foreign company
highly functional devices that will
York. The project "will support
with money, some of which is taken
New York State's efforts to become
go far beyond the one-gigabit level.
from U.S. taxpayers, and they're us-
a leader in the application of maglev
The project will focus on fine-line
ing that to buy our technology and
technology in the upcoming federal-
quantum devices, quantum dot
take the profit and the technology
ly supported maglev research and
memories and quantum wave inter-
overseas. That says to me that the
development programs," says the
ference devices. MITI will initially
taxpayers are paying, in part, for
Authority.
develop a fine-line quantum device
the acquisition," the Semi-Gas ex-
that connects a source electrode to a
ecutive said.
(Continued on page 12)
(Continued on next page)
(Continued on page 4)
Japan adopts the new process, while the U.S. lags behind.
Plastic Refining: Solid Waste Solution?
BY KIMBERLY DOZIER
Government Industrial Laboratory in Hokkaido, Japan,
since 1973, was licensed jointly to Fuji Recycle, Mobil
Fuji Recycle Industry K.K. of Tokyo is using
Chemical Industries Ltd. and the Japanese Ministry of
government-developed technology to turn plastic
International Trade and Industry (MITI) in 1987, Fuji
waste into petroleum products, freeing up incin-
Recycle chief executive officer Toshio Hirota told New
erators, and making a profit out of a growing waste
Technology Week.
disposal problem. Japanese and Korean governments
Fuji Recycle has spent $5.1 million to commercial-
are lined up to buy the process, which joint patent
ize the process and build a pilot-scale facility with an
owner Mobil Corp. has dismissed as problematic and
annual capacity of 400 kilograms. An additional $4
unprofitable.
million has been promised from MITI for further
The Fuji process is described as a simple one, in
research. Mobil and Japan-based Tosoh Corp. are
which crushed polyethylene plastic-the low-grade
supplying the primary catalyst used in the petroleum
plastic used for milk and soda bottles-is heated and
reclamation, but have little or no involvement in the
broken down into a vapor. A catalyst then reacts with
commercialization process.
the vapor to break it into naphtha, kerosene and gas
While Mobil is convinced the technology works, the
oil. The products are condensed into liquids in a cooler
company remains skeptical about the commercial
and refined.
practicality of plastics recycling. "[Fuji Recycling] still
The technology, under development by the
(Continued on page 8)
JUL-11'-1990
08:31
FROM
UNDER
SEC
OF
TECHNOLOGY
TO
94567739
P.03
4
Monday, July 2, 1990 NEW TECHNOLOGY WEEK
U.S. Scientists Complain About Employers
Semi-Gas
After polling 4,300 research scientists, R&D Magazine has found that 48
percent of them feel that they are working for organizations that are "not
open to new ideas." This conclusion, says R&D Magazine's editor Robert
Controversy.
Cassidy, "is startling because it indicates that the people most responsible for
(Continued from page one)
making American strong in technology think the idea-creating system isn't
The executive said employees of
working."
the Massachusetts-based Semi-Gas
Two-thirds of the scientists are distressed by the way they are treated by
feel helpless as they sit back and
management, saying their employers "do not offer researchers the same re-
watch the sale of their company to a
wards and opportunities to advance that they offer managers." The poll also
foreign firm unfold. The final sale is
indicates that scientists feel that they are kept in the dark when it comes to
up to parent company Hercules,
their company's long-range plans and that they are burdened with red tape in
who is hungry for the cash.
recommending and carrying out research. Fifty-nine percent said their em-
"We're just pawns on the
ployers failed to effectively communicate their organizational goals.
board," he said.
The survey also found that the scientists love their jobs.
Semi-Gas is the largest supplier of
Top 100 Slow R&D Spending
gas handling equipment to the semi-
conductor industry worldwide, with
sales last year of $20 million. Nip-
The top 100 spenders on research
Japanese way of conducting R&D,
pon Sanso plans to acquire the
and development among U.S. cor-
says Inside R&D. The top 100 U.S.
company through its American sub-
porations increased R&D funding
companies in R&D spent $53 billion
sidiary Matheson Gas Products
by 8.7 percent last year, down from
conducting their research in 1989,
Inc., and came a step closer last
the 10.7 percent increase in 1988,
accounting for 77 percent of the
week as officials from the govern-
according to a survey by the publi-
total industrial R&D spending.
ment's Committee on Foreign In-
cation Inside R&D. The slowdown
R&D spending as a percent of
vestment in the United States
is attributed to a growing emphasis
sales increased, on average, from
[CFIUS] said they will step aside
on pursuing incremental product
3.67 percent in 1988 to 3.82 percent
and allow the acquisition to occur
improvements rather than on basic
in 1989. Research spending per em-
unless a threat to national security
research targeting big break-
ployee increased as well, from an
emerges, sources said.
throughs. This trend is the result of
average of $9,010 per employee in
In private meetings in Washing-
companies trying to imitate the
1988- to $10,500 per employee in
ton, CFIUS officials met with rep-
1989.
resentatives from Nippon Sanso,
Matheson Gas, Hercules and Semi-
Top 10 on Inside R&D 100 List
Gas. CFIUS, which has blocked the
1989 R&D
(Increase)
sale of only one U.S. company to a
Rank
Spending
from Previous
foreign firm since its creation
1989
1988
several years ago, is not expected to
Company
($ Million)
Year (%)
stop the Semi-Gas Systems sale be-
1
1
General Motors
5247.5
10.4
2
2
IBM
cause its sale is not regarded as a
5201.0
17.7
3
3
Ford
3167.0
8.1
national security issue.
4
4
AT&T
2652.0
3.1
CFIUS officials declined to con-
5
6
Digital Equipment
1525.1
16.7
firm whether the sale of Semi-Gas
6
5
Du Pont
1387.0
5.2
7
7
General Electric
1334.0
was under review.
15.5
8
9
Hewlett-Packard
1269.0
20.2
But industry sources told New
9
B
Eastman Kodak
1253.0
9.2
Technology Week that Nippon
10
10
United Technologies
956.6
2.6
Sanso intends to finance about half
the cost of the sale through a $10
Source: Inside R&DO
million cash-loss carryforward re-
corded by its Matheson subsidiary.
Nippon Sanso completed its acquisi-
R&D spending by Top 100 Companies by Industry
tion of Matheson in 1969.
($ Million)
When Nippon Sanso announced
Industry (number of
%
its intentions to acquire Semi-Gas
companies included)
1989
1988
Increase
last winter, it triggered widespread
Computers (15)
11,510.4
9,840.5
17.0
opposition in U.S. industry among
Motor vehicles (4)
9,491.8
8,664.5
9.5
companies concerned that it was
Pharmaceuticals (13)
5,688.4
5,068.6
12.3
another case of a Japanese firm
Electronics (15)
5,280.0
4,779.7
10.5
Aerospace (10)
profiting off U.S. innovation. One
4,729.4
4,656.5
1.6
Chemicals (9)
4,127.7
3,849.7
7.2
of the most outspoken critics of the
Scientific and
sale has been the Austin, Texas, semi-
photographic equipment (6)
3,917.6
3,264.8
20.0
conductor manufacturing consor-
Telecommunications (2)
2,933.0
2,869.0
2.2
Petroleum (8)
2,055.0
1,918.0
7.1
tium, Sematech. Semi-Gas has col-
Industrial and farm
laborated with Sematech for two
equipment (4)
694.0
597.9
16.1
years on development of its gas dis-
tribution technology.
Source: Inside REDD
"Sematech feels very strongly
(Continued on page 9)
JUL-11'-1990 08:32 FROM UNDER SEC OF TECHNOLOGY
TO
94567739
P.04
NEW TECHNOLOGY WEEK Monday, July 2, 1990
9
Semi-Gas
Japanese Control Liquid Crystal Displays
(Continued from page four)
TOKYO-Japan's electronics industry, with government help, is pouring
that it is against the best interests of
huge sums into liquid crystal displays and hopes to overcome formidable
the U.S. semiconductor industry
technical barriers that would allow them to develop large displays. "Techni-
and the nation as a whole for Semi-
cally, 40-inch LCDs with quality comparable to today's TVs will be realized
Gas Systems to be sold to a foreign
in six or seven years," says Eiji Kaneko, director of the Giant Electronics
competitor whose apparent inten-
Research Laboratory, a government-sponsored consortium of 17 companies.
tions are worldwide market domina-
"We're hopeful they can be commercialized in 10."
tion," wrote Turner Hasty, Se-
Sharp, Hitachi, Hosiden and other Japanese firms this year will invest
matech executive vice president and
about $1 billion to research, develop and set up plants to make LCDs, which
chief operating officer, to Hercules
are widely used in watches and laptop computer screens. Sharp, which is con-
Chairman David Hollingsworth in
sidered the leader of the pack, plans to invest $650 million over the next three
April.
years.
Sematech is concerned the sale
The only foreign group that is even close to the Japanese in LCD de-
would offer Nippon Sanso insight
velopment is IBM, which makes LCDs in a joint venture with Toshiba. "This
on the consortium's strategies,
is a Japan-supplies-the-world market," says Steve Myers, an analyst with
harming national security and di-
Jardine Fleming Securities.
vulging proprietary U.S technology
State-of-the-art production models deliver 16 colors on a laptop display.
information.
Samples of 14-inch displays with far better picture quality and color compar-
Officials from Sematech and the
able to televisions are due out later this year but will cost about $3,900.
Semiconductor Equipment and Ma-
Prototypes of 20-inch LCD screens are expected next year, though com-
terials International [SEMI] contac-
mercialization is still three to four years off. Scaling up beyond 25 inches will
ted Hercules executives and told
require technical breakthroughs that many people doubt are possible.
them of their concern of the pro-
Although research is costly, strong demand for LCD products is fueling
posed sale to a foreign firm.
R&D spending. Demand is growing rapidly for smaller LCD panels used in
"We understand that Hercules
Inc. has refused to consider a lever-
portable TVs and VCRs, video telephones, electronic pocket notebooks, lap-
top personal computers and automobile dashboards.
aged buyout by Semi-Gas Systems
By the middle of this decade, LCDs should displace cathode ray tubes as
management that would have ena-
the most valuable display technology. By 2000 the LCD business will have
bled it to remain an American com-
grown 10 times to some $13 billion.
pany," Hasty wrote Hollingsworth.
Despite the Japanese blitz, the game is far from over. Active-matrix LCDs
Despite SEMI/Sematech offers to
may never be scaled up to large sizes at affordable prices. And Japanese
help Hercules find an American
companies, along with many in the United States and Europe, continue to
buyer, the formal offers "did not
explore alternative flat-panel technologies.
even receive the courtesy of an ac-
But even if other approaches to LCDs turn out to be the screen technology
knowledgement."
of the future, Japanese firms are likely to dominate. "Whichever way the
The Semi-Gas executive said that
market moves. they'll have a product," says Myers.
Hercules "perceives Sematech as the
-Steven Brull, Reuters
enemy because [Hercules] wants the
money." And, if the Semi-Gas sale
proceeds, "the ramifications are
Coal Production Hits Record High
that we would become discontinued
Production and consumption of coal is hitting a record pace, according to
from Sematech, which would se-
the National Coal Association. NCA's mid-year forecast says coal produc-
verely hurt our R&D."
tion will hit just over one billion tons by year end, about 22 million tons over
Sam Harrell, president of
the prior record of last year and the first time ever that production will top
Semi/Sematech, told Hercules exec-
the billion-ton mark.
utives in January that "a disassocia-
tion with Semi-Gas at this time or at
Medtronic To Build Lab In Japan
any time in the near future would
Medtronic Inc. of Minneapolis, will soon be breaking ground on a tech-
harm Sematech's long-term stra-
nology center in Chitose, on Hokkaido in northern Japan. The center is a
tegies. As you know, Sematech's
"significant milestone in the evolution of Medtronic as a global company,"
charter, as guided by the Defense
proclaims Winson Wallin, chairman and CEO. The center will manufacture
Department and the U.S. Congress,
cardiac pacemakers. "As the leader in the Japanese pacemaker market,
provides preferential treatment to
Medtronic intends to grow from those roots [and] build closer relationships
U.S. vendors/suppliers of semicon-
with Japanese physicians," says Wallin.
ductor manufacturing equipment
and materials. While our charter al-
lows us to transact with foreign-
Du Pont Receives Thallium SC Patent
owned companies, this may only be
Du Pont boosted its high temperature superconductivity patent count
done as a measure of last resort."
last week to seven, making it the leading company in the amount of
But the sale of Semi-Gas to Nip-
patents granted for the new generation of superconductors. The patent
pon Sanso is not a done deal. The
is for a thallium-barium-copper-oxygen superconductor. The composi-
Department of Treasury plans to
tion is similar in structure to a thallium-lead superconductor patent Du
conduct an anti-trust investigatory
Pont received earlier this year, but differs in that the concoction has a
review within the next three weeks
single copper-oxygen layer instead of multiple layers. It is superconduc-
before a deal could be consum-
tive at temperatures in the range of 90 degrees Kelvin.
mated, a source said.
The
Competitive Status
of the U.S.
Electronics
Sector
from
Materials to Systems
DEPARTMENT OF COMMERCE
UNITED AMERICA
STATES OF
U.S. DEPARTMENT OF COMMERCE
International Trade Administration
The Competitive Status of the U.S.
Electronics Sector
From Materials to Systems
A report from
The Secretary of Commerce
to
The Appropriations Committee
U.S. House of Representatives
U.S. DEPARTMENT OF COMMERCE
International Trade Administration
April 1990
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402
FOREWORD
The issue of the competitive status of U.S. industry vis-a-vis
foreign competitors has been under examination for some time. The
President's Commission on Industrial Competitiveness defined
competitiveness as: "the degree to which a nation can, under free
and fair market conditions, produce goods and services that meet the
test of international markets while simultaneously maintaining and
expanding the real income of its citizens.' 1/
This definition implies that the competitiveness of nations and
companies are intertwined. A government must provide a favorable
environment which fosters economic growth, a well-educated work
force, and a well-developed infrastructure to support investment and
innovation. In order to survive, a company depends upon this larger
environment and, in addition, must provide products of high quality
and reliability at a competitive price.
This study will examine both of these levels of competitiveness,
focusing on the U.S. electronics industries, considered to be one of
the leading high technology sectors, and thus a bellwether of U.S.
competitiveness.
This effort is the result of a request from the House Appropriations
Committee of the U.S. Congress to the Department of Commerce,
mandating that it work with other government agencies and the
private sector to develop a plan to restore the international
competitiveness of the U.S. semiconductor and electronics
industries. This document has been seen by nearly 50
representatives in the electronics sector and officials in 10
agencies of the U.S. Government. It represents the first step in
this process--a statement on the status of the U.S. electronics
sector, the issues facing it, and some options for consideration in
addressing these issues.
This report represents the views of the Department of Commerce.
It does not neccessarily reflect the views of the Administration
nor has it received interagency clearance.
This report represents the status of the sector and its associated
issues through December 1989.
1/ Global Competition-The New Reality, The Report of the President's
Commission on Industrial Competitiveness, January 1985, Volume I,
page 6.
- iii -
TABLE OF CONTENTS
Page
Executive Summary
X
Definition
xiii
I. Current State of the U.S. Electronics Sector
1
A. Key Characteristics
1
B. Importance of Sector to the National Interest
7
C. Competitive Status of the U.S. Electronics Sector
10
II. Issues Facing the U.S. Electronics Sector
20
A. National Issues
21
1. The Cost and Availability of Capital
21
2. Exchange Rates
23
3. R&D Tax Credits
25
4. Education and the Work Force
27
5. Antitrust
29
6. Short-Term Corporate View
30
B. Sectoral Issues
31
1. Lack of Consensus
31
2. Research and Development
32
3. Unfair International Trade Practices
37
4. Intellectual Property Rights
39
5. Export Regulations
40
6. Growing Dependence on Foreign Suppliers
41
7. Increased Foreign Investment in the Sector
45
8. Export Financing
53
III. Actions Taken on Behalf of the Electronics Sector
54
A. Actions on National Issues
55
1. The Cost and Availability of Capital
55
2. Exchange Rates
55
3. R&D Tax Credits
55
4. Education and the Work Force
56
5. Antitrust
58
6. Short-Term Corporate View
59
B. Actions on Sectoral Issues
59
1. Lack of Consensus
59
2. Research and Development
59
3. Unfair International Trade Practices
63
a. Recent U.S. Government Trade Actions
63
b. U.S. Company Actions
68
C. Future Trade Concern-EC 92
70
4. Intellectual Property Rights
70
a. U.S. Government Actions
70
b. Company Level Actions
72
5. Export Regulations
72
6. Growing Dependence on Foreign Suppliers
76
7. Increased Foreign Investment in the Sector
76
8. Export Financing
77
IV. Government and Private Sector Roles
in the Electronics Sector
79
A. Role of Government
79
B. Role of Private Sector
81
C. Conclusions
82
V. Future Competitive Trends
83
- V -
CONTENTS (Continued)
Page
VI. Options for Addressing the Issues Facing
the U.S. Electronics Sector
87
A. Department of Commerce Initiatives
89
B. Proposals for Consideration by Other
Organizations
91
APPENDICES
A. Semiconductor Case Study: Memory Market
93
B.
Workstation Case Study
106
C.
Major R&D Facilities of Foreign Electronics
Companies in the United States
121
D.
Sematech Case Study
125
E.
Digital Central Office Switches
128
F. History of U.S. Government Involvement in
Research and Development
144
G.
Directives for EC 92
147
H.
Comparison of Electronics Policies in
Selected Countries
156
I.
Country Profiles
175
Japan--Computer Equipment
175
Japan--Computer Software
189
Japan--Telecommunications
191
Brazil
195
India
199
Singapore
204
Korea
207
Taiwan
210
France
213
European Economic Community
218
- vi -
LIST OF TABLES
Page
Table
1
Comparison of R&D Spending by Selected Industries
3
Table
2
U.S. Trading Patterns in Leading Computer Markets
1986
5
Table 3
Alliances Between U.S. and Foreign Electronics Firms
6
Table 4
Number of Enterprises in the U.S Electronics Sector
6
Table 5
Comparison of Exports by Industry Sector
7
Table
6
Patents Granted to U.S. and Foreign Inventors
9
Table 7
Ranking of Electronics Sector in Selected Countries
11
Table
8
Comparing Electronics Sectors in Selected Countries. 12
Table
9
Top Ten Firms Awarded U.S. Electronics Patents in
1987
15
Table 10 U.S. Share of Worldwide Electronics Markets -
1984 and 1987
17
Table 11 Datamation 100 Results - 1983 and 1987
19
Table 12 Shares of Venture Capital Funding by Industry
23
Table 13 Ranking of Corporate Objectives - Japan vs U.S
31
Table 14 Value of U.S. Electronics R&D by Funder - 1977-1986 33
Table 15 The Worldwide Laptop Computer and Components Market
U.S. and Japanese Share
44
Table 16 Foreign Direct Investment Position in the U.S.
Electronics Sector
47
Table 17 Annual Foreign Investment Outlays for Acquisitions
and Establishments in the U.S. Electronics Sector
48
Table 18 Investment/Acquisition and New Plant Establishments
of Japanese Companies in Selected U.S. Electronic
Industries 1980 - 1987
49
Table 19 Share of Total Assets of U.S. Electronics Sector
Held by U.S. Affiliates of Foreign Companies
50
- vii -
TABLES (continued)
Page
Table 20 U.S. Sales and Trade of U.S. Affiliates of
Foreign Electronics Companies
50
Table 21 Share of Total Employment in U.S. Electronics
Sector Held by Affiliates of Foreign Companies
52
Table 22 Research and Development Outlays of U.S.
Affiliates of Foreign Electronics Companies
52
Table 23 Federal Obligations for Research Performed
in Universities and Colleges in Electronics-
Related Disciplines by Major U.S Government Agency
61
Table 24 Federal Obligations for Applied and Basic
Research Performed at Universities and
Colleges in Electronics-Related Disciplines
62
Table 25 U.S. Government Trade Actions in the Electronics
Sector
64
Table 26 U.S. Industry Trade Actions in the Electronics
Sector
69
Table 27 Elements That Have Led to Success in Electronics
80
Table 28 Principal U.S. Competitors in the Future
83
- viii -
LIST OF CHARTS
Page
Chart
1
The U.S. Electronics Sector
xiv
Chart
2
Capital Expenditures
2
Chart
3
1987 Shipments and 1977-87 Growth Rates. of Selected
Selected U.S. Industries
8
Chart
4
U.S. Share of Selected International Computer
Markets. (1977 and 1986)
18
Chart
5
YEN Appreciation and Pass-Through in Dollar Import
Prices-Quarterly (1st Quarter 1986 - 4th Quarter
1987)
24
Chart
6
Japanese Joint Research and Development Efforts
34
Chart
7
European Joint Research and Development Efforts
35
Chart
8
U.S. Share of Computer Shipments (1984 and 1987)
42
Chart
9
Competitiveness Issues and U.S. Government
Agencies Responsible
88
APPENDICES
Appendix A
Chart 10 MOS Memory World Market Share
94
Chart
11 Worldwide MOS Memory Market Share of Sales
95
Chart
12 1987 Worldwide DRAM Demand by End-User Product
Type
96
Chart
13
DRAM Market Share
97
Chart 14 DRAM Revenue by Region of Production
98
Appendix B
Chart 15 Evolution of Computer Architectures
108
Chart 16 Selected U.S. Workstation
Products: Price and Performance
109
Chart
17
Technical Workstation Vendor Market Share
111
Chart 18 U.S. Versus Japanese Competitive Advantages
114
Chart
19 Major Workstation Microprocessor Architectures
116
Chart 20 Major Strategic Alliances of U.S. Workstation
Suppliers
119
- ix -
EXECUTIVE SUMMARY
The U.S. electronics sector has been historically and remains today
the overall leader in the world by many measures. In terms of
output, employment, innovation, and technology base, the United
States is number one. However, in terms of the growth of these
measures and others, such as exports, Japan and Korea are quickly
reducing the U.S. advantage. In fact, if current relative growth
rates continue, the Japanese will be the world's number one
electronics producer and trader by the early 1990s.
U.S. suppliers of a broad range of electronic products have seen
their worldwide market shares rapidly decline over the last several
years--from silicon wafers and DRAMs (memory chips) to computer
displays and telecommunications network switches. The situation is
even bleak for some of the newest technologies: X-ray lithography,
optical storage devices, and flat panel displays.
Thus, U.S. leadership in electronics is under serious challenge and
may very well be eclipsed unless continued tenacity by the U.S.
private sector is accompanied by a higher degree of consensus within
the industry and improved coordination with academia, federal, state
and local governments.
The Importance of Electronics to the Nation
Electronics is the major growth area in the U.S. economy--in terms
of employment, output, exports, and innovation. In 1988, the sector
employed nearly 2 million workers and shipped $200 billion in
products, of which $39 billion was exported. Electronic inventions
received 40 percent of all patents, and the sector conducted 20
percent of all U.S. industry's research. These facts suggest that
any further erosion in this sector's competitive status could have
serious implications for the health of the U.S. economy and the
standard of living of Americans generally.
Electronics is also vital to the nation's defense and security since
our military advantage is based on technological superiority, not
the quantity of the weapons in our arsenals.
Causes of the Competitive Challenge
The causes can be found both domestically and internationally.
Domestically, the electronics sector is disadvantaged relative to
other nations in such areas as the higher cost and lower
availability of finance capital, weaknesses in vocational training
and science and engineering education, and stricter antitrust laws.
Although these issues affect many other U.S. industries, electronics
is particularly vulnerable, since the sector is one of the most
capital intensive, is extremely dependent on scientists and
engineers throughout its operations, and may be forced to move
toward joint manufacturing efforts in some products to counter
foreign dominance.
- X -
Internationally, the sector faces targeting by many foreign
governments which have identified electronics as crucial to their
economic destinies. They have instituted policies to foster their
domestic industries, including restricting domestic markets, funding
joint R&D projects, and forcing the transfer of technology from
foreign suppliers to domestic firms. Electronics firms have been
hurt by unfair trade practices such as dumping and intellectual
property rights violations.
In contrast to these foreign governments, the U.S. Government has
not had a coordinated set of policies directed at this sector. In
general, the United States has followed an ad hoc approach, the
effect of which has been to place the U.S. electronics sector at a
competitive disadvantage vis-a-vis some of its foreign competitors.
The electronics sector itself is the origin of some of the reasons
for its declining competitiveness. As is true of U.S. corporations
in general, management of electronics companies has been forced by
their equity structure to take a less strategic view of the market
than have their foreign competitors, who often emphasize market
share over return on investment. The smaller capitalized,
entrepreneurial character of companies comprising over 90 percent of
the firms in this sector make them more vulnerable to price
discounting tactics frequently employed by foreign competitors.
Some U.S. electronics firms are not as efficient as their Japanese
competitors in transferring research and development results to the
market. Moreover, the Japanese lead in manufacturing techniques,
giving them an edge in producing low-cost, high-quality products.
The Japanese have made substantial market gains through their focus
on making incremental improvements on existing products.
There is a lack of consensus on the magnitude of the competitiveness
problem, its causes, and there has been much discussion of the
appropriate roles of government and industry in addressing the
problem.
U.S. Government and Private Sector Actions
The U.S. Government, companies, trade associations, and universities
have begun to take steps to enhance the competitiveness of the
sector. For example, the Sematech R&D consortium was established,
jointly funded by government and industry, to regain U.S. leadership
in semiconductor manufacturing technologies. Additionally, the U.S.
Government is considering amendment of the U.S. antitrust laws to
allow consortia which would cover joint production efforts.
Internationally, the U.S. Government's trade policy activities have
focused on countering the targeting efforts of foreign governments
through bilateral and multilateral negotiations to pressure these
governments to open their domestic markets and to stop trade
distorting practices.
- xi -
Both government and industry have been active in addressing the
unfair trade practices of foreign companies in terms of dumping and
infringement of intellectual property rights. Despite considerable
attention by policymakers, however, challenges to the sector's
competitiveness remain.
Recommendations for Additional Action
Unless other steps are taken to address the broad range of issues
which affect the competitiveness of the sector, the long-term
competitiveness of the U.S. electronics industries could be placed
at unnecessary risk. The U.S. Government needs to play an active
role, but it is the role of the private sector to chart the course
to competitiveness.
- xii -
DEFINITION OF THE ELECTRONICS SECTOR
"Electronics" has always been an imprecise term, but confusion over
its definition has increased as new technologies, products, and
applications have proliferated. According to the American Heritage
Dictionary, electronics is, "the commercial industry of electronic
devices and systems." This definition would include a broad range
of products that incorporate some electronic content--from talking
teddy bears, to automobiles, to space satellites to supercomputers--
both consumer and industrial goods.
This study will concentrate on the industrial segment of this range
of products and largely ignore the consumer segment. A variety of
studies have been done on this latter segment, including a recent
effort from Massachusetts Institute of Technology (MIT). 1/ We
judged any additional study on our part to be duplicative.
We will concentrate on those industries that are directly involved
in the manufacturing of electronic equipment, i.e., primarily the
seven industries in the solid boxes in Chart 1: business equipment
(including photocopiers), computers, electronic components
(including semiconductors), instruments (including automatic test
equipment or ATE), semiconductor manufacturing equipment (SME),
software, and telecommunications. 2/ This collection of industries
will be referred to as the electronics sector.
In addition to this study, the Department of Commerce is currently
conducting a competitiveness study of the U.S. telecommunications
industry as mandated by Section 1381 of the Omnibus Trade and
Competitiveness Act of 1988. Many issues unique to the
telecommunications industry that have not been addressed in this
study on the electronics sector will be examined in detail in the
telecommuncations report, which is due to be published in fiscal
year 1990.
1/ The Decline of U.S. Consumer Electronics Manufacturing: History,
Hypotheses, and Remedies, The Working Papers of the MIT Commission
on Industrial Productivity, MIT Press, Cambridge, Massachusetts,
1989.
The following SIC codes (Standard Industrial Classification) are
covered: business equipment -- SIC 3574, 3579, 38612; computers --
SIC 3573; electronic components -- SIC 367; instruments --
SIC 382; software -- SIC 7372; telecommunications equipment --
SIC 3661, 36621.
- xiii -
Chart 1
The U.S. Electronics Sector
Total Electronics - - 1988
Revenues: $202 Billion
Employment: 2 Million Persons
Software
$20 B
237,000
e.g. DBMS
Operating Systems
Materials
$138 M
Computer
Telecommunications
-
Equipment
Equipment
Instruments
e.g. Silicon
$61 B
$24 B
$35 B
Gallium Arsenide
294,000
410,000
Telecomm
344,000
Services
e.g. Supercomputers
e.g. Central Office
e.g. Process Control
Personal Computers
Switching
Instruments
SME & ATE
Workstations
Private Branch Exchange
Magnetic Resonance
$4 B
Peripherals
Fiber Optics
Imaging Equipment
Data Proc.
-
Services
e.g. Steppers
Etchers
Business
Logic/Memory Testers
Equipment
$8 B
Consumer
80,000
Other High-
Electronics
Tech Services
Components
e.g. Copiers
$59 B
Typewriters
553,000
Facsimiles
e.g. Semiconductors
Passives
Source: Science & Electronics, U.S Department of Commerce
I. CURRENT STATE OF THE U.S. ELECTRONICS SECTOR
This section will cover the key characteristics that make the
electronics sector unique and its importance to the U.S. economy and
national security. It will also examine how the U.S. sector
compares to similar sectors in other countries and the sector's
competitive status in the world market.
A. Key Characteristics
Summary: The electronics sector has a number of characteristics
that affect its competitiveness. The sector is characterized by
capital, and research and development (R&D) intensity,
cross-industry dependencies, a global marketing and production base,
increasing firm-level collaboration both domestically and
internationally, and a high concentration (95 percent) of companies
with assets of less than $10 million.
Capital Intensive
The electronics sector is highly capital intensive, exceeding all
manufacturing by a wide margin (see Chart 2). Although the sector
is a major employer, the percentage of production workers has
declined in recent years, replaced by increasing automation to
remain competitive in the world market in terms of price, quality,
and time of delivery.
Labor costs are no longer an important competitive factor, since,
for most electronic products, direct labor costs only represent 5 to
10 percent of total manufacturing costs. Any slight advantage that
still exists in the Far East and Latin America has reportedly been
offset by higher administration, shipping, and inventory costs, and
by lower productivity in some newly industrialized nations.
R&D Intensive
The electronics sector is the leader in the U.S. economy in the
amount spent on R&D and as a percent of sales. Table 1 shows that
by 1987 a sample of U.S. electronics companies had more than doubled
the rate of spending on R&D over the 10-year period, accounting for
20 percent of the all industry composite. The relatively higher
percentage (7.9 percent in 1987) spent on R&D by the electronics
sector reflects short product life cycles and the resulting need for
rapid product development. In many cases, electronics companies
gain a high percentage of their revenues from products that are less
than five years old.
"Manufacturing Offshore is Bad Business," by Constantinos C.
Markides and Norman Berg, Harvard Business Review, September
-October 1988. Also, "ADDS is Bringing A Lot of It Back Home," "
Electronics, January 1989.
- Z -
Thousands of Dollars
Source: Bureau of the Census
0
5
10
15
20
25
30
SEMICONDUCTORS
TELECOMMUNICATIONS
MEDICAL EQUIP.
INSTRUMENTS
per U.S. Production Worker
CAPITAL EXPENDITURES
Chart 2
COMPUTERS
ELECTRONICS
ALL MANUFACTURING
S
1986
1984
1982
1980
1978
Table 1 Comparison of R&D Spending by Selected Industries
1977
1987
Industry
Value
Percent
Value
Percent
Sector
($ M)
of Sales
($ M)
of Sales
Electronics
4,240
3.7
10,645
7.9
Aerospace
972
3.5
3,865
4.4
Chemicals
1,665
2.5
4,168
3.7
Automotive
3,719
2.4
8,653
3.5
Manufacturing
1,428
2.6
1,463
2.3
All Industry
Composite
18,048
1.9
54,267
3.4
Source: Derived from "R&D Scoreboard" for the years 1977 and
1987, in Business Week, July 3, 1978 and June 20, 1988.
Cross-Industry Dependencies
The industries within the U.S. electronics sector are linked
technologically and economically with companies having close working
relationships. For example, manufacturers who produce ultra pure
silicon wafers in the materials industry must work closely with
makers of semiconductor manufacturing equipment (SME), automatic
test equipment (ATE), and semiconductor devices to ensure that such
products as dynamic random access memories (DRAMs) can be produced
cost effectively in high volume. The suppliers of the various
"downstream" systems products--computers, business equipment, and
telecommunications equipment--will design these memory chips into
their latest products and will depend on the "upstream" suppliers
for reliable, high-quality chips at competitive prices. Software is
an overriding product that is necessary to make all digital
electronic systems function. Software is found in virtually all
these products whether embedded in the circuity of the chips or
recorded on magnetic disks or tape.
A technological or business development in one of the electronics
industries can have a profound effect on others. The most recent
example of this interdependence was the DRAM shortage beginning in
1987 (see case study on memory market in Appendix A), which involved
the shortage of 256K and 1M memory chips from Japanese suppliers and
which found many U.S. system-level suppliers facing squeezed profit
margins and lost sales.
Broad Product Range
Products in the electronics industries cover a wide range, from
those that are sold in the millions of units and that are very price
sensitive to those whose annual sales number in the hundreds and for
- 3 -
which price is secondary to performance. Commodity items, such as
many semiconductors, are similar from one manufacturer to another in
terms of function, design, quality, and process technology. These.
items are often purchased in large quantities, with competition
centering on price as the major factor in a purchaser's decision.
Profit margins can be razor thin for such products.
At the other extreme are products, such as supercomputers, that may
cost as much as $10 to $25 million per system, but the sale of which
is contingent on the overall level of performance of the hardware,
including the type and variety of software available. While
competing systems might have a theoretically higher raw processing
speed, their ultimate utility for real world tasks can be severely
limited by a lack of proper software. In fact, at the electronic
systems level, the availability of appropriate software to run the
machines is a major competitive advantage of U.S. suppliers.
Global Production and Marketing
Since their commercial beginnings, companies in the U.S. electronics
sector have had a major presence overseas. U.S. electronics
companies are leading employers, manufacturers and exporters in
Europe, Japan, Canada, and many of the developing countries.
This strong foreign position can be seen by examining the overseas
position of the largest industry in the sector, computer equipment.
Table 2 shows the relative proportions of five major overseas
markets served by U.S. computer exports and by U.S. overseas
subsidiaries. These figures highlight the importance of foreign
investment to the U.S. computer industry. In 1986 these five
markets had a total value of about $47 billion, of which U.S. firms
supplied $21 billion or 45 percent. U.S. exports represented about
$9 billion of the $21 billion, leaving $12 billion supplied from
overseas production facilities of U.S. computer firms. Thus, U.S.
overseas investment was the source of more than 60 percent of the
value of U.S. computer shipments to these markets. Less than 40
percent of U.S. computer shipments was represented by U.S. exports.
Increasing Collaboration
The U.S. electronics sector has had a history of collaborations
among both domestic and foreign firms with complementary product
lines. These collaborations have taken several forms: joint
ventures in R&D, manufacturing, or sales; distribution and marketing
agreements; technology licensing agreements; and outsourcing
(purchasing foreign designed and developed parts and components).
Overseas, U.S. electronics firms have often been required to forge
such links to avoid market restrictions imposed by foreign
governments. In addition, as foreign electronics firms have
advanced relative to U.S. suppliers in terms of delivering products
competitive in technology, price, and quality, U.S. electronics
companies have come to depend on them to remain competitive in
- 4 -
Table 2 U.S. Trading Patterns in Leading Computer Markets-1986
Total
Total
Total U.S.
Country
Market
U.S. Share
Export Share
($B)
($B)
(%)
($B)
(%)
Japan
15.0
3.3
22
1.2
8
West Germany
10.0
5.8
58
2.3
23
United Kingdom
8.1
3.2
40
1.9
23
France
8.7
4.8
55
2.0
23
Italy
4.8
3.8
79
1.2
25
Total
46.6
20.9
45
8.6
18
Source: Various, including official foreign government data.
certain markets. Some of the more recent agreements have resulted
from the need to share the growing costs and risks of R&D, to
broaden product lines, and to obtain manufacturing capabilities not
available in-house. The long-term cost of some of these linkages
has been the more rapid diffusion of U.S. technology to foreign
concerns, many of which have emerged as major competitors in the
world market. Several studies have documented this phenomenon.
During 1980-86, the pace of these major collaborations accelerated
substantially as shown in Table 3. The data cover the
semiconductor, computer, and telecommunications industries, but the
activity was greatest among semiconductor firms. Japan was the
leading country with which U.S. companies forged alliances,
reflecting the growing competitive prowess of Japanese semiconductor
suppliers over this period.
Japanese firms have established collaborative links with foreign
partners, but are perceived as having been largely successful in
acquiring advanced technologies without surrendering their own to
See, for example, Made in America: Regaining the Productive Edge,
The MIT Commission on Industrial Productivity, 1989; Micro-
electronics Manufacturing Technology: A Defense Perspective: Final
Report of the Defense Microelectronics Technology Base Project,
Institute for Defense Analyses, April 1988; "The Japanese
Challenge in High Technology" by Daniel I. Okimoto in The Positive
Sum Strategy: Harnessing Technology for Economic Growth, National
Academy of Sciences, 1986.
- 5 -
Table 3 Alliances Between U.S. and Foreign Electronics Firms
Joint
Marketing/
Technology Technology
Out-
Year
Venture
Distribution
Licensing
Development
Sourcing
1980
4
1
4
2
2
1986
24
27
31
19
4
Source: Merger Yearbook, Cambridge Corp.; Mergers and Acquisitions,
Gee and Co.; Dataquest; and Business International.
major competitors. The Japanese strategy in entering many of the
electronics markets has been to begin with original equipment
manufacturer (OEM) agreements, thus gaining marketing assistance and
establishing a reputation for a product. The companies eventually
withdraw from the OEM arrangements and establish their own brand
name operations.
Source of New Firm Growth
The electronics sector is a major source of new firm creation and is
composed of a high percentage of small firms.
From 1977 through 1985 (the most recent year available), the number
of manufacturing firms in this sector nearly doubled to over 17,000
(see Table 4). Enterprises with total assets below $10 million
constituted 95 percent of this total, underlining the fact that the
Table 4 Number of Enterprises in the U.S. Electronics Sector
Manufacturing
Software
Total
Assets
Software
Software
Year
< $10M
>$10M
Total
Products
Firms
1977
8,738
348
9,086
-
-
1979
-
-
-
1,095
1,915
1980
11,537
434
11,971
1,225
2,200
1981
-
-
-
1,605
3,919
1982
11,923
585
12,508
1,879
4,340
1983
-
-
-
2,250
4,850
1984
-
-
-
2,500
5,250
1985
16,579
912
17,491
2,488
5,192
1986
-
-
-
2,705
5,422
Sources: Manufacturing: Almanac of Business and Industrial
Financial Ratios, Leo Troy, Phd., 1980, 1984, 1986
and 1988 editions; software: Input in the Association
for Data Processing Services Organizations (ADAPSO)
annual reports 1980-1987.
- 6 -
sector has a predominance of small, entrepreneurial companies that
have been a key source of innovation and new products. The size and
behavioral characteristics of these firms allow them to respond
quickly to market opportunities, but their smaller size makes them
vulnerable to price competition from larger competitors. Table 4
also shows the growth in software suppliers over this same time
period, to over 5,000 companies by 1986.
B. Importance of Sector to the National Interest
Summary: The U.S. electronics sector is the major growth area in
the U.S. economy. In terms of increases in shipments, productivity,
exports, and employment, electronics leads all other sectors. It is
also highly innovative and a major source of new firms and products
that are critical to economic growth and national security.
Production and Trade Leader
Although relatively young, electronics has become as important a
barometer of the economic health of the nation as any other major
sector. As shown in Chart 3, electronics' average annual growth
rate of 11 percent in output since 1977 has been more than twice
that of automobiles and chemicals, and three times that of textiles
and wood products. Only aircraft, another high technology sector,
had a growth rate comparable to electronics. But in 1987,
electronics had reached $200 billion in shipments, compared to $75
billion in aircraft.
Substantial gains were made in productivity during 1977-86. Value
added per production worker hour increased by two and one-half times
in electronics versus the doubling of this measure in all
manufacturing.
Similar trends in terms of the level and increase in exports are
evident. Not only does the electronics sector export a high
percentage of its output--25 percent--but the value of exports has
increased at an average of 18 percent a year since 1977, reaching
about $39 billion in 1987. This growth even outpaced that of
aircraft exports as seen in Table 5.
Table 5 Comparison of Exports by Industry Sector
Annual
1977
1987
Growth
($B)
($B)
(%/yr)
Aircraft
7.1
22.2
12.1
Automobiles
2.7
2.7
0.0
Chemicals
12.9
32.0
9.5
Electronics
7.6
38.8
17.7
Textiles
1.3
1.7
2.7
Wood Products
1.7
3.4
7.2
Source: U.S. Bureau of the Census.
- 7 -
Chart 3
1987 Shipments and 1977-87 Growth Rates
of Selected U.S. Industries
5.2%
200
5.0%
11.2%
175
150
8 I I
Billions of Dollars
125
100
11.1%
75
3.8%
3.1%
50
25
0
CHEMICALS
AUTOS
ELECTRONICS
AIRCRAFT
WOOD PRODUCTS
TEXTILES
Source: Bureau of the Census
In terms of the jobs created in the last decade, the electronics
sector leads all others. The electronics sector directly employs
about 9 percent of the manufacturing work force, having grown at an
average of nearly 3 percent a year since 1977. This increase has
meant the addition of nearly 600,000 new jobs over the 10-year
period to a level of more than 2 million workers. Worth noting is
that these figures do not include the indirect effect electronics
has had on employment in many other industries that use the output
of this sector for their own livelihood. Examples would include
data entry personnel, software programmers, and systems analysts who
make up the internal data processing staff of many large
organizations, as well as staff supporting telecommunications
systems in these firms.
Leader in Innovation
The electronics sector is the leader in innovation in the United
States, as measured by the number of patents granted per year.
The rate at which new products are developed in the electronics
sector outstrips that of any other industry sector in the economy.
Table 6 shows that U.S. patents awarded to electronics inventors
were 36 percent of all patents awarded in 1986 (the most recent year
available), up from around 30 percent 11 years before.
Table 6 Patents Granted to U.S. and Foreign Inventors
1975
1986
Industry
Total
U.S.
Foreign
Total
U.S.
Foreign
Sector
Patents
Share (%)
Share (%)
Patents
Share (%)
Share (%)
Electronics
21,353
66
34
25,724
53
47
Machinery
15,648
63
37
13,766
50
50
Chemicals
10,806
59
41
7,804
54
46
Fab. Metal
6,064
72
28
5,769
59
41
Rubber/Plast.
2,931
66
34
2,856
56
44
Motor Veh.
3,163
66
34
2,809
47
53
Drugs/Med.
1,067
55
45
1,411
49
51
Stone/Clay/Gl.
1,375
65
35
1,352
53
47
Other
3,500
83
17
3,240
55
45
Total
72,000
65
35
70,860
54
46
Source: Derived from Science and Engineering Indicators-1987,
National Science Foundation.
- 9 -
Source of Critical Products
The products and services of the electronics sector are increasingly
vital to a broad range of industries in the U.S. economy and, in
fact, are critical to their long-term growth. They are also
critical to national security. The use of electronics technology
has spread widely to disparate sectors of U.S. business and
industry. Manufacturers are increasingly turning to sophisticated
instrumentation, computers, software, and advanced communications
systems to lower their costs and increase their efficiency.
Similarly, firms are incorporating electronics technology into the
design of their products. Automobiles, for example, have increased
the value of their electronic components substantially. In 1988,
electronic sub systems represented more than $800 of the price of
the average car, double that of 1982. As products incorporate
larger amounts of electronics technology, the dependence of
manufacturing upon the electronics sector grows stronger.
Electronics technology has become central to the service industries
as well. A wide variety of transportation, legal, financial, and
research firms have invested heavily in advanced computers,
electronic business equipment, software, and telecommunications for
day-to-day operations.
A strong, technologically superior industrial base is a key element
of national security. The future of the U.S. electronics sector, as
one of the key high technology sectors, is particularly important to
the United States since the country's military advantage is based on
technological superiority, not quantity of weapons. As the Defense
Science Board stated in its study of the U.S. industrial base,
"These challenges (to U.S. technological leadership) must be met by
new policies which link military and industrial strategy to assure
the existence of the industrial and technological resources on which
our military strategy relies.'
C. The Competitive Status of the U.S. Electronics Sector
Summary: The U.S. sector is still the largest in the world in
terms of production, exports, and employment, but each of these
indicators is growing faster in other countries. Although the U.S.
electronics market is the largest in the world, imports have risen
substantially, displacing domestic production. U.S. firms have
overall technological leadership, but face strong competition from
the Japanese. In addition, they are losing world market share to
their foreign competitors across the broad spectrum of the sector,
from materials to systems.
Final Report of the Defense Science Board 1988 Summer Study on
the Defense Industrial and Technology Base, Office of the Under
Secretary of Defense for Acquisition, Volume I, Oct. 1988, \pg.1.
- 10 -
Comparisons Between Countries
In Table 7, the U.S. electronics sector is compared with those in
seven countries (Brazil, India, Singapore, South Korea, Taiwan,
France, and Japan) and one regional group, the European Community
(EC). Together, these entities represent about 95 percent of the
world's electronics manufacturing. The countries are ranked from
one (highest) to nine (lowest) in terms of parameters covering
electronics: production, domestic consumption, trade with the
world, employment, and technology base (infrastructure). These
factors were chosen because they represent common development goals
of most countries and can be objectively measured.
Production: The data in Table 8 show that the United States for
1988 had the largest electronics manufacturing sector in the world,
with about 38 percent of world output. Japan and the EC followed,
with 26 and 24 percent, respectively. These three entities
represented 88 percent of the world's total. The figures in Table 8
cover domestic production only. If output from overseas
subsidiaries could be broken out from these production figures, the
U.S. electronics sector would show a larger production share
worldwide.
Table 7: Ranking of Electronics Sectors in Selected Countries
Ind
Brz
Sng
Twn
Kor
Frn
Jpn
EC
U.S.
PRODUCTION*
Volume
9
8
7
6
5
4
2
3
1
Growth
3
5
2
4
1
7
6
8
9
CONSUMPTION*
Volume
9
7
8
6
5
4
3
2
1
Growth
2
4
3
5
1
7
6
8
9
Imports/Cons.
6
8
1
2
3
4
9
5
7
TRADE WITH WORLD*
Exports
9
8
6
5
7
4
1
3
2
Export Growth
5
9
4
2
1
6
3
8
7
Trade Balance
7
5
3
2
4
6
1
9
8
Trade Improvement
6
7
4
2
3
5
1
8
9
EMPLOYMENT*
7
4
9
8
5
6
3
2
1
TECHNOLOGY BASE
9
8
7
5
6
3
2
4
1
* Does not include data on the software industry.
Source: U.S. Department of Commerce.
- 11 -
Table 8
Comparing Electronics Sectors in Selected Countries
INDIA
BRAZIL
SINGAPORE
TAIWAN
S.KOREA
FRANCE
JAPAN
E.C.
U.S.
WORLD
PRODUCTION
Value (M$, 1988)
2,314
3,876
7,651
7,890
9,103
24,175
127,208
115,136
186,232
486,718
% of World Total (1988)
0.5
0.8
1.6
1.6
1.9
5.0
26.1
23.7
38.3
100.0
CAGR, Real (1984-88)
23
11
23
15
24
6
8
6
1
4
Production/GDP (%, 1987)
1.7
1.0
28.6
10.0
6.0
2.6
4.6
2.6
3.9
n.a.
Export/Production (%, 1987)
3
13
145
89
80
45
39
24
20
n.a.
CONSUMPTION
Value ($M, 1988)
2,680
4,175
3,456
4,848
7,604
25,639
93,002
124,255
187,913
470,498
% of World Total
0.6
0.9
0.7
1.0
1.6
5.4
19.8
26.4
39.9
100.0
CAGR, Real (1984-88)
20
13
14
10
22
7
9
5
3
5
Consumption/GDP (%, 1987)
0.8
1.2
14.4
6.2
5.1
2.7
3.3
2.7
3.9
n.a.
Import/Consumption (%, 1987
27
21
193
76
67
51
9
33
22
n.a.
TRADE WITH U.S.
Exports ($M, 1987)
17
90
3,580
3,742
2,673
758
15,428
5,807
n.a.
32,342
Export Growth (CAGR, 1980-87)
11.4
7.9
24.2
31.6
31.9
13.3
27.5
15.0
n.a.
19.3
Export/Import Ratio (1987)
.06
.19
2.0
2.95
1.87
.25
3.78
.36
n.a.
n.a.
Change in E/I Ratio (1980-87)
-.02
.05
.99
1.67
.98
.08
2.29
.13
n.a.
n.a.
Trade Balance ($M, 1987)
-253
-373
1,792
2,473
1,243
-2,308
11,344
-10,207
n.a.
n.a.
% of U.S. Trade (1987)
0.4
0.8
7.8
7.3
6.0
5.6
28.5
31.9
n.a.
100.0
I
TRADE WITH WORLD
2
Exports ($M, 1987)
84
338
7,012
7,297
5,349
10.811
38,331
26,688
35,418
167,507
I
Export Growth (CAGR, 1980-87)
12.9
-2.0
21.5
28.2
29.8
10.7
22.2
8.3
8.6
12.1
Export/Import Ratio (1987)
.06
.27
1.24
1.74
1.07
.91
6.12
.69
.88
n.a.
Change in E/I Ratio (1980-87)
-.06
-.15
.32
.66
.35
-.05
3
-.24
-.92
n.a.
Trade Balance ($M, 1987)
-1,357
-924
1,337
3,113
348
-1,060
32,063
-11760
-4,795
n.a.
% of World Trade (1987)
0.5
0.5
3.8
3.4
3.1
6.8
13.3
19.5
22.6
100.0
EMPLOYMENT
Total (000, 1986)
200
257
71
194
254
230
1,201
1,454
1,776
n.a.
CAGR (1980-86)
n.a.
n.a.
-.2
2.6
9.8
4.1
9.6
1.5
1.3
n.a.
TECHNOLOGY BASE
Telephones/1000 Pop. (1986)
4
84
417
228
186
620
558
520
791
n.a.
Scientists & Engineers (000, 1986)
100
33
2
42
47
102
575
468
787
n.a.
Scientists & Eng/ineersM Pop.
128
230
923
2,149
1,116
1,840
4,712
1,443
3,230
n.a.
U.S. Patents Granted (1963-87)
36
75
21
248
68
12,731
57,374
69,812
294,103
444,250
% of Total Patents Granted
0
0
0
.1
0
2.9
12.9
15.7
66.2
100.0
MACRO ECONOMIC DATA
GDP ($B, 1987)
255.1
326.0
19.9
74.0
121.3
878.3
2,374.6
4,255.0
4,484.3
n.a.
GDP/Capita ($, 1987)
326
2,304
7,654
3,794
2,881
15,797
19,448
13,137
18,393
n.a.
Population (M, 1987)
781.4
141.5
2.6
19.5
42.1
55.6
122.1
323.9
243.8
4,917.0
*EC data exclude Portugal and Greece
CAGR = compound annual growth rate
Sources: U.S. Department of Commerce, United Nations, International Monetary Fund, and Elsevier Science Publishers.
In terms of growth rates since 1984, the picture is quite
different. The United States fell to last place, with an average of
only 1 percent per year, compared with 8 and 6 percent for Japan and
the EC, respectively. In short, if Japan and the United States
maintained their respective growth rates, Japanese electronics
production would surpass that of the United States in 1994. The
newly industrialized countries-- (NICs) South Korea, Taiwan,
Singapore, Brazil, and India--all had double digit average growth
rates, although from much smaller bases.
Several factors contributed to the relative decline in the growth of
U.S. shipments of electronic products. In addition to some softness
in the U.S. market, the growing strength of the dollar until 1985
compared with other foreign currencies weakened overseas demand for
U.S. products. Finally, foreign competition increased, in terms of
price, reliability, and level of technology.
Trade: Japan not only was the leading electronics exporter in
volume ($42 billion) in 1987, but also outstripped the United States
in export growth by a ratio of 3 to 1. Although representing about
23 percent of the world's electronics trade in 1987 (the most recent
year available across these countries), the United States had a
$4.8 billion trade deficit and ranked last among the selected
countries in terms of the rate of improvement in its balance of
trade. The EC had the highest deficit, $11.8 billion. Only the
Pacific Rim countries, led by Japan's $32.1 billion, had trade
surpluses.
While U.S. electronics exports grew substantially from 1980-87, with
some impetus from a weakening dollar, their growth was outstripped
by that of U.S. electronics imports, contributing to several years
of multibillion dollar trade deficits.
The principal source of these imports was the Far East. Some of
this deficit was attributable to the movement offshore of U.S.
production, some to outsourcing by U.S.-based firms (including
affiliates of foreign companies) from both U.S. overseas
subsidiaries and foreign suppliers.
Consumption: The United States also had the largest electronics
market in 1988, with a 40 percent share of world consumption. Japan
and the EC followed with 20 and 26 percent, respectively. As in the
case of production, other markets have been growing faster, placing
the U.S. market in last place in terms of growth. Also, the figures
show imports. that the U.S. production base has lost competitive ground to
These figures show that Japan and Europe taken together surpass the
U.S. market in value, underscoring the fact that U.S. electronics
companies must not only compete successfully in their own market,
but in these overseas markets as well if they are to survive. The
sector cannot depend only on its domestic market for future growth.
Flowing from this is the implication that these foreign markets must
- 13 -
be free of trade and investment barriers for U.S. electronics firms
to compete fairly.
Employment: The United States has the largest electronics work
force, but electronics employment in other countries, such as Japan
and Korea, has grown more rapidly. While employment in the U.S.
electronics sector has shown steady gains, growth since 1982 has
slowed. Within this overall growth, the number of production
workers remained virtually unchanged, reflecting the movement to
offshore production and the increasing use of automation.
Technology Base: A country's physical and human infrastructures are
vital to the support of a high technology sector, such as
electronics. As a proxy for the physical infrastructure, telephones
and computers per capita will be compared. The rationale is that
these products are fundamental elements of an environment that
provides not only communications, but also the computational
resources to design, develop, and manufacture sophisticated product
technologies. The United States leads in physical infrastructure,
while Singapore, with its high concentration of foreign operations,
is the leading developing country.
In terms of the human infrastructure, the situation is different.
While the United States has the largest number of scientists and
engineers of any country (787,400), according to U.N. data, Japan
has the highest concentration of scientists and engineers (4,712 per
million of population). Korea has the largest number of scientists
and engineers among the NICs. From 1974 to 1984, the number of
research scientists in Korea increased 16 percent a year compared
with only 6 percent growth in India. Growth rates are lower in the
industrialized countries.
The number of U.S. electronics patents granted from 1963 to 1987 was
used as the proxy for these countries' technological know-how.
Patents awarded by the United States usually reflect the most
advanced technologies developed worldwide and the technological
prowess of competitors in the U.S. market. As expected, the United
States has the predominant share, although this has declined from 80
percent of the total prior to 1974 to 55 percent in 1987. There has
been a significant surge recently in the number of foreign-owned
patents granted, with most of these going to Japan. Taiwan has the
largest number of patents (1 percent of the total) among the
developing countries; however, data show that relative latecomers,
like South Korea, have increased their activity substantially in
recent years.
The Japanese have more than doubled the number of U.S. electronics
patents they were awarded when compared with the mid-1970s, and
their patents have been cited more frequently than those of their
U.S. counterparts. Japanese companies also held the top three
positions for U.S. electronics patents received in 1987 (see
Table 9).
- 14 -
Table 9 Top Ten Firms Awarded U.S. Electronics Patents in 1987
Rank
Company
Country
Number of Patents
1
Canon
Japan
847
2
Hitachi
Japan
845
2
Toshiba
Japan
823
4
G.E.
U.S.
779
5
Philips
Netherlands
687
6
Westinghouse
U.S.
652
7
IBM
U.S.
591
8
Siemens
West Germany
539
9
Mitsubishi
Japan
518
10
RCA
U.S.
504
Source: The Structure of the Japanese Electronics Industry,
Dodwell Marketing Consultants, Tokyo, Japan,
December 1988.
Specific Electronics Technologies
This downward trend in the U.S. share of patents is reflected in the
declining capabilities of U.S. firms relative to the Japanese in the
research and development phases of bringing key electronics
technologies to market. In process materials, U.S. firms lag behind
the Japanese in nearly all areas. Their Japanese competitors are
now the dominant suppliers of high-quality semiconductor materials
and the only source of ceramic packaging materials and quartz glass
for mask blanks.
U.S. companies also trail in many processing equipment technologies,
particularly those required to produce sub-micron semiconductor
devices.
At the component level, U.S. firms lead only in microprocessors and
custom/semicustom logic and are behind in several key memory
technologies and optoelectronics. The United States has seen its
lead eroded in many systems-level products. In the computer area,
U.S. firms are roughly at parity with the Japanese in hardware
design although they still have a slight, but dwindling, advantage
in the development of parallel, multiprocessor systems.
In telecommunications, a panel of government and industry experts
reported in 1986 that the United States had generally lost ground
to the Japanese in advanced research and product development in
Microelectronics Manufacturing Technology: A Defense Perspective:
Final Report of the Defense Microelectronics Technology Base
Project, Institute for Defense Analyses, April 1988.
- 15 -
telecommunications wire and radio systems. But the United States
remained strong in basic research on networks and networking
subsystems. 5/
World Market Shares
The declining competitive position of the United States relative to
Japan in the research and development of these technologies already
has begun to be reflected in a comparable erosion of U.S. worldwide
market shares of these products. Table 10 shows that dramatic
erosion occurred from 1984 to 1988 in the share of worldwide
shipments of U.S. companies across a broad range of major products
corresponding to many of these technologies.
Another perspective can be seen by narrowing the view to computers.
Chart 4 focuses on five leading foreign markets for
computers--France, Italy, the United Kingdom, West Germany, and
Japan. The graph shows that over the 1977 to 1986 period, U.S.
computer companies, while showing revenue growth, lost market share
to local and third-country suppliers in all five markets. The loss
was particularly startling in Japan, where the U.S. market share
dropped from about 50 to 22 percent over this period.
At the company level, a view of the market status of the top 100
computer firms in the world is provided in Table 11, which is an
analysis of data from Datamation magazine's annual survey.
Estimates place the top 100 firms as representing about 85 percent
of the worldwide revenues from rental and sales of computer
equipment, software, data processing services, maintenance and
after-sales services of companies. The number of U.S. companies in
the Datamation 100 dropped by 11 from 1983 to 1987, while European
companies gained 3 slots and Japanese firms gained 8. The reason
for the U.S. losses can be seen in the growth column, which shows
that, in terms of worldwide revenues, the groupings of both European
and Japanese computer companies grew respectively 60 and 160 percent
faster over this period than the grouping of U.S. computer firms.
5/ JTECH Panel Report on Telecommunications Technology in Japan,
Science Applications International Corporation, May 1986.
- 16 -
Table10 U.S. Share of Worldwide Electronics Markets
(1984 and 1987)
Worldwide
Percent
Market
1984
1987
($B)
Silicon Wafers
85
22
$ >.01
Automatic Test Equip.
75
68
1.2
Semiconductor Mfg. Equip.
62
57
6.5
Microlithography Equip.
47
35
2.0
All Semiconductors
54
41
$38.1
ASICs
60
50
7.3
DRAMs
20
8
3.4
Microprocessors
63
47
1.7
Computers
78
69
$121.0
Personal Computers
75
64
47.2
Laptop Computers
85
57
1.6
Supercomputers
96
77
1.1
Computer Subsystems
Displays
11
8
8.2
Flat Panel Displays
25
15
2.4
Floppy Drives
35
2
2.5
Hard Drives (up to 300 MB)
73
65
8.2
Hard Drives (up to 40 MB)
70
60
2.3
Dot Matrix Printers
10
8
4.8
Software
70
72
$44.5
Operating Systems
90
90
16.4
Data Base Mgmt. Systems
100
95
2.8
Spreadsheets
100
100
0.9
Telecommunications Equip.
33
32
$88.0
Central Office Switching
30
24
4.8
Fiber Optics
75
50
3.0
Private Branch Exchange
29
26
7.8
Data PBXs
100
36
0.2
Facsimile
30
25
3.1
Key Telephone Systems
28
22
5.7
Voice Mail Systems
100
100
0.6
LANs
100
98
2.4
Data Modems
49
37
3.2
Statistical Multiplexors
94
35
0.5
Instruments
52
46
$48.9
Medical Equip.
35
41
12.3
Photocopiers
40
36
$13.4
Consumer Electronics
19
12
$37.2
Source: Science & Electronics, U.S. Department of Commerce
- 17 -
Chart 4
U.S. Share of Selected International
Computer Markets
(1977 and 1986)
X
Rest-of-World Share
2
U.S. Share
20000
15000
18 I I
Millions of Dollars
10000
5000
0
France 77 France 86
Italy 77
Italy 86
U.K. 77
U.K. 86
Germany 77 Germany 86
Japan 77 Japan 86
Source: Various U.S. Government market studies
Table 11 Datamation 100 Results - 1983 and 1987
Number of
Percent Growth
Companies
Total Revenues
Per Year (%) *
1983
1987
1983
1987
U.S. Companies
71
60
$87B
$132B
10.8
European Companies
19
22
$12B
$35B
17.5
Japanese Companies
8
16
$9B
$40B
27.9
* Growth rates were calculated in native currencies: dollars, yen,
and European currency units.
Source: Derived from Datamation magazine.
- 19 -
II. ISSUES FACING THE U.S. ELECTRONICS SECTOR
The sections of Chapter I highlighted key characteristics and trends
in the U.S. electronics sector, some of which implied strength and
others weakness. New firm creation, high rates of innovation,
shipment and employment growth, and a worldwide production and
marketing base were indicators of a strong, vital sector. But
higher growth rates in other countries in production, consumption,
and employment; an eroding trade balance and technology base; and a
diminishing share of worldwide markets point to a weakening position.
Few observers believe that the sector is a terminal case at this
point. But from materials to systems, the sector is under serious
challenge from foreign competitors, often with the assistance of
their governments. The private sector must lead in addressing these
challenges, but there are also areas where government policy can
help ensure improved competitiveness.
The issues range from "national," issues which affect most
industries--such as the lack of sufficient low-cost capital--to
"sectoral" issues, which are more industry-specific problems--such
as the targeting of the electronics sector by foreign governments.
National Issues
Sectoral Issues
Capital costs
Lack of consensus on issues
Federal budget deficit
facing sector and solutions
Taxes
Research and development
Savings
Unfair international trade
Exchange rates
practices
R&D tax credits
Intellectual property rights
Education and the work force
Export regulations
Antitrust laws
Growing dependence on foreign
Short-term corporate view
suppliers
Increased foreign investment
in the sector
Export financing
The following pages will briefly examine each of these problems as
they relate to the U.S. electronics sector.
- 20 -
A. National Issues
1. The Cost and Availability of Capital
The cost and availability of finance capital 1/ are important to the
competitiveness of U.S. industry generally and to the electronics
sector in particular, given its capital intensity. These factors
not only affect the overall growth of net investment, but also the
speed with which an industry can modernize in response to
competitive challenges. Although debate continues over the nature
and degree of difference between the cost of capital in the United
States versus other countries, U.S. industry speaks with virtually
one voice that this difference continues to exist and that it is a
significant burden to improving industrial competitiveness.
Cost of Capital
Several recent studies have indicated that the real cost of finance
capital during the 1980s may have been more than twice as high in
the United States than in Japan and 30 percent higher than in West
Germany.
When comparing the United States and Japan from 1972 to 1985 (the
most recent year available), the United States was seriously
disadvantaged relative to Japan in the net real cost of capital for
equipment, fixed assets, and research and development (R&D)
projects. The largest cost-of-capital differential was in R&D
projects, reflecting the fact that R&D has been significantly more
expensive to perform in the United States than in Japan. The
smallest gap between both countries was in the real cost of
equipment, which resulted from the existence of the investment tax
credit through 1985 in the United States. Repeal of this credit and
an increase in the capital gains tax on investment contained in the
1986 Tax Reform Act have reportedly widened the real cost of capital
differential. 2/ Two Stanford University economists, Douglas
Bernhein and John Shoven, have estimated that the cost of capital
disadvantage with Japan may now be at least 3 to 1. 3/
The high cost of capital in the United States has adversely affected
the rate of investment in manufacturing and productivity
1/ The cost of capital is the least return that satisfies the
need to cover taxes, the interest required by lenders, and
the dividends and capital gains required by equity holders.
From The Cost of Capital in the United States and Japan,
George Hatsopoulos and Stephen H. Brooks, 1987.
2/ Hatsopoulos and Brooks, pp.26-31.
3/ Statement of Mark Shepherd, Jr., Chairman of Texas Instruments,
before the U.S. Senate Finance Committee on February 3, 1987.
- 21 -
growth in this country. A study prepared by the Organization for
Economic Cooperation and Development (OECD) in 1987 showed that,
although manufacturing gross investment per worker in the United
States recovered in 1985 to its pre-1980 peak level, this investment
in constant dollars was little more than half of the $6,000 invested
in each worker by the Japanese. Moreover, the rate of growth of
Japanese manufacturing investment has increased much faster than the
U.S. rate since 1978.
The high cost of capital and the low rate of capital formation in
the United States are attributable to several causes. Most
economists agree that the federal budget deficit is a fundamental
cause. The capital required to continue to finance this deficit has
placed the federal government in the role of a competitor with the
private sector for a limited pool of funds, driving up the cost of
capital and reducing funds available to U.S. industry for
investment. Economists have also blamed the structure of the U.S.
tax system, which encourages borrowing and consumption rather than
savings and investment. This has resulted in a very low savings
rate and a smaller pool of funds available for investment.
Relative to foreign competitors, the higher cost of capital in the
United States has a rippling effect, raising costs for U.S. firms
all along the spectrum of business functions, from R&D through
marketing. By contrast, studies have shown that because Japanese
firms benefit from high debt-to-equity ratios and a cost of capital
considerably lower than in the United States their costs and risks
are lower, permitting them to take a longer term view. Because of
this they are reportedly able to employ strategies such as
forward-pricing to gain market share, while U.S. firms must focus on
short-term profitability at the expense of market share (see
discussion under "Short-Term Corporate View" on page 30). Many in
the electronics sector feel that this differential poses serious
long-term problems for this capital intensive sector, since the
firms with the lowest cost of capital can be expected to be the
eventual winners.
Venture Capital
Capital problems also plague the newest companies in the U.S.
electronics sector due to changes in funding by and attitude of U.S.
venture capitalists. Along with private investors, venture
capitalists have long been major financiers for start-ups, the
source of much innovation in the United States. They have generally
provided not only cash but also management expertise and contacts
for additional funding later on. However, as Table 12 shows,
venture capital funding of the U.S. electronics sector peaked in
1984, with the computer hardware and software industries receiving
more than half of these investments. Since then U.S. venture
capital funding has shifted away from electronics to consumer- and
medical/health-related industries.
Hatsopoulos and Brooks, pg. 34.
- 22 -
Table 12 Shares of Venture Capital Funding by Industry
Industry
1980
1982
1984
1986
1987
($M)
(%)
($M)
(%)
($M)
(%)
($M)
(%)
($M)
(%)
Computers
283
26
774
43
1200
40
812
28
975
25
Communications
127
11
180
10
450
15
464
16
585
15
Other Electronics
107
10
234
13
390
13
377
13
351
9
Subtotal
517
47
1188
66
2040
68
1653
57
1911
49
Other Industries
583
53
612
34
960
32
1247
43
1989
51
Total
1100
100
1800
100
3000
100
2900
100
3900
100
Source: Venture Economics, Incorporated.
Venture capitalists have now become much more selective and cautious
in their approach to U.S. electronics firms. They have been
dissatisfied with their overall rate of return on investments in
many of these companies over the past few years and view electronics
start-ups as less attractive because they are taking longer to
mature and are more capital-intensive than they were in the early
1980s. Their ceiling of $35 million on a typical investment is
considerably less than what most start-ups currently need to
survive. In addition, U.S. venture capitalists are very demanding.
They usually want a high percentage of the ownership and may expect
as much as a 60 percent compound annual rate of return on investment.
Because of these requirements, electronics start-ups have
increasingly turned in recent years to well-financed foreign
investors such as the Europeans and the Japanese who offer funds at
relatively low interest rates and ask for less ownership than U.S.
venture capitalists. However, the transfer of advanced technology
to potential competitors is often the price that they have to pay
for foreign money. A number of promising start-ups that have been
unsuccessful in their funding search have filed for bankruptcy or
have been absorbed by larger U.S. and foreign firms before they have
had a chance to bring their products to market.
2. Exchange Rates
Since the U.S. dollar peaked in value in February 1985, imports of
electronics products have continued to increase in nominal value.
While exports have increased, presumably in response to the effect
of the cheaper dollar in overseas markets, the corresponding
fall-off expected in more expensive imports has not materialized.
Chart 5 shows that at least part of the reason in the case of
- 23 -
Chart 5
Yen Appreciation and Pass-Through in
Dollar Import Prices - Quarterly
1st Quarter 1986 - 4th Quarter 1987
Index
1985:Q1=100
190
180
Appreciation of Yen
Against Dollar
170
160
24 I I
150
Amount of Exchange Rate Change
Not Passed Through
140
$ Unit Value of U.S.
Imports from Japan
130
120
Amount of Exchange Rate Change
Passed Through
110
100
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
1985
1986
1987
Source: Trade & Information Analysis, USDOC
Japanese imports can be traced to Japanese firms not passing through
the full yen appreciation to U.S. buyers. 5/ By the end of 1987,
only 33 percent of the yen's appreciation since the first quarter of
1985 had been passed through on U.S. imports from Japan. In those
import categories covering electronics products, the pass-through
was even less. For example, in the category containing consumer
electronics and electronic components, the pass-through by the end
of 1987 had only totaled 6 percent. This low percentage was
attributed to Japanese firms reducing prices on videocassette
recorders (VCRs), since the pass-through was 23 percent, if the
large category for these products is excluded. The categories
containing photocopiers, instruments and medical equipment also
showed a pass-through of only 6 percent.
While Japanese imports showed a 33 percent pass-through due to the
appreciation of the yen, U.S. imports from the world showed a 42
percent pass-through due to foreign currency appreciation. Thus,
electronics products did not show appreciable price increases due to
a weaker dollar, and demand from U.S. buyers continued to buoy U.S.
electronics imports. The ability of foreign firms to absorb the
increased costs due to currency appreciation stymied the use of
exchange rates as a tool to improve the U.S. electronics trade
balance.
3. R&D Tax Credits
The R&D tax credit was introduced by Congress as part of the
Economic Recovery Tax Act of 1981 (ERTA) to increase R&D spending
and, as a result, to stimulate industrial innovation. Although
viewed favorably within U.S. industry, the credit has certain
features that have generated a great deal of controversy since it
went into effect.
As enacted, the credit was designed only as a temporary tax
benefit. It has been extended periodically and is scheduled to
expire on December 31, 1990. Furthermore, the benefits of the
credit have been gradually diluted by reducing it from a 25 to 20
percent credit and by adding a 50 percent deduction disallowance.
Nevertheless, the credit has proven effective in fostering growth in
R&D. Industry has lobbied vigorously over the past several years to
have the credit increased once again and made permanent. In support
of this position, the American Electronics Association (AEA) cites
recent findings of two Brookings Institution economists who note
that U.S. R&D spending from 1980 to 1986 nearly doubled to $60
billion and estimate that the R&D tax credit actually boosted
private sector research expenditures during this period by 7 percent
over the amount they would have spent without the benefit of the
credit.
5/ From: "U.S. Import Prices and the Pass-Through of the Change in
the Yen/Dollar Exchange Rate," Victoria Hatter, ITA, February
1989.
- 25 -
The question of eligibility has created some concern within
industry. The intent of the tax break was to encourage innovation,
but a firm must be in the process of carrying on a trade or
business, i.e., selling products and incurring tax liabilities, in
order to be eligible to take advantage of the credit. These
eligibility requirements exclude highly innovative start-ups that
may take several years to turn their research into marketable
products and reach profitability. Start-ups are also the companies
that need the credit the most.
Many companies in the electronics sector are still uncertain about
what is covered under the tax credit. In the area of product
technology, it is clear that expenses related to the development of
a working prototype are covered. These expenditures are defined in
the ERTA as researchers' wages, research supplies, rent for
equipment, and 65 percent of contract research. Direct purchases of
R&D plant and equipment do not qualify, but are eligible for
accelerated depreciation. By contrast, nonexperimental product
development (i.e., incremental product improvements) and
non-laboratory process technology (i.e., improvements in factory
floor processes) may be ineligible for the credit. The R&D tax
credit is one area in which the U.S. electronics sector has a
competitive disadvantage relative to the Japanese.
Software development was initially another grey area under the tax
credit. The Internal Revenue Service (IRS) originally took the
position in draft regulations issued in 1983 that most software
development costs would be ineligible for credit consideration.
However, based on published IRS revenue procedures, it was clear
that software development costs would be treated like hardware
development costs for purposes of the Section 174 deduction
election. Most software companies have assumed that at least a
portion of these same R&D expenses would qualify for the credit.
Congress clarified the software credit issue in 1986 by including
language in the legislative history of the Tax Reform Act of 1986
defining those software development costs that would qualify for
credit consideration. In general, costs incurred in the development
of software that is to be sold, leased, or otherwise licensed may be
eligible. These costs will be evaluated on a basis similar to that
used for hardware development costs. Costs incurred in the
development of software to be used in-house (except for use in other
qualified R&D) will be subject to separate rules. The IRS is
drafting interpretative regulations.
Another feature of the R&D tax credit that has sparked industry
opposition is the incremental base period used to evaluate R&D
increases. Critics claim that it has reduced the incentive effect
of the credit for some firms since current expenditures on R&D
automatically increase the base for each of the next three years
and, in turn, raise the amount by which a company will have to boost
R&D spending in those years to receive additional tax credits.
Particularly disadvantaged are companies that may have large
- 26 -
absolute R&D expenditures, but which are increasing at a low rate.
In certain circumstances, such as an economy-wide slowdown, this
feature may act as a disincentive by encouraging firms to reduce or
postpone R&D spending so they can obtain future tax credits when the
outlook improves.
H.R. 3150, introduced in the House of Representatives on August 4,
1989, would make the tax credit permanent. Passage of this
legislation would demonstrate to the industry that Congress
appreciates the competitive challenges facing the industry.
Besides the R&D tax credit, industry favors making the Basic
Research Credit permanent in the future. This tax benefit was
enacted by Congress under the 1986 Tax Reform Act to encourage
strong private sector support for basic research at universities and
nonprofit research centers. Industry also supports modification of
Treasury regulations (1.861-8 allocation rules) on the treatment of
U.S. R&D expenses that were imposed in 1977. These regulations
require a firm to allocate a substantial portion of its U.S. R&D
expenses to foreign income even when the foreign country does not
allow a deduction for the expense. This places U.S. industry at a
disadvantage competitively with companies in nations that have no
such requirement for this kind of R&D allocation. Moreover, they
have the effect of creating an incentive for U.S. firms to transfer
their R&D operations and related jobs overseas.
4. Education and the Work Force
The education of today will shape the worker of tomorrow. There is
concern that the U.S. educational system is not adequately preparing
students for current and future jobs. This is of particular concern
within the electronics sector, which is in the forefront of the
economy's growth.
The Work Force Equation
In order to have a competitive electronics sector, educated workers
must be available. One can summarize the process of producing a
skilled worker by considering the following factors:
Demographic
Industry
Education
Skilled
Trends
+
Sector Demand
+
and Training
=
Workers
By having a clear vision of who will make up the work force and what
skills the electronics sector needs, the nation can work towards
formulating and implementing an educational policy that can shape
the worker of today and tomorrow. Education and educational
assistance are tools that can be used to attract and retrain the
current and future work force.
Demographic Trends
The U.S. work force is changing with more women and minorities
entering the ranks. Some of the demographic changes occurring in
- 27 -
the United States are summarized in Workforce 2000, a study
conducted for the U.S. Department of Labor. According to this
study, by the year 2000 the following demographic trends will be
taking place:
the population and the work force will grow more slowly;
the average age of the population and the work force will
rise and the pool of younger workers entering the labor
market will shrink;
more women will enter the work force, although the rate of
increase will taper off;
minorities will be a larger share of new entrants into the
work force;
immigrants will represent the largest share of the increase
in the population and the work force.
Industry Sector Demand
Workforce 2000 also identifies the fastest-growing jobs and the
educational and skill requirements needed to fill them during the
1984-2000 period. Jobs falling under the electronics sector,
including computer and mathematical scientists, engineers,
technicians, and marketing, sales, and managerial positions are
projected to grow at an average rate of 46 percent, higher than the
25 percent growth rate of all occupational categories. These jobs
will require higher levels of education and skills, including
language, math, and reading.
Education and Training
Educational trends indicate that a decreasing number of students are
specializing in science and engineering. U.S. electronics firms may
find it more difficult to keep up with their international
competition as a result of this trend. The National Science
Foundation has estimated that by the year 2000 the United States
will produce 400,000 fewer scientists and engineers than the country
needs.
The National Science Board's (NSB) publication Science and
Engineering Indicators 1987 points to inadequacies in the academic
performance of students, the teaching force, and the curriculum in
pre-college science and mathematics. Achievement in these
disciplines among minority groups and females lags substantially
behind white males. Yet, minority groups and females are expected
to constitute the bulk of the labor force by the turn of the
century. Moreover, U.S. high school students overall are less
skilled in science and mathematics than students in competitive
countries, especially Japan.
- 28 -
The number of noncertified teachers in certain fields of science and
mathematics is high, and the supply of new teachers in this field is
diminishing. Teaching methods often do not stimulate students to
learn science and mathematics, and thus students often avoid taking
these subjects. In many states, school systems offer a wide range
of nonscientific and math electives that students may substitute for
these courses.
Enrollment levels for full-time undergraduates in engineering have
been decreasing. Any increase in full-time graduate enrollments has
been largely due to growth in the foreign student population. In
1986, foreign graduate students represented 44 percent of full-time
graduate enrollments in engineering in all institutions. In the
same year, foreign graduate students made up 39 percent of full-time
students in science and engineering. 6/ Doctorates awarded in
science and engineering continue to increase but remain below the
peak years of 1972 and 1973. These increases are wholly accounted
for by foreign citizens.
Continuing education and vocational training programs are inadequate
in the United States, according to the MIT study Made in America:
Regaining the Productive Edge. Formal educational institutions
provide most of the specialized skills needed in the workplace while
on-the-job training involves little more than quick task-related
instructions. As a result, U.S. workers have limited skills and
have minimal input into improving the manufacturing process. By
contrast vocational training in Japan and West Germany occurs within
corporations and emphasizes the development of both general and
specialized job skills. It is also extensive in character, ranging
from apprenticeships to job rotations, off-the-job training,
correspondence courses, and participation in quality circles. These
programs give workers broad experiences and skills that allow them
to deal flexibly with a variety of manufacturing tasks, unforeseen
production problems and technological changes. Their impact on
industrial performance has been significant. Studies have shown
that Japanese and West German workers make greater contributions to
labor productivity than their U.S. counterparts.
5. Antitrust
On October 11, 1984, the President signed the National Cooperative
Research Act of 1984, which amended U.S. antitrust law to permit
joint R&D projects in the private sector. 7/ As a result, 125
consortia have notified the Department of Justice and the Federal
Trade Commission of their intent to collaborate in R&D. Some of
6/ Figures are from the National Science Foundation. Science
includes physical, environmental, mathematical, and computer
sciences.
See "The Antitrust Laws Have Been Changed to Encourage
Cooperative R&D, Office of Productivity, Technology and
Innovation, U.S. Department of Commerce.
- 29 -
these are in the electronics area, the most publicized example being
the Microelectronics and Computer Technology Corporation, based in
Austin, Texas.
The act implicitly acknowledged the existence of a competitive,
global marketplace, of which the U.S. market represents only one
piece. The law substantially reduced the incentive for unwarranted
private antitrust suits by specifying the applicability of the rule
of reason and by reducing treble damages to actual damages in the
event that anti-competitive activity is found. But other problems
plague U.S. industry that suggest the need for additional amendments
to U.S. antitrust law. Commerce Secretary Robert Mosbacher
articulated the concerns behind the administration's support for
antitrust relief in his July 26, 1989 testimony before the House
Committee on the Judiciary. He stated:
The enactment of remedial legislation would also strengthen
competition by eliminating a substantial competitive
disadvantage that prospective American coventurers face
vis-a-vis their foreign counterparts. European or Japanese
firms that seek to establish joint production ventures need
only obtain clearance from national or European antitrust
officials. Once they obtain such clearance, they do not
face the uncertain prospect of unwarranted private
antitrust suits--private treble damage litigation is not
authorized under European or Japanese antitrust law.
Indeed, even suits for single damages are rarely brought.
As a result, potential American coventurers today face
greater antitrust uncertainty than potential European or
Japanese coventurers. Antitrust reform would help
eliminate this unwarranted disparity and thus level the
international competitive playing field.
Antitrust concern has become particularly evident in the electronics
sector recently, with the joint efforts on the part of the American
Electronics Association (AEA) and the Semiconductor Industry
Association (SIA) to stimulate U.S. companies' reentry into DRAM
(memory chip) production. Since a new semiconductor fabrication
facility costs approximately $250 million for 1MB devices and $350
million for 4MB DRAMS, few U.S. semiconductor companies can afford
to make such investments on their own. With this in mind, the SIA
sent to its membership in May 1989 a $1 billion preliminary business
plan to establish a joint producer-user consortium to manufacture
4MB DRAMS, called U.S. Memories. Although this effort has failed
for a number of reasons, unless current antitrust law is amended,
other joint-manufacturing consortia are subject to the possibility
of third-party antitrust suits.
6. Short-Term Corporate View
Stockholder equity is an important source of funds for U.S.
companies, and this is equally true in the electronics sector.
With this dependence comes a requirement that short-term profits be
- 30 -
maximized, which usually translates to businesses looking at their
operations with a short-term tactical view. Under these
circumstances, a long-term strategic approach is usually difficult
to take. However, many foreign companies, particularly Japanese
firms, have close relationships with major domestic banks which
allow the firms to take a longer term view.
Table 13 summarizes a survey taken of Japanese and U.S. corporate
executives that ranked their respective corporate objectives. The
ranking validates the preceeding statements. Japanese executives
place market share and return on investment as their first and
second objectives, whereas U.S. executives are primarily concerned
about return on investment and share price increase, with market
share in third place. Japanese executives place share price
increase in last place, reflecting their relatively weak dependence
on stockholder equity.
Table 13 Ranking of Corporate Objectives-Japan vs. U.S.
U.S.
Japan
Market Share
3
1
Return on Investment
1
2
Ratio of New Products
7
3
Rationalization of Production
and Distribution
5
4
Improve Product Portfolio
4
5
Increase Equity ratio
6
6
Improve Company's Image
8
7
Improve Working Conditions
9
8
Share Price Increase
2
9
Source: Kaisha by Abegglen and Stalk.
The remaining major difference between the two groups is the
placement of the ratio of new products, which the Japanese place
high on the list in third place and the U.S. executives rank as
number seven. This last comparison is not entirely reflective of
the U.S. electronics sector, since it has had and continues to have
a high rate of new product introductions, from chips to systems.
B. Sectoral Issues
Issues at the industry and company level will be examined in this
section, focusing on those issues that are closely tied to the
electronics sector.
1. Lack of Consensus
Industry observers in both the U.S. Government and private sector
considering the competitiveness of U.S. industry are roughly divided
into two camps.
- 31 -
One camp is composed of those who believe that significant problems
exist that are threatening the sector's future viability and that
extraordinary measures must be taken to avoid a crippling of the
sector or its total disappearance. This group feels that many other
nations are not playing the international trade game by the same
rules and that U.S. firms do not enjoy the proverbial "level playing
field." It says foreign governments are acting unfairly to nurture
their domestic electronics industries to the disadvantage of U.S.
suppliers. The group argues that U.S. firms cannot overcome the
advantages that their competitors have by reason of the government
aid of their competitors, the use of unfair trade practices such as
dumping, and violations of intellectual property rights. While no
champion of government intervention, the group believes that
restricted or targeted foreign markets run counter to free trade
principles and should be addressed at the governmental level,
through an aggressive use of U.S. trade laws as well as through
selected changes in domestic policies and laws.
The other camp believes that while U.S. leadership has slipped, such
erosion is a normal evolution stemming from growth in the world
economy since the Second World War. It also believes that free
trade is a compelling ideal, generally accepted worldwide,
admittedly with some deviations toward restricted trade. The second
group, while condemning unfair trade practices, argues that the U.S.
electronics industries, like other U.S. industries, suffer from
problems of their own doing, including poor management practices and
lower product quality, and that solving these problems, plus "trying
harder in the world markets," will assure their long-term health. A
corollary of this position is that U.S. firms have to "run faster"
and stay ahead of their competitors through increased R&D and new
products. This second group also argues for as little U.S.
Government involvement as possible, allowing market forces to
determine the ultimate result, which they feel will be in the best
interests of the consumer. The U.S. Government should not try to
influence the outcome, even if, in the extreme, it may mean the U.S.
electronics sector is "hollowed out" 8/ and only acts as a
distributor of foreign-manufactured products.
2. Research and Development
As mentioned previously, the U.S. electronics sector is the nation's
leader in both the level and rate of R&D spending. R&D has been the
key to the growth of the U.S. electronics sector and will continue
to be in the future.
The term was borrowed from a Business Week article, March 3, 1986,
and refers to companies which do little or no manufacturing, but
perform other profit-making functions, such as distribution.
- 32 -
The Roles of the U.S. Government and Industry
While the U.S. Government played an important role in fostering the
development of the electronics sector, most of the funding and
procurement were directed toward military and national security
purposes. Although debate continues over the degree to which R&D
directed toward these purposes results in commercial spin-offs, most
observers agree that such a structure is not an efficient mechanism
by which to translate laboratory results into marketable products.
The preponderance of electronics R&D has been funded by and
performed by the U.S. industry for some time. As shown in Table 14,
since the mid-1970s, U.S. industry has been responsible for roughly
70 percent of the R&D funding in electronics. This figure is
somewhat higher than the all-industry average in the United States,
which was about 65 percent over this same period. This high
percentage of R&D funding by industry and the military focus of U.S.
Government R&D have meant that R&D for marketable products has been
largely the responsibility of U.S. industry (for further discussion,
see Appendix F). Electronics R&D performed by industry has been
generally uncoordinated, with few joint efforts between companies
until recently. Much of this R&D has been necessarily focused on
the near term.
Table 14 Value of U.S. Electronics R&D by Funder
1977-86
($B)
77
78
79
80
81
82
83
84
85
86
Industry
4.6
5.4
6.4
7.8
9.0
10.7
12.6
14.8
16.0
15.8
Government
1.8
1.9
2.3
3.0
3.1
3.7
4.3
5.2
5.9
6.3
Total
6.4
7.3
8.7
10.8
12.1
14.4
16.9
20.0
21.9
22.1
Source: American Electronics Association, 1989.
Foreign Joint R&D Programs
The U.S. experience is in direct contrast to the history of R&D in
Japan and recently in Europe where, in addition to companies
focusing their R&D efforts on the market, the respective governments
have funded R&D for commercial reasons. These governments also have
played an important role in bringing coordination and a long-term
focus to this R&D and improving technology transfer between
government and university labs and the industry.
Charts 6 and 7 show joint government and private sector R&D projects
in Japan and Europe for the electronics sector. The R&D has covered
a broad spectrum of the electronics industries, from materials
through end products and services, including the manufacturing
- 33 -
Chart 6
Japanese Joint Research and Development Efforts
Software
Materials
Computer Equip.
Telecomm Equip.
Instruments
Telecomm
services
SME & ATE
Data Proc.
Services
Business Equip.
Consumer Elec.
Components
Other High-
Tech Services
Super High Performance
Computer (1966-72)
HDTV (1968-ongoing)
Pattern Information Processing (1971-80)
Integrated Information/Communications
Systems for Buildings (1984-ongoing)
3.5 Generation Computer
Automatic Translation Telephones
(1972-76)
(1986-93)
Software
Intelligent Communications
Automation
Systems (1986-96)
(1976-81)
VLSI Mfg/Design (1976-79)
Optical Wave Telecommunications
(1986-96)
Electronic Dictionary for use in Natural Language
Processing (1986-ongoing)
Optoelectronics
Coherent Light Comm. (1986-ongoing)
(1979-86)
Integrated Info./Communication Systems
for Buildings (1986-ongoing)
4th Generation
Computer (1979-83)
Satellite Multibeam Antenna/Data
Telecom Systems (1986-ongoing)
Fifth Generation
Computer (1979-91)
ETS-VI Transponder (1986-ongoing)
SIGMA (1981-89)
Super SIGMA (1989-94)
Voice Activated Information Storage and
Communications Systems (1986-ongoing)
Supercomputer (1981-89)
Sortec/Optical IC's (1986-96)
Ultra High-Speed Broadband Comm.
Networks (1988-ongoing)
TRON (1984-89)
HDTV Transmission/Satellite Network
New Function Elements (1981-89)
Facilities (1986-ongoing)
Data Communications Network
Architecture (1977-?)
Research on Asian
Sources: Various Japanese Governmet documents and U.S. Embassy, Tokyo
ISDN (1986-ongoing)
- 34 -
Chart 7
European Joint Research and Development Efforts
Software
Materials
Computer Equip.
Instruments
Telecomm
Telecomm Equip.
Services
Data Proc.
SME & ATE
Services
Business Equip.
Consumer Elec.
Other High-
Components
Tech Services
Distributed Computing System
U.K. (1984-86)
ESPRIT Phase I (1984-88)
ESPRIT Phase II (1989-94)
RACE (1988-93)
EUREKA (1985-Ongoing)
BRITE/EURAM
SUPRENUM
(1989-92)
W. Germany
Joint Optoelectronic Research Scheme
(1982-ongoing) U.K.
LINK (1988-93) U.K.
LINK
ALVEY (1983-88) U.K.
Transputer (1987-91) U.K.
MEGA Project
W. Germany/Netherlands
Sources: Dr. Jacob Blackburn, U.S. Embassy, London; U.K. Government documents; and the European Economic Commission
- 35 -
processes involved. The bulk of these foreign R&D activities have
been directed toward the development of commercial products.
How successful have these joint R&D efforts been in advancing these
countries' commercial interests? In the case of the programs in
Europe, which have only dated from the mid-1980s, there has not been
sufficient time to judge the success of such programs as ESPRIT
(European Strategic Program for Research in Information Technology),
although commercial products have begun to appear in the market as a
result of these joint efforts. But in the case of Japan, where the
chart shows joint efforts dating from the 1950s, judgments can be
made. There is a very strong correlation between joint R&D projects
and the subsequent market success of Japanese electronics firms.
Few would reject the view that the VLSI (Very Large Scale
Integration) manufacturing and design project from 1976 to 1979
catapulted Japanese semiconductor and semiconductor manufacturing
equipment firms into world prominence in the 1980s (see Appendix I,
country profile on Japan--Computer Hardware).
Similarly, the many joint projects in the computer area--"3.5
Generation Computer (1972-76)," "4th Generation Computer
(1979-1983), and the "Supercomputer (1981-89) "--have allowed the
Japanese to offer very competitive mainframes and supercomputers.
Fujitsu has claimed that the ability of its newest generation
supercomputer, the VP 2000, to process tasks in parallel was aided
by its participation in the Supercomputer Project sponsored by
Japan's Ministry of International Trade and Industry (MITI).
Furthermore, the recent supercomputer announcements from Fujitsu and
Nippon Electric show that the impressive performance claims for the
systems are due in part to equally impressive high-speed
semiconductor logic and memory devices. There has been
a vital synergism between the R&D at the component level and that at
the systems level, which will increasingly allow the Japanese to
make major inroads into systems markets worldwide.
The Japanese and Europeans have learned how to form joint efforts
quickly. Within a matter of weeks after the spate of successful
experiments in raising the temperature of superconductive materials,
the Japanese and Europeans had formed R&D consortia to explore this
key technology.
But these joint R&D efforts are not the whole story in Japan. The
National Science Foundation has published figures comparing
corporate non-defense expenditures for electronics R&D as a percent
of gross national product in the United States and Japan. From 1980
to 1984 (most recent year available), Japan's private sector
increased its relative level of R&D spending on electronics (0.38 to
0.66 percent), outpacing the U.S. increases (0.41 to 0.55 percent).
U.S. R&D Weaknesses
The U.S. electronics companies are seen as not being as efficient as
their Japanese competitors in transferring R&D results to the
- 36 -
market. In addition, many U.S. firms do not seek out and evaluate
the latest foreign advances in technology. By contrast, the
Japanese invest considerable time, money, and effort into
identifying and acquiring key technologies that will improve their
manufacturing capabilities and lead to new and better products.
They benefit from a culture and a corporate structure better suited
to stimulating technology transfer and assimilating technology
internally. Examples of Japanese success in technology transfer
include videocassette recording and optical storage, both of which
were invented outside of Japan, but have been more aggressively
exploited by the Japanese for commercial advantage.
While generally acclaimed for their innovative research, U.S.
electronics firms are at a competitive disadvantage in manufacturing
processes and product development. Part of this disadvantage is due
to the fact that U.S. firms generally devote less attention to R&D
in manufacturing processes and part is due to the fact that there
has been relatively little emphasis on manufacturing in engineering
and master of business administration curricula. Manufacturing is
often viewed as a linear process in which design and engineering are
separate from production and marketing.
The Japanese and other Far Eastern competitors take an integrated,
team-oriented approach that includes staff responsible for each
point in the spectrum, from design to manufacturing. As a result,
they take far less time to bring their products to market. In
addition, Japanese firms are stronger in making incremental
improvements in their products and processes that help to reduce
manufacturing costs and result in higher product quality and
reliability. 9/
3. Unfair International Trade Practices
Foreign Government Practices
Since it has become clear that electronics can be a key to economic
growth, foreign governments have instituted a number of practices to
See Michael Dertouzos, et al, Made in America: Regaining the
Productive Edge, MIT Commission on Industrial Productivity,
Cambridge, Massachusetts, 1989.
- 37 -
create and nurture domestic electronics sectors. These practices
have covered a broad range as shown below.
Market barriers
Import licensing/quotas
Restricted markets
Investment restrictions
Preferential procurement
Exclusionary standards
Local content requirements
Export performance requirements
Forced technology transfer/investment
Financial support
Joint R&D
Subsidies
Offsets
U.S. electronics firms have increasingly faced many of the above
practices in a growing number of foreign markets. Foreign
government intervention has resulted in a restructuring of the U.S.
electronics sector and a distortion of trade and investment patterns
in the sector. For example, forced technology transfer in exchange
for access to a country's market has meant that foreign competition
has emerged more rapidly, and a company's revenues over the
product's life cycle have been reduced. Forced local investment,
local content requirements, and export performance requirements have
changed trading patterns and moved production out of the United
States in order to serve these markets. Some of this trade has
flowed back to the United States, negatively affecting the sector's
trade balance.
Offsets, which are mandated by foreign governments when purchasing
weapons systems, are another method in which foreign competitors are
enhanced through acquisition of U.S. technology and new market
opportunities at the expense of U.S. firms. Offsets, which include
mandatory investment, subcontractor production, technology transfer,
coproduction, licensed production, and countertrade, have had a
major effect on the U.S. electronics sector because of the strong
presence of this sector in military systems. In fact, the
electronics sector was second only to aerospace in offset
requirements from U.S. firms.
Dumping and Subsidies
U.S. trade law provides for the protection of U.S. manufacturers
from unfair foreign trade practices, such as dumping and subsidies.
For example, if manufacturers believe that foreign competitors are
dumping merchandise in the United States or are being subsidized by
foreign governments, they may file for relief with the U.S.
Department of Commerce and the U.S. International Trade Commission
(ITC).
- 38 -
Through its antidumping law, which levies duties on goods dumped on
the U.S. market, the United States discourages the sale of
merchandise in the United States at less than fair value if such
sales cause or threaten material injury to a U.S. industry. By
imposing similar duties, the government checks the unfair
competitive advantage foreign manufacturers and exporters receive
from subsidies.
In general, merchandise is considered to have been sold at
less-than-fair value when the U.S. price of the imported good is
less than the home market price (i.e., foreign manufacturer's
domestic price), after adjustments for differences in the
merchandise, quantities purchased, and circumstances of sale are
made. If a home market price is not available, a third-country
market is used, or a value is constructed factoring in costs of all
inputs in the home market and an 8 percent profit assumption.
Another unfair trade practice that appears to have made a
substantial difference in the course of events of the electronics
sector is subsidies. Subsidies are direct and indirect grants for
the production or exportation of goods. They can take many forms,
including direct cash benefits, credits against taxes, and loans
with artificially low interest rates. The U.S. countervailing duty
law provides relief to U.S. manufacturers facing unfair competition
from subsidized imports. Upon investigation, if subsidies are found
and a U.S. industry is injured, countervailing duties can be imposed.
Whether material injury results from dumping or subsidies depends
upon an analysis of the effects that U.S. imports have on U.S.
producers of like products. Injury may take the form of depressed
prices; lost sales; a general decline in sales, market share,
profits, productivity, or return on investment; or underutilization
of production capacity.
In the U.S. market, foreign companies have often used dumping to
enter and gain market share. Such practices have been responsible
for profound changes in the composition of the U.S. electronics
sector. From television sets and portable electric typewriters to
the recent case of semiconductors, U.S. firms have been driven out
of the market because of dumping by foreign firms. Moreover, the
dumping duties imposed upon foreign suppliers have not enabled the
U.S. firms to reestablish themselves in the market.
4. Intellectual Property Rights
To maintain a competitive position, the electronics sector relies
heavily on intellectual property protection, e.g., patent,
trademark, trade secrets, copyright and mask work protection. As
companies expand their operations into foreign markets, they often
discover that protection in those markets is inadequate.
Specifically, some forms of protection available in the United
States are not available in other countries. Enforcement of
existing laws can be ineffective or nonexistent.
- 39 -
Proposals by some countries to eliminate copyright coverage for
software altogether and replace it with a sui generis form of
protection also pose a threat to the sector, if adopted. This form
of coverage would shorten the period of protection significantly and
require mandatory registration and disclosure of source code. It
might also adversely affect the protection of microcode embedded in
semiconductor chips.
Intellectual property rights violations in the electronics sector
have grown significantly during the 1980s, mainly in the
semiconductor, computer hardware, and software industries. U.S.
semiconductor companies have had to contend with the copying of
semiconductor masks and microcode, which has allowed several Far
Eastern suppliers to flood the market with counterfeit chips. Texas
Instruments was one of the first U.S. semiconductor manufacturers to
take aggressive action, filing lawsuits in early 1986 against eight
Japanese and one South Korean memory chip producers for patent
infringements.
In the computer area, firms such as Apple and IBM have long suffered
from cheap clones of their personal computers appearing on the world
market while U.S. software companies have been victimized by the
illegal copying of software programs by users and software pirates.
Revenue losses from software piracy, for example, reached an
estimated $4 billion in 1988 alone. Countries in which
counterfeiting and software piracy are particular problems include
Brazil, Mexico, Italy, Saudi Arabia, India, the People's Republic of
China, Thailand, South Korea, and Taiwan.
These violations substantially injure U.S. electronics firms. They
cause sizeable revenue losses, which make it very difficult for a
company to recover its R&D costs on current products and fund the
necessary R&D required to develop new products. In short,
intellectual property rights violations can have a dampening effect
on the rate of innovation, which is one of the sector's strongest
competitive advantages.
5. Export Regulations
The United States' policy of controlling the export of certain items
stems primarily from its concern over supplying strategically
significant technologies to countries in the Soviet Bloc.
Contention arises when national security controls are applied to
dual-use technologies. U.S. electronics firms have expressed
concern over the federal government's application of export
controls, citing the importance of these dual-use technologies to
their companies and to the economic vitality of the United States.
In addition to national security controls, U.S. companies have
expressed concern over foreign policy controls, unilateral national
security controls, export license processing times, the perceived,
unequal internal export control systems among COCOM allies, and the
- 40 -
availability of controlled commodities from non-COCOM countries.
They claim the uncertainties inherent in the process have convinced
some foreign customers that U.S. companies are unpredictable and
unreliable suppliers.
6. Growing Dependence on Foreign Suppliers
In the section that examined the competitive status of the U.S.
electronics industries, the discussions on the technology base and
world market shares showed that U.S. electronics firms are losing
their historic technological and commercial leadership to foreign
competitors in a broad range of products. Another perspective on
this trend is the growing U.S. dependence on foreign suppliers.
Many firms in the sector increasingly rely on foreign manufacturers
for their components, subsystems, equipment, and, in some cases,
entire systems.
For example, in the case of silicon wafers, some U.S. suppliers
remain that produce for their internal needs (so-called captive
suppliers). No significant U.S. supplier to the commercial market
exists since the purchase of Monsanto Electronic Materials Company
by Huels of Germany in early 1989. Virtually all manufacturing of
this basic ingredient to downstream electronics manufacturing is now
under the control of Japanese and European companies.
The U.S. Erosion in PC Subsystems
Chart 8 presents another illustration of this phenomenon. It
focuses more narrowly on the dynamic personal computer segment of
the computer industry showing the top five suppliers worldwide of
major components pieces of a personal computer system. The chart
shows the strong position of Far Eastern manufacturers in key
components (memory chips or DRAMs, application specific integrated
circuits or ASICs) and subsystems (floppy and optical drives, and
video displays). However, U.S. firms are still quite strong in
several key products--microprocessors (MPUs), software (including
operating and data base management systems or DBMS), and local area
networks (LANs). Although U.S. firms appear strong in laser
printers, the principal subassembly in these printers, the laser
engine, comes from Japan. The Japanese, in particular, are steadily
becoming the principal suppliers of the upstream products in these
systems, while U.S. companies are becoming systems integrators.
As systems integrators, companies buy the lowest cost, highest
performance components, subsystems and equipment from wherever they
can be obtained in the world market. The companies then integrate
the "pieces" into a system of their own design, adding software, and
sell the combined system. The systems integrators count on being
able to buy the latest component and subsystem technologies, often
from the vertically integrated manufacturers who may be their
competitors at the systems level. They assume that these
technologies will be commercially available at the same time that
their suppliers incorporate them into their own systems.
- 41 -
Chart 8
U.S. Share of Computer Shipments (1984 and 1987)
Software
Components
Personal Computers
Networks
NEC
IBM
Microsoft
Northern Telecomm
Toshiba
Apple
Lotus
AT&T
Texas Instruments
NEC
Ashton-Tate
Rolm
Fujitsu
Compaq
IBM
Mitel
Oki
Zenith
NEC
42 I I
All Semiconductors
Personal Computers
PC Software
PBXs
NEC
Intel
HP
Sharp
Microsoft
DEC
Toshiba
Apple
Sony
IBM
IBM
Zilog
DEC
Olympus
Apple
3-Comm
(ranked by
n/a
Kyocera
n/a 0
AT&T
U-B
units shipped)
QMS
DCA
MPUs
Laser Printers
Optical Drives
Operating Systems
LANs
Toshiba
NEC
IBM
Legend
Mitsubishi
Teac
Fujitsu
Microsoft
Hitachi
Matsushita
NEC
100%
Ashton-Tate
NEC
0
Mitsubishi
Seagate
Market
Fujitsu
Y-E Data
CDC
Leaders
DRAMs
Floppy Drives
Hard Drives
DBMS
1984 1987
Fujitsu
Samsung
Oki
Lotus
Toshiba
Tatung
NEC
Microsoft
Percent of World
NEC
Matsushita
SAS Institute
Shipments by
LSI Logic
Goldstar
Computer Assoc.
U.S. Companies
AT&T
Hyundai
ASICs
Displays
Dot Matrix Printers
Spreadsheet SW
Note: Exact percentages can be found in Table 10
A corollary to this strategy is that the systems integrators can
stay ahead of their vertically integrated suppliers by better system
design and software.
An example of the weakness of this strategy is U.S. suppliers'
experience in the laptop portion of the PC market. The Japanese
moved from a 24 percent worldwide market share in 1984 to a 41
percent share in 1988. Table 15 shows the Japanese strength in the
various component and subsystem products which was an important
reason for their success at the systems level. U.S. competitors did
not maintain an advantage in systems design nor in software. The
Japanese laptop suppliers had competitive designs and incorporated
standard U.S. microprocessors and software packages.
The U.S. Strength in Microprocessors and Software
The strong U.S. position in microprocessors and software has been
critical in the development of the personal computer segment. There
has been a synergism between U.S. suppliers in these technologies,
which has helped U.S. personal computer suppliers become leaders at
the systems level. Some foreign-made microprocessors are now
beginning to make inroads, notably the "transputer" from Inmos, a
British firm, and the "V" series from Nippon Electric Company (NEC).
But U.S. suppliers remain leaders in the latest microprocessor
designs, both in RISC--reduced instruction set computers, which
promise higher processing speeds than their predecessors--and CISC
or complex instruction set computers. Not only are the traditional
U.S. microprocessor firms bringing out new designs, but others,
particularly workstation suppliers, have designed RISC chips for use
in their products. Japanese firms, such as NEC, Toshiba, and
Fujitsu, have targeted RISC as a technology of choice and have
entered into licensing agreements with the U.S. suppliers to obtain
the technology (see the workstation case study in Appendix B).
For the Japanese to truly excel in the PC systems market, they must
have the lead in operating systems software and the associated
microprocessors. In order to achieve this, the Japanese have
initiated a joint government-industry effort to design and produce
their own operating system and associated microprocessors--TRON--
which they hope will become a world standard in a wide range of
electronic equipment, from workstations to telecommunications
switching equipment. Importantly, one of the principal goals of the
project is to allow the Japanese to become independent of U.S.
suppliers and avoid frictions over intellectual property rights and
the payment of royalties for use of U.S. software and
microprocessors in their equipment.
More broadly, the Japanese have substantial resources devoted to
software development. In addition to TRON and efforts within the
Japanese computer companies, the joint industry and government R&D
project SIGMA (Software Industrialized Generation and Maintenance
Aids) is striving to create the necessary software development tools
and train programmers and systems analysts to take the lead away
from the U.S. software industry.
- 43 -
Table
15
The Worldwide Laptop Computer
and Components Market; U.S. & Japanese Share
1984
1988
Unit Value
Source
Laptop Computers
U.S.
71%
57%
$2500
DataQuest
Japan
24
41
Other
0
2
Microprocessors
80C88
U.S.
22
31
$10
DataQuest
Japan
78
68
Other
0
0
80C86
U.S.
23
16
$10
DataQuest
Japan
77
84
Other
0
0
80286 & 80386
U.S.
-
100
$25 & $250
DataQuest
Japan
-
0
Other
-
0
Rigid Disk Drives
U.S.
67
78
$500-600
Disk/Trends
(upto 300 MB)
Japan
30
12
Other
3
10
Flexible Disk Drives
U.S.
30
2
$50
Disk/Trends
Japan
67
95
Other
3
3
Memory Chips
U.S.
15
24
$5
DataQuest
256K
Japan
85
66
Other
0
0
1Megabit
U.S.
1
1
$25
DataQuest
Japan
99
99
Other
0
0
Flat Panel Displays
Liquid Crystal
U.S.
5
3
$188
S.R.I.
Japan
72
82
Other
23
15
Electroluminescence
U.S.
49
53
$380
S.R.I.
Japan
27
29
Other
24
18
Gas Plasma
U.S.
57
24
$340
S.R.I.
Japan
41
68
Other
2
8
- 44 -
If the Japanese achieve this goal, they will have neutralized one of
the few remaining competitive advantages that the United States
currently has in electronics.
7. Increased Foreign Investment in the Sector
The issue of increased foreign investment and its role in the U.S.
economy has sparked considerable debate over the past few years.
Supporters of open foreign investment have cited its economic
benefits such as job creation and growth in local tax bases and
exports. They stress the fact that the United States has become
more dependent on foreign capital to finance the federal deficit and
point out that any attempts to discourage this investment might harm
the economy. In addition, they note that the U.S. Government has
advocated an unrestricted foreign investment climate with its
trading partners and encouraged them to maintain markets that are
open to U.S. investment.
Others have taken a more cautious approach based on their concern
over the adverse economic, national security, and political
implications that they see in the rising tide of foreign
investment. They believe that the United States should not provide
blanket support for all foreign investments, but should actively
encourage only those which are clearly beneficial. Among the
questions they most often ask about foreign investment are whether
or not foreign-owned firms make a substantial contribution to U.S.
employment and trade, whether these firms reinvest their profits in
the United States or repatriate them, and whether they import as
much technology from abroad as their parent companies export through
acquisitions, minority investments, and technology
licensing/development agreements. They also question whether
foreign dominance in a growing number of critical U.S. industries
might leave the United States vulnerable in a national emergency and
impair the country's ability to develop both trade and foreign
policy independently.10 The following section will endeavor to
shed light on some of these questions as they pertain to the U.S.
electronics sector.
Foreign Investment in U.S. Electronics
Cumulative foreign direct investment in the U.S. electronics sector
has tripled since 1980 to over $12 billion in 1988. This compares
to $31 billion in U.S. direct investment in foreign electronics
10/ Linda M. Spencer, American Assets: An Examination of Foreign
Investment in the United States, Congressional Economic
Leadership Institute, Arlington, VA, July 1988. Also,
Anne Marie Richter, Foreign Direct Investment: A Global Shift
in Corporate Power, November 1988, and Who Owns America?:
Foreign Direct Investment and the Globalization of Capital,
November 1987, Nuala Beck & Associates, Inc., Toronto, Canada.
uses 45 -
sectors abroad. The focus of this investment has been the radio,
television, and communications industry, but high growth rates were
evident in most of the other industries during this period (see
Table 16) 11/. In the case of the first industry, the high
percentage stemmed from the acquisition of former U.S. TV equipment
producers by Dutch and Japanese companies. Investment in the
computer industry grew strongly.
The data from the Bureau of Economic Analysis (BEA) cover not only
the cumulative equity investments from outside the United States in
start-ups, acquisitions, joint ventures, and plant establishments
and expansions, but also intercompany loans and reinvested
earnings. However, BEA data on the leading nations' investments in
the U.S. electronics sector are not published and may be incomplete
due to disclosure considerations.
Table 17 shows an incomplete but revealing picture of foreign
acquisition and business/plant establishment activity in the
electronics sector. Foreign outlays were particularly heavy from
1986 through 1988 in the electronic components, radio, TV and
communication equipment, and computer industries. Several factors
were responsible for this upsurge in spending. First, the sharp
depreciation of the U.S. dollar relative to other major currencies
lowered the cost of U.S. assets, making many innovative U.S.
companies attractive investment targets. The objectives of these
investors were reportedly to gain access to the latest advances in
U.S. electronics technology and to expand their U.S. market
presence. Secondly, cash-poor start-ups that had difficulty
obtaining financing from domestic sources sought out foreign
investors to remain in business and to underwrite their R&D
efforts. Finally, the concern of some foreign firms over U.S. trade
actions led them to establish assembly operations in the United
States.
The Japanese have been very active investors in the U.S. market over
the past few years (see Table 18). In the office and computing
equipment industry during 1987, they acquired investment positions
in five U.S. computer firms and opened eight new plants. Among the
investments were Ardent Computer, a start-up graphics supercomputer
company; and MIPS Computer Systems, an acknowledged leader in RISC
microprocessor technology. Several of the new plants were built to
avoid 100 percent duties placed on certain Japanese personal
computer imports as part of the trade sanctions in the semiconductor
area. Japanese suppliers of portable typewriters also moved some
operations to the United States in part to avoid dumping duties
imposed on their imports. A number of Japanese firms announced
plans in mid-1989 to establish new production facilities and to
expand existing ones over the next few years to manufacture laser
11/ BEA data does not break out radio and TV products (part of
consumer electronics) from communications equipment. The
figures also exclude software in the tables on foreign
investment and U.S. affiliates of foreign companies used in
this section.
- 46 -
printers and color displays, copiers, communications equipment, and
semiconductor devices such as 4MB DRAMS, ASICS, and microprocessors.
Table 16 Foreign Direct Investment Position in the
U.S. Electronics Sector
($ Millions)
Annual
Share
Share
Growth
of Total
of Total
1980-88
Industry
1980
(%)
1988
(%)
(%)
Office and
443
13
2,701
22
25
Computing Machines
Radio, TV and
1,104
33
4,598
38
20
Communications
Equipment
Electronic
1,522
46
3,052
25
9
Components
Scientific and
89
3
702
6
29
Measuring
Instruments
Photographic
166
5
1,077
9
17
Equipment
Total
3,324
100
12,130
100
18
Electronics
Total Mfg.
33,011
---
121,434
--
18
All Industries
83,046
---
328,850
--
19
Source: Bureau of Economic Analysis, U.S. Department of Commerce.
- 47 -
Table 17 Annual Foreign Investment Outlays for Acquisitions
and Establishments in the U.S. Electronics Sector
($ Millions)
Industry
1980
1981
1982
1983
1984
1985
1986
1987
(R)
1988 (P)
Office and
118
42
(D)
19
49
(D)
62
429
986
Computing Machines
Radio, TV, and
(D)
147
(D)
(D)
(D)
(D)
(D)
(D)
1,463
Communications
Equipment
Electronic
130
147
92
60
107
275
338
933
2,070
Components
Scientific and
20
(D)
45
(D)
32
(D)
635
597
484
Measuring
Instruments
Photographic
(D)
6
0
0
0
0
1
(D)
(D)
Equipment
(D) - Not provided due to disclosure regulations.
(R) - Revised
(P) - Preliminary
Source: Bureau of Economic Analysis, U.S. Department of Commerce.
- 48 -
Table 18 Investment/Acquisition and New Plant
Establishments of Japanese Companies in
Selected U.S. Electronic Industries
1980-87
(Number of Transactions)
ndustry
Activity
1980
1981
1982
1983
1984
1985
1986
1987
Total
omputers/
Invest/Acq.
-
1
-
2
1
1
-
5
10
usiness
New Plants
-
-
-
1
-
1
2
8
12
quipment
lectronic
Invest/Acq.
3
-
-
-
-
3
4
2
12
omponents
New Plants
3
2
2
1
2
4
4
3
21
ommuni-
Invest/Acq.
-
-
1
1
1
-
-
2
5
ations
New Plants
-
1
-
-
3
2
1
2
9
quipment
ource: Japan's Expanding U.S. Manufacturing Presence, Japan Economic
Institute of America, December 1988.
ata on the affiliates of foreign companies in the United States
rovide some insights into their role in the U.S. electronics
ector. According to statistics compiled by BEA, the number of
breign affiliates participating in the U.S. electronics market has
creased from 71 in 1977 to 209 in 1986. Their annual sales jumped
ive fold to $20.5 billion by the end of this period, concentrated
argely in electronic components, and radio, TV, and communications
quipment. Table 19 shows that their total assets in the United
tates expanded at a 24 percent annual rate through 1985,
ubstantially outpacing the asset growth of the U.S. electronics
ector. As a result, their share of the domestic electronics asset
ase nearly doubled to 20 percent in those eight years. Roughly
alf of these assets were held in the electronic components
ndustry. The upswing in foreign investment for acquisitions and
ew plants in the United States during 1986 and 1987 may have raised
foreign affiliate share of asset holdings further.
value that these manufacturing operations added in the United
tates cannot be determined since sufficient detail at the industry
evel is not available for this purpose. However, trade data show
at imports represented an important ingredient in the significant
S. sales growth of these affiliates. Table 20 shows that in 1986
ese affiliates imported twice as much as they exported, leaving a
rade deficit of $2 billion. As a result, they were a major
ontributor to the U.S. electronic sector's overall trade deficit.
- 49 -
Table 19 Share of Total Assets of U.S. Electronics Sector
Held by U.S. Affiliates of Foreign Companies
Annual Growth
1977-85
1977
1980
1985
(%)
U.S. Affiliates of
2,914
8,791
15,779
+24
Foreign Companies
U.S. Electronics
24,866
40,336
78,079
+15
Sector
Share U.S. Affiliates
11.7
21.8
20.2
Hold (%)
Sources: Bureau of Economic Analysis and the Census Bureau,
U.S. Department of Commerce.
Table 20 U.S. Sales and Trade of U.S. Affiliates
of Foreign Electronics Companies
1977
1980
1986
Sales ($M)
4,136
10,421
20,500
Exports ($M)
364
1,511
1,968
Imports ($M)
640
1,384
4,071
Trade Balance ($M)
-276
+127
-2,103
Imports as Percent
15.5
13.3
19.9
of Sales (%)
Exports as Percent
8.8
14.5
9.6
of Sales (%)
Source: Bureau of Economic Analysis, U.S. Department of Commerce,
unpublished data.
- 50 -
With regard to the affiliates' contributions to employment in the
sector, Table 21 shows that they doubled the number of U.S.
employees in their operations and their share of electronics sector
employment since 1977. The data do not reveal the composition of
this employment, e.g., the percentage of manufacturing versus sales
or marketing positions. Nor do they indicate whether or not the
skill levels and pay scales of the jobs these affiliates have
created match those of U.S.-owned firms.
The R&D outlays of U.S. affiliates rose at a 34 percent annual rate
from 1977 to around $1.3 billion in 1986 as shown in Table 22.
Despite this rapid growth, the monies that they allocated to R&D
represented less than 10 percent of the research spending by
industry within the U.S. electronics sector. Most of their outlays
were for research on electronic components, and radio, TV, and
communications equipment.
Affiliates of European electronics firms have established the
strongest foreign R&D presence in the United States. They accounted
for the bulk of affiliate research expenditures in 1986. Philips of
the Netherlands, Siemens of Germany, and Thomson-CSF of France have
research interests that span a broad range of technologies
from materials and integrated circuits through computer and
telecommunications systems (see Appendix C). In telecommunications,
Northern Telecom of Canada has devoted significant resources to R&D
efforts at its Bell Northern Research (BNR) laboratories in Ann
Arbor, Dallas, Mountain View, and Research Triangle Park, employing
more than 1,000 U.S. researchers.
The Japanese have reportedly moved much more slowly in building up
a U.S. research capability. They performed some product development
and design work through 1986, but their level of research activity
was not on the same scale as their European counterparts. However,
their U.S. R&D efforts have begun to expand in recent years. For
example, in the computer area, NEC has launched laptop personal
computer and workstation development projects while Fujitsu and
Hitachi have software engineering centers in California to tap U.S.
programming talent.
The question of how much technology has been transferred from
foreign parents to their U.S. affiliates and vice versa is difficult
to answer. Many of the affiliate R&D operations in the major high
tech regions of the United States were established in part as
"listening posts" to monitor important technological developments
within U.S. companies and leading university research laboratories
and to transfer this information back to their foreign parents. In
addition, some of the affiliate research base has been obtained
through minority investments in and acquisitions of U.S. firms
possessing advanced technology. BEA data on licensing fees and
royalties are too broad to assess with any degree of accuracy the
flow of technical know-how across U.S. borders.
- 51 -
Table 21 Share of Total Employment in the U.S. Electronics
Sector Held by Affiliates of Foreign Companies
Annual Growth
1977-86
1977
1980
1986
(%)
U.S. Affiliates
73,046
154,395
182,065
+11
of Foreign Companies
Total U.S. Electronics
1,543,100
1,924,300
1,951,800
+ 3
U.S. Affiliate Share
4.7
8.0
9.3
of Total Employment
(%)
Sources: Bureau of Economic Analysis and the Census Bureau,
U.S. Department of Commerce.
Table 22 Research and Development Outlays* of U.S.
Affiliates of Foreign Electronics Companies
($ Millions)
Annual Growth
1977-86
Industry
1977
1980
1986
(%)
Office and Computing
15
99
219
+35
Machines
Radio, TVs and
38
68
445
+31
Communications Equipment
Electronic Components
31
194
570
+38
Scientific and Measuring
2
8
17
+27
Instruments
Photographic Equipment
2
4
12
+22
Total Electronics R&D
88
373
1,263
+34
Outlays
R&D as Percent of U.S.
2.1
3.6
6.2
Affiliate Sales (%)
Share U.S. Affiliates
Hold of U.S. Electronics
1.9
4.8
8.0
Sector R&D (%)
* Represents all R&D costs incurred including cost of R&D conducted
by others on behalf of U.S. affiliates.
Sources: Bureau of Economic Analysis, U.S. Department of Commerce,
and American Electronics Association.
- 52 -
8. Export Financing
U.S. electronics firms have been put at a disadvantage relative to
their foreign competitors due to the limitations of the U.S. export
financing program in addressing the sector's global supply
structure. The U.S. electronics sector sources parts and components
worldwide. Such sourcing patterns can reduce the U.S. content of
electronics products exported from the United States to the point
that they become ineligible for U.S. export financing. The export
financing authorities of other nations, in contrast, are more
flexible and do not have such stringent requirements on domestic
content. Electronics suppliers from these countries therefore have
an advantage when competing with U.S. companies on a worldwide basis.
The U.S. disadvantage is most evident in competitions involving
multimillion dollar electronics projects, such as large-scale
telecommunications and computer networks. U.S. export financing
institutions have traditionally been very effective in financing
large, capital-intensive infrastructure projects in developing
countries, such as power generating plants. Historically, the
equipment for these projects was largely built in the United States
and had a high percentage of U.S. content. However, large-scale
electronic systems may have levels of U.S. content below the current
85 percent requirement of the U.S. Export-Import Bank (Eximbank).
In such situations, U.S. electronics systems suppliers would not be
able to compete with Eximbank support. In response, some U.S.
electronics firms have applied for export financing assistance from
foreign countries in which they have subsidiary operations and have
shipped systems from those countries instead of the United States.
- 53 -
III. ACTIONS TAKEN ON BEHALF OF THE ELECTRONICS SECTOR
Introduction
There have been a number of actions taken to address some of the
issues affecting the U.S. electronics sector listed in the previous
chapter. Federal and state governments alone and in concert with
companies in the sector, as well as the companies themselves, have
been involved in dealing with these problems.
While there has never been a coordinated set of federal government
policies in the United States that have been applied to U.S.
industry in general, and the electronics sector in particular, the
U.S. Government has a number of policies, laws, and regulations that
have affected the course of events in this sector. For many of the
electronics industries, the principal historic role of the U.S.
Government has been to fund R&D and to serve as a major market for
their output. Foreign competition was at a minimum because
electronics originated and was developed in the United States.
Government involvement was the most extensive in the
telecommunications industry, which was regulated as a natural
monopoly. In the rest of the sector, the U.S. Government had a
laissez faire approach, leaving companies to determine their own
destinies. These factors have tended to mitigate against extensive
cooperation between companies and with the government to address
common problems.
At the state level, a number of governments have been actively
courting U.S. electronics firms to locate various facets of their
operations in their states to develop their local economies. In
some cases, these efforts have been done in a broad, coordinated
fashion. For example, the State of Georgia has worked to achieve
close cooperation with the state government, local universities, and
companies to ensure that an adequate infrastructure and resources
are available to foster innovation and new firm creation. An
important aspect of the state's strategy has been to attract a broad
range of electronics companies, from component suppliers to systems
level manufacturers in order to create a self-sufficient,
interdependent local industry.
Some of the experience at the state level in the United States is
comparable to programs in a number of foreign countries, where
governments have been actively involved in a coordinated effort to
nurture their electronics industries. Additional detail on other
countries' development programs is covered in Appendix H of this
study.
The following is a brief review of recent government actions that
have been directed toward the issues raised previously in this study.
- 54 -
A. Actions on National Issues
1. The Cost and Availability of Capital
In 1986, the Gramm-Rudman Amendment set spending guidelines for
reducing the federal budget deficit, but the results have not had a
positive effect yet on lowering capital costs or increasing capital
availability. A lower savings rate in the United States,
particularly relative to Japan, has often been cited as contributing
to higher costs of capital in this country. Although the U.S.
Government has instituted tax reforms in recent years, the net
effect has not been a significant stimulation of savings in the
United States.
2. Exchange Rates
The effect of the weakening of the U.S. dollar since February 1985
on the electronics sector may have had more of a negative influence
than a positive one, since imports continued to grow faster than
exports. Because the Japanese are sole source suppliers in several
categories of consumer electronics, the depreciation of the dollar
may not have any stimulative affect on certain categories of U.S.
exports. In addition, the weaker dollar has reduced the cost to
foreign firms of investing in U.S. electronics technology, U.S.
subsidiaries, and equity positions in a wide variety of firms across
the spectrum of the sector.
3. R&D Tax Credits
The tax credit for R&D expenditures has been extended for another
year, but debate continues over making it permanent. Companies
state that they need a permanent tax credit to remove the
uncertainty in their long-term R&D efforts. The Department of
Commerce was instrumental in creating the original R&D tax credit in
1981. Recently, the Bush administration has proposed to extend and
redesign the credit to ensure maximum effect on technological
innovation and U.S. competitiveness. Discussions within the
administration led to general agreement on three major points:
First, the credit should be made permanent. Protracted temporary
status significantly reduces the credit's incentive value, leaving
little long-lasting effect on R&D spending.
Second, the credit should be made available to new technology
ventures. The current credit is available only to ongoing
businesses.
Third, the credit's incremental feature should be redesigned because
it drastically limits the effectiveness of the credit as an R&D
incentive. Currently, the credit is calculated as 20 percent of a
firm's R&D expenditures above the average of its qualified R&D
expenditures over the preceding three years. Since only the new
increment of R&D counts for credit purposes, there is no incentive
for firms with a base period of high R&D expenditures to maintain
- 55 -
expenditures at high levels. Indeed, there is an artificial
incentive for firms to make R&D expenditures in cycles. A fixed
base credit indexed to nominal GNP would be more effective as an
incentive. The critical feature of the base is that a firm's
current spending will have no effect on future credits.
The administration is working with Congress, which has introduced
two identical bills (HR. 1416 and S.570), to correct some of the
original deficiencies of the R&D credit and make the R&D tax credit
permanent. Both bills provide a fixed historical base period that
should considerably broaden the number of eligible users by
encouraging more companies to increase or sustain their R&D
spending. They also extend eligibility for the credit to
start-ups. The bills do not address the issue of expanding coverage
to include other important R&D activities in the sector, such as
nonexperimental product development and nonlaboratory process
technology.
The administration has also responded to industry's concern about
the effects of Treasury Regulation 1.861-8 on allocation of U.S. R&D
expenses by drafting a compromise proposal to treat 67 percent of
U.S. R&D spending as U.S. source income. Congress passed a series
of full and partial moratoria to handle this problem, but the last
one generally expired on May 1, 1988.
4. Education and the Work Force
Currently, the federal government has a number of programs aimed at
improving scientific and engineering education. Agencies such as
the National Science Foundation, the Department of Education and the
National Institutes of Health support and fund teacher training,
curriculum and materials development, and research and graduate
fellowships. The Department of Education sponsors the Educational
Resources Information Center (ERIC). The Science, Mathematics, and
Environmental Clearinghouse, one of ERIC's 16 clearinghouses, is
designed to acquire the significant educational literature within
the field. The clearinghouse is used by academics and students who
wish to improve their teaching methods and enhance their research
sources.
Many state governments have made changes to improve their
educational systems. They have toughened academic standards,
requiring students to take more science and math courses to qualify
for graduation. They have also established special magnet schools
for science and technology. For example, in 1984, the State of
South Carolina enacted the Education Improvement Act (EIA). A
one-cent sales tax increase funded 61 new programs and policies,
including raising science and math course requirements, higher
teacher's salaries, remedial education, and bonus dollars for
schools that perform well. South Carolina also established the
Governor's School for Science and Mathematics where two science
courses are required each semester and a major research project in
science, math, or computer science is mandatory.
- 56 -
Universities and colleges are also attempting to increase interest
in science and engineering. For example, "Engineering 2000,"
sponsored by the Catholic University of America, is a program
designed to educate high school students on career opportunities in
engineering. This is accomplished through a seminar program led by
leading engineers from government, industry, universities, and
professional societies.
U.S. companies, including those in the electronics sector are making
a response to the education issues. Some solutions supported by
private industry include funding for experimental teaching programs,
support of state-level educational reforms, employee/teacher
exchanges, and job training. For example, members of the American
Electronics Association (AEA) contributed more than $23 million to
their Electronics Education Foundation for graduate fellowships,
faculty development grants, and equipment donations. University
research has benefited from funding by U.S. electronics companies,
both on an individual company basis, as well as through cooperative
efforts such as the Semiconductor Research Corporation.
A recent effort is "Project 2061" designed by the American
Association for the Advancement of Science (AAAS), funded by the
National Science Foundation, and industry. The program seeks to
develop a new approach to teaching, including possibly eliminating
regular subjects and ending standardized testing. Teaching may
consist largely of guiding students through projects that include
not only science and mathematics, but also related aspects of
literature, economics, and history. The program falls into three
phases. The first, already completed, established the conceptual
base by outlining the knowledge of science and nature that students
should have upon leaving high school. The second phase, just under
way, teams teachers from school districts led by the AAAS group to
outline new curricula, texts, and student schedules. In the last
phase, these outlines will be adopted by states and local school
districts, modified to fit local conditions; and then installed in
schools. According to AAAS the goal is to bring together
"scientific societies, educational organizations and institutions in
a nationwide effort to turn the second phase into education
practice."
The President and the nation's governors met for an education summit
in September 1989 in Virginia. In a joint statement, they agreed to
establish a process for setting national education goals; seek
greater flexibility and enhanced accountability in the use of
federal resources to meet the goals, through both regulatory and
legislative changes; undertake a major state-by-state effort to
restructure the education system; and report annually on progress in
achieving goals.
The National Governor's Association Task Force on Education was
instructed to have the national performance standards completed and
announced in early 1990 after consultations with educators, parents
groups, and the business community. The performance goals are to
guarantee an internationally competitive standard in seven areas:
- 57 -
the readiness of all children to start school;
the performance of students on international achievement tests,
especially in math and science;
the reduction of the dropout rate and the improvement of
academic performance, especially among at-risk students;
the functional literacy of adult Americans;
the level of training necessary to guarantee a competitive work
force;
the supply of qualified teachers and up-to-date technology;
the establishment of safe, disciplined and drug-free schools.
5. Antitrust
U.S. antitrust laws have affected developments within the
electronics industries, most notably the telecommunications
industry. Under pressure from an antitrust suit filed by the
Justice Department in 1974, American Telephone and Telegraph (AT&T)
agreed in 1982 to a divestiture which split the nationwide Bell
System into a new, smaller AT&T corporation and seven regional Bell
operating companies (RBOCs). As part of the settlement, AT&T was
allowed to enter the computer market, from which it had been banned
since a 1956 Consent Decree with the Justice Department. A
continuing review of the effect of the settlement has led to a
number of proposals to allow the RBOCs to engage in the
manufacturing of telecommunications equipment and to provide
information services, activities from which they are currently
prohibited.
Another major example of the use of antitrust laws by the government
relative to the electronics industries was the suit brought against
IBM in 1969. The trial ran from 1975 to 1982, when the Justice
Department decided to dismiss the suit.
The thrust of the government's past actions with regard to both the
telecommunications and computer industries was to increase
competition. However, since 1982, the government has taken several
steps to liberalize antitrust laws to allow U.S. firms to cooperate
more closely in certain situations. Reflecting the awareness that
many of their foreign rivals acting in concert have a competitive
edge in the world market, the government has relaxed antitrust
restrictions covering joint R&D activities and passed legislation
that allowed the issuance of export trade certificates of review for
the purpose of joint marketing overseas. Most recently, the
Secretary of Commerce and the Attorney General have expressed
interest in further relaxation of antitrust laws to permit joint
production by rival firms under certain conditions.
The actions described above have been undertaken to address problems
that broadly affect the industrial base in the United States. While
some progress has been made, problems remain. Debate at the
national level continues in order to reach a consensus on more
effective solutions. To the extent solutions to these problems are
found, the electronics sector and all U.S. industries will benefit.
- 58 -
6. Short-Term Corporate View
There has been a number of actions taken recently by companies in
the electronics sector that imply a change of attitude to the extent
possible in the U.S. economic system toward developing a longer term
view of the market. There has been a greater emphasis on quality
control, which is not only responsive to customer needs, but also
represents a commitment to regaining market share lost on this
basis. Some companies have brought back manufacturing operations to
the United States, which, while being responsive to the effects of
the weaker dollar, also allows companies to link more closely their
R&D and manufacturing processes and, in turn, helps to stem the
erosion of the U.S. manufacturing base. Another perspective on
recent efforts to form R&D and manufacturing consortia is that these
actions have been taken with a long-term view of supporting U.S.
research and manufacturing capabilities.
B. Actions on Sectoral Issues
1. Lack of Consensus
As part of the effort to fashion this statement on the competitive
status of the U.S. electronics sector, the Science and Electronics
unit of the Department of Commerce (DOC) went out to industry and
academia to elicit their views. It became clear that this outreach
effort coincided with a growing awareness on the part of many
companies that the U.S. electronics sector was in fact facing a
growing erosion in its historic leadership role and that some
extraordinary actions on the part of industry, with support from
government, were needed. Efforts are already under way in the U.S.
electronics sector. The fact that several research consortia have
been formed shows that many companies in the sector are beginning to
take a more cooperative, long-term approach to competitiveness.
2. Research and Development
One of the basic channels by which the U.S. Government has been
involved in the electronics sector has been through funding of R&D,
principally for military and national security applications. The
funding has been channeled through such agencies as the Department
of Defense (DOD), Department of Energy (DOE), National Aeronautic
and Space Administration (NASA), National Science Foundation (NSF),
and National Institute of Health (NIH). Some, such as DOE and DOC,
also perform electronics-related R&D. A summary of the historical
involvement of these agencies in R&D is provided in Appendix F.
Although U.S. Government R&D has been directed toward defense and
space applications, there are examples of R&D projects which have
had commercial spin-offs. From DOD, examples include integrated
circuits, value-added networks, computer timesharing, the computer
language ADA, artificial intelligence/expert systems, and
semiconductor design systems.
- 59 -
From NASA, the space program provided such advances as
high-resolution video displays, communications satellite systems,
high-speed data transfer techniques, real-time data base systems,
portable emergency medical systems, ultrasound imaging systems, and
electronic component miniaturization.
Several other government agencies have been important funders of
basic research in the electronics area, principally through
universities. Important contributions, for example, have been made
to the theory of computer science by NSF and DOE funding. NSF has
also played a significant role in providing universities with access
to high performance computers for a wide range of basic research,
including electronics applications, through its Supercomputer
Centers Program.
Recent R&D Efforts
Department of Defense
DOD's concern over the effect that the loss of U.S. leadership in
electronics technologies will have on its near- and long-term
national security objectives has moved the agency into new research
efforts. In 1987, DOD's Defense Advanced Research Projects Agency
(DARPA), with 14 U.S. semiconductor companies, jointly funded
SEMATECH, a R&D consortium devoted to the development of
semiconductor manufacturing technologies. The goal of the effort is
to regain U.S. leadership in the technologies lost to foreign
competitors, particularly the Japanese. Because the R&D covers
basic process technologies, the results originally directed toward
military uses could serve equally to improve the commercial
competitiveness of the U.S. electronics sector (see SEMATECH case
study in Appendix D).
In January 1989, DARPA issued a call for proposals for R&D on high
resolution displays that also could be considered dual-use
technologies. Such displays could be used in military systems, such
as "heads up" displays for crews of fighter aircraft, as well as in
commercial systems, such as laptop computers, workstations and HDTV
(high definition television). The concern over dominance of foreign
suppliers, particularly Japanese, in the potentially lucrative
market for HDTV led to the formation of study and advisory groups to
agree on a plan of action to ensure that U.S. suppliers would not be
excluded. The Secretary of Commerce established an Advanced
Television (ATV) advisory committee, made up of representatives from
those offices involved in science and technology and trade policy in
the Commerce Department, and representatives from the private sector.
Department of Energy
The DOE's laboratories, such as Los Alamos, Sandia, and Lawrence
Livermore, have had important roles in supporting the U.S.
electronics industries. They have historically been a significant
user of and contributor to high performance computer technology.
Most recently, Sandia, for example, has been involved in developing
- 60 -
software for massively parallel computer systems which has
demonstrated a substantial improvement in the solution of a
particular kind of complex mathematical problem. The laboratories
also continue to perform, state-of-the-art developments in
semiconductor manufacturing processes such as synchrotron radiation
sources for X-ray lithography.
National Science Foundation
NSF has been an important funder of R&D in academia. Table 23 shows
that its role in supporting both applied and basic research in U.S.
universities and colleges has grown while the involvement of DOD and
DOE has declined over the past few years. NSF now accounts for 40
percent of these federal research obligations.
NSF figures in Table 24 show the emphasis on basic versus applied
research in federally-supported academic projects. The funding for
these basic research efforts has increased at a much faster pace
since 1986.
Department of Commerce
The National Institute of Standards and Technology (NIST) within the
Department of Commerce does not normally rely on grants or contracts
but rather carries on R&D in-house and provides technical services
and consultation to industry and government agencies. NIST's
programs in semiconductors, optoelectronics, microwaves and
millimeter waves, and electronic instrumentation are directed at
Table 23 Federal Obligations for Research Performed in
Universities and Colleges in Electronics-Related
Disciplines by Major U.S. Government Agency
(Million of Dollars)
1986
1987
1988
CAGR (86-88)
DOD
240.4
237.0
227.3
- 2.8
NSF
128.4
148.5
183.9
+19.7
DOE
21.0
24.9
16.7
-10.8
NASA
17.0
19.1
20.9
+10.9
Other U.S. Govt.
Agencies
5.6
6.1
6.5
+ 7.7
Total
412.4
435.6
455.3
+ 5.1
Source: National Science Foundation.
- 61 -
Table 24 Federal Obligations for Applied and Basic Research
Performed at Universities and Colleges
in Electronics-Related Disciplines
(Millions of Dollars)
1986
1987
1988
CAGR (86-88)
Applied
131.8
137.4
142.1
+3.8
Basic
280.6
298.2
313.2
+5.6
Total
412.4
435.6
455.3
+5.1
Source: National Science Foundation, 1989.
generic problems deemed important by the U.S. electronics sector.
NIST works closely with the Semiconductor Research Corporation and
SEMATECH as well as with individual electronics companies and with
trade and voluntary standards organizations such as the Electronics
Industries Association and the American Society for Testing and
Materials.
NIST has Regional Centers for the Transfer of Manufacturing
Technology to provide direct support to small and medium firms in
automating and modernizing their facilities.
Federal Laboratory Consortium
The Federal Technology Transfer Act of 1986 gave authority to
directors of all government-operated federal laboratories to enter
into cooperative R&D agreements with the private sector,
universities, and state and local governments. The law allows them
to negotiate licensing agreements and contracts, giving special
consideration to small businesses and those companies willing to
manufacture in the United States.
Within the Federal Laboratory Consortium, there are over 600 federal
laboratories and centers, which have annual in-house R&D budgets of
$20 billion and employ 17 percent of the nation's science and
engineering professionals. The consortium has a clearinghouse for
industry and academic access to its technical resources and proven
technology and technology assessments through special data bases.
The consortium has seven regional coordinators to assist industry
and academia.
Argonne/University of Chicago Development Corporation
An example of cooperative efforts to transfer federal laboratory
technology into commercial products is the Argonne/University of
Chicago Development Corporation (ARCH), a joint venture formed in
1986 between Argonne National Laboratory and the University of
- 62 -
Chicago. As part of ARCH, an industrial affiliates program was
established to provide a mechanism for transferring results in
advanced computing between the research laboratory and industry.
Implications of the New Trade Act
The Omnibus Trade and Competitiveness Act (The Trade Act) of 1988
contains a number of provisions that could affect R&D projects and
funding in the electronics sector. An example of these would be the
authority to create advisory bodies on semiconductors, semiconductor
manufacturing equipment, and superconductors to assess and recommend
strategies to improve the U.S. competitive position in these areas.
One of the responsibilities of these advisory groups is to identify
key technologies that will impact the national defense or U.S.
competitiveness as well as to recommend appropriate action.
Another aspect of the Trade Act that affected R&D was the
establishment of an Advanced Technology Program within the
Department of Commerce's NIST. Congress gave NIST the authority to
provide seed money for joint projects in critical emerging
technologies.
Private Sector Efforts
The high cost of trying to stay ahead technologically and the
competitive threat represented by joint government and private
sector R&D programs in Europe and Japan have stimulated several
cooperative R&D efforts in the United States. A list of these
efforts include the Semiconductor Research Consortium (SRC), which
channels private sector funds to academic research, and the
Microelectronics and Computer Technology Corporation (MCC), in which
researchers from member companies engage in joint R&D. The results
of the R&D are then shared among corporate partners, thus focusing
research and reducing risk and costly duplication of effort.
As a result of recommendations made by the National Advisory
Committee on Superconductivity, AT&T, IBM, and Lincoln Laboratories
at MIT announced their intention in mid-1989 to cooperate in an R&D
consortium on superconductivity. DARPA will provide more than $4
million in funding for MIT's research while both AT&T and IBM are
expected to match this amount to support their own efforts.
3. Unfair International Trade Practices
a. Recent U.S. Government Trade Actions
The federal government has been active in addressing unfair trade
practices by foreign governments and companies both on a bilateral
and multilateral basis (see Table 25). Within the context of the
current Uruguay Round of the General Agreement on Tariffs and Trade
(GATT), the government has established negotiating priorities in
several areas particularly affecting the electronics sector. These
include services, investment, and intellectual property rights.
- 63 -
Table 25 U.S. Government Trade Actions in the Electronics Sector
Date
Action
Product
Complaints
Country
Initiated
Results
Telecom
Telecom equip.
Market
Japan
1980
U.S.-Japan agreement
negotiations
restricted
on NTT procurement
301
Informatics
Trade/invest
Brazil
1984
Case-by-case relief
restrictions
copyright coverage
No copyright
of software
law for
software
301
Software
No copyright
Korea
1985
Copyright law,
and other
law
including separate
works
law for software
301/
Semiconductors/
Market
Japan
1985
Semiconductor trade
sanctions
DRAMs/EPROMs
restricted
sanctions imposed
Sanctions remain
Antidumping
256K DRAMs
Dumping in
Japan
1985
Semiconductor trade
investigation/
and future
U.S. and
arrangement
sanctions
generations
3rd markets
Sanctions imposed
Dumping ended
Sanctions removed
MAFF
Telecom Equip.
Market
Europe/
1985
Discussions folded
talks
restricted
Korea
into 1988 Trade
Act implementation
MOSS
Telephone
Standards/
Japan
1985
MOSS agreement;
talks
equipment and
certific/
regulatory structure
services
services
reformed
barriers
MOSS
Radio equipment
Standards/
Japan
1985
MOSS Agreement;
talks
and services
certific/
regulatory structure
services
reformed
barriers
Free trade
Telecom equipment
High tariffs,
Canada
1987
Tariff reductions
agreement
discriminatory
procurement
305
Supercomputers
GOJ market
Japan
1987
Procurement
study
restricted
agreement
Price
discounting
1377
Telecom equip.
Noncompliance
Japan
1989
Telecom agreement
determination
and services
with Moss
concluded
Agreement
1374
Telecom equip.
Market
EC and
1989
EC and Korea were
determination
and services
restricted
Korea
named priority
countries
Super 301
Supercomputers
Market
Japan
1989
Investigations
and satellites
restricted
initiated
- 64 -
On a bilateral basis, the U.S. Government has addressed a number of
unfair trade practices affecting this sector under various
provisions of U.S. trade laws. In the 1970s, for example, the U.S.
Government found that Japanese typewriter manufacturers were dumping
portable electric typewriters in the U.S. market and imposed duties
to compensate for the injury to U.S. suppliers. However, the action
came too late to stop U.S. typewriter producers from leaving the
portable segment of the industry.
Telecommunications
The United States and Japan signed a bilateral telecommunications
agreement, implemented in 1981, as an adjunct to the Government
Procurement Agreement of the General Agreement on Tariffs and
Trade. As part of this agreement, Nippon Telephone and Telegraph
(NTT) agreed to allow foreign telecommunications equipment suppliers
to compete for some categories of its procurement (NTT Agreement).
This agreement was renewed in 1984 and 1987.
Beginning in 1985, Market-Oriented Sector-Specific (MOSS) talks on
telecommunications were conducted with Japan in two phases. Phase I
centered on telephone communications--in particular standards,
certification, testing of terminal equipment, and value-added (VAN)
services--and was concluded in April 1985 by an agreement. Phase
II, which focused on radio telecommunications, was concluded with an
agreement in January 1986.
In order to encourage liberalization and gather information on
foreign telecommunications markets, the U.S. Government began
bilateral telecommunications discussions, Market Access Fact Finding
(MAFFs) discussions, with a number of countries. The MAFF
discussions have been overtaken by the implementation of the
telecommunications section of the new Trade Act.
The new Trade Act included measures to address trade barriers
affecting telecommunications products and services. Pursuant to
these provisions, the United States Trade Representative (USTR), in
January 1989, designated South Korea and the European Community as
priority countries that have significant barriers to trade in U.S.
telecommunications products and services. USTR has initiated
consultations as required by the law. If trade agreements to remove
the barriers are not entered by February 1991, retaliation may take
place.
On January 1, 1989 the U.S.-Canada Free-Trade Agreement went into
force. This followed two years of negotiations. With respect to
telecommunications, the issues addressed were high tariffs and
discriminatory procurement. Tariff reductions resulted from this
effort.
Section 1377 of the 1988 Trade Act requires an annual review of
trade agreements involving telecommunications products or services.
This review is to determine whether the foreign country is in
- 65 -
compliance with the terms of the agreement or otherwise denies
mutually advantageous market opportunities within the context of the
terms of the agreement to U.S. telecommunications products and
services. In April 1989, USTR determined under this provision that
certain practices of Japan with respect to third party radio and
cellular phone products and services were not in compliance with
Japan's commitments under the MOSS agreements on telecommunications.
After extensive negotiations, an agreement was reached in June 1989
in which the Government of Japan agreed to bring these practices
into compliance.
Semiconductors
In 1986, the United States suspended two antidumping investigations
when Japanese semiconductor producers agreed to stop dumping
programmable read only memories (EPROM's) and dynamic random access
memory semiconductors of 256K and future generations (DRAM's) in the
U.S. and third country markets. Concurrently, the Semiconductor
Arrangement, signed by USTR and the Government of Japan, suspended a
Section 301 investigation against Japan, which had been filed by the
U.S. semiconductor producers in protest of restrictions on the U.S.
industry's access to the Japanese semiconductor market. Under the
Semiconductor Arrangement, Japan agreed not to dump in the United
States or third countries and to provide foreign producers with
greater access to its market.
In 1987, after the U.S. Government found that no significant
progress had been made under the Semiconductor Arrangement, the
President invoked his authority under Section 301 to unilaterally
assess penalties against certain imports from Japan, including some
personal computers. The sanctions were partially lifted in November
1987 to reflect the cessation of dumping in the U.S. and
third-country markets. The U.S. Government retained the remaining
sanctions because little progress had been made in terms of
increased market share. The United States continues to monitor the
prices at which Japanese companies export to the United States, to
ensure that these prices are not below the cost of production.
The U.S. Government, in consultation with the appropriate segments
of the electronics sector, is proposing to extend price monitoring
to application specific integrated circuits (ASICs) from Japanese
suppliers. This particular type of semiconductor is becoming a
critical component in a wide range of electronics equipment,
including microcomputers and automotive controls.
Supercomputers
Under Section 305 of the 1974 Trade Act, a study was initiated on
barriers to U.S. supercomputer sales in the Japanese Government
market and price discounting practices by Japanese supercomputer
firms in the world market. An agreement covering public sector
procurement of supercomputers was signed between the U.S. and
Japanese Governments in August 1987.
- 66 -
However, in spite of this agreement, subsequent procurements by the
Government of Japan went to Japanese supercomputer suppliers, and
U.S. firms remained shut out of the market. As a result, in June
1989, USTR initiated "Super 301" investigations of Japanese
procurement of supercomputers and satellites in accordance with the
1988 Trade Act.
Software
In August 1989, the Import Administration initiated a countervailing
duty investigation to determine whether manufacturers, producers, or
exporters in Singapore of certain computer-aided software
engineering (CASE) software products receive benefits that
constitute bounties or grants within the meaning of the
countervailing duty law.
Accomplishments
Most of these trade actions on market access have resulted in
agreements that were structured to remove foreign market barriers.
In some cases, such as copyright protection for U.S. software firms
in Brazil and South Korea, negotiations have been successful and
barriers have disappeared. In others, such as semiconductors, the
process of opening foreign markets has taken longer.
The U.S. Government has also engaged in bilateral talks with the
Governments of Colombia, Indonesia, South Korea, and Mexico to
persuade them to keep their computer markets open to U.S. suppliers.
The Commerce Department, in particular, has focused its trade
promotion efforts on products that appear to have good export
potential in certain markets based on market research and has worked
closely with the Export-Import Bank to help U.S. companies obtain
low-interest financing to offset government support provided to
foreign competitors on major telecommunications and computer systems
projects overseas.
The Omnibus Trade and Competitiveness Act of 1988
The Omnibus Trade and Competitiveness Act of 1988 included a number
of changes to strengthen U.S. trade law to deal with unfair trade
practices of foreign governments and companies. Some of these
changes had the special circumstances of the electronics sector in
mind. For example, the act established dumping procedures under the
antidumping law for short life cycle products i.e., products which
are likely to become outmoded within four years. This new provision
allows a U.S. company to file a petition requesting that a product
category be established with respect to short life cycle merchandise
any time after the merchandise becomes the subject of two or more
affirmative dumping determinations.
The act also identified several electronics industries and product
sectors where Congress gave the President greater authority to
address unfair trade practices and requested that specific reviews
- 67 -
of such practices be undertaken. For example, monitoring the
supercomputer procurement agreement and increasing the access of
U.S. supercomputer suppliers to the Japanese Government market.
Advisory Committees
In order to maintain a continuing consultation process with the
electronics sector, the Department of Commerce utilizes its program
of private sector advisory committees. The committees are comprised
of representatives from the private sector who advise the Secretary
of Commerce and the U.S. Trade Representative on international trade
negotiations. Private sector advice has helped the U.S. Government
develop negotiating positions that seek to enhance the competitive
status of U.S. industry.
Issues relating to the electronics industry are addressed in the
Industry Sector Advisory Committee (ISAC) on Electronics and
Instrumentation and the Industry Functional Advisory Committees
(IFACs) on Intellectual Property Rights, Standards, and Customs.
The Bush administration has utilized this valuable means of
continuing the U.S. Government dialogue with the private sector.
Recent agenda items for these advisory groups have included U.S.
strategy for the Uruguay Round of the GATT and Europe 1992.
Congress has a critical role to play in maximizing federal
participation in the enhancement of the competitiveness of the U.S.
electronics sector. The creation of the National Advisory Committee
on Semiconductors to devise a national semiconductor strategy is an
example of congressional action to promote joint private industry
and government initiatives to strengthen the international
competitiveness of the U.S. semiconductor and electronics industries.
b. U.S. Company Actions
Trade law actions, principally antidumping petitions, have been
filed by companies within the electronics sector (see Table 26).
For example, Micron Technology filed an antidumping petition against
Japanese suppliers of 64K DRAMs in 1985. The U.S. Government found
dumping and levied duties on imports of these products from Japan.
Also in 1985, Intel Corporation, Advanced Micro Devices, Inc., and
National Semiconductor Corp. filed an antidumping petition against
Japanese suppliers of electronically programmable read only memories
(EPROMs). This latter suit was suspended under terms of the
Semiconductor Trade Arrangement between the U.S. and Japanese
Governments.
On March 17, 1988, Verbatim, a leading U.S. floppy disk supplier,
filed a petition on behalf of the U.S. industry, charging that
certain Japanese suppliers were selling 3.5 inch diskettes below
cost in the U.S. market. On February 7, 1989, the Department of
Commerce announced a final determination that the Japanese suppliers
were dumping these products, ranging from 28 to 51 percent below
cost. In March 1989, the International Trade Commission (ITC)
- 68 -
Table 26
U.S. Industry Trade Actions in the Electronics Sector
Date
Action
Product
Complaints
Country
Initiated
Results
Antidumping
Televisions
Dumping
Japan
1968
Duties levied
Antidumping
Tuners
Dumping
Japan
1970
Duties levied
Antidumping
Portable
Dumping
Japan
1974
Duties levied
electric
typewriters
Antidumping
High-powered
Dumping
Japan
1981
Duties levied
microwave
amplifiers
Antidumping
Televisions
Dumping
S. Korea
1983
Duties levied
Antidumping
Televisions
Dumping
Taiwan
1983
Duties levied
Antidumping
64K DRAMs
Dumping
Japan
1985
Included in
semiconductor
arrangement
Antidumping
EPROMs
Dumping
Japan
1985
Included in
semiconductor
arrangement
Antidumping
Cellular radio
Dumping
Japan
1985
Duties levied
telephones
Antidumping
Color picture
Dumping
Singapore
1986
Duties levied
tubes
Antidumping
Color picture
Dumping
S. Korea
1986
Duties levied
tubes
Antidumping
Color picture
Dumping
Canada
1986
Duties levied
tubes
Antidumping
Color picture
Dumping
Japan
1986
Duties levied
tubes
Antidumping
Floppy disks
Dumping
Japan
1988
Dumping
determined
Antidumping
Small business
Dumping
Japan
1988
Duties levied
phone systems
Antidumping
Small business
Dumping
S. Korea
1988
In progress
phone systems
Antidumping
Small business
Dumping
Taiwan
1988
Duties levied
phone systems
- 69 -
determined that the imports materially injured the U.S. industry.
The Commerce Department has issued a final order instructing the
U.S. Customs Service to collect antidumping duties.
At the end of 1988, AT&T initiated an antidumping investigation of
suppliers of small business telephone systems in Taiwan, Japan and
South Korea. In October 1989, the Commerce Department concluded its
investigation of Taiwan and Japan and made a determination of
dumping in both cases, with antidumping margins as high as 178
percent. The investigation of Korea South is continuing.
C. Future Trade Concern--EC 92
The long-term effects on the U.S. electronics sector of the European
Community's internal market liberalization by 1992 (EC 92) remain
unclear. The EC has begun to issue policy directives for comment
that will be implemented to form a single regional market by
eliminating trade and investment barriers between its member
states. Some observers are concerned that this internal
liberalization will result in the creation of external barriers to
trade that will exclude U.S. suppliers. Others believe that the
liberalization will make it easier and less costly to produce and
market foreign products in Europe. In anticipation of the 1992
goal, many U.S. firms are expanding their operations in Europe,
including joint ventures with European partners. U.S. Government
actions on this issue have included an outreach program to U.S.
industry, providing information on EC directives and receiving
comments in return to gauge the potential effect on U.S. trade and
investment (see Appendix G for listing of EC directives), and
appropriate representation to the EC to defend American interests.
4. Intellectual Property Rights
a. U.S. Government Actions
A 301 case initiated in 1985 against Brazil on informatics was
terminated in October 1989. Under the 301 action, Brazil adopted a
copyright law for the protection of computer software.
In 1985, the U.S. initiated a 301 case against South Korea
concerning intellectual property rights (IPR) and reached a
settlement in 1986, which included commitments by Korea to amend its
patent and copyright laws and to enact a computer program protection
act. A Section 305 study of Korea's patent system, initiated in
1988, is ongoing. The U.S. industry alleges that the system
discriminates against foreign applicants and owners.
Working closely with the U.S. software industry, the U.S. Government
has conducted bilateral negotiations with countries of the Pacific
Rim with regard to unauthorized copying and distribution of computer
software and illicit cloning of computer systems. Using leverage
under the Generalized System of Preferences (GSP) program, the U.S.
Government has urged Asian governments to enact laws providing
- 70 -
explicit copyright protection for software, including computer
programs, descriptions, and user manuals, and to enforce vigorously
the laws that already exist. Successes have been recorded in
Singapore, South Korea, Taiwan, Malaysia, and Indonesia. However,
the failure of the Royal Thai Government to provide copyright
protection for software resulted in reduction of Thailand's GSP
benefits. U.S. Government pressure also figured in the Japanese
Government's decision to protect software under copyright rather
than under a sui generis regime favored by Japan's Ministry of
International Trade and Industry.
The 1988 Trade Act amended Section 301 of the Trade Act of 1974 to
create a "special" 301 proceeding, which relates solely to IPR.
Under the amended law, USTR must identify "priority foreign
countries" that deny adequate and effective protection for U.S.
IPR. In May 1989, the USTR announced a "special" 301 action,
identifying 25 countries as deserving special attention because of
the denial of protection of IPR and market access to U.S. firms
relying on such protection. Of these countries, 17 were placed on a
"Watch List," with eight on a "Priority Watch List." These eight
were Brazil, India, Mexico, the People's Republic of China, the
South Korea, Saudi Arabia, Taiwan, and Thailand. On November 1,
1989, USTR moved Korea, Saudi Arabia, and Taiwan off the "Priority
Watch List" in light of their commitments to improve their
intellectual property policies. These countries joined the original
17 countries on the "Watch List."
The U.S. Government has acted on the multilateral level to improve
protection in foreign markets for U.S. intellectual property. On
March 1, 1989, the United States became a member of the Berne
Convention for the Protection of Literary and Artistic Works, the
oldest and most respected copyright treaty, with more than 75
members. Works of U.S. origin are now entitled to the same degree
of copyright protection in all Berne countries that is provided to
works originating in such countries.
Also on the multilateral level, the U.S. Government is seeking an
agreement on intellectual property in the Uruguay Round of
negotiations under GATT. Such an agreement would provide
substantive standards for protection of patents, trademarks,
copyrights, trade secrets, and rights in semiconductor chip layout
designs (mask works), which all parties to the agreement would be
required to incorporate into their domestic laws. The agreement
would also contain minimum standards for enforcement of IPR and
would provide for dispute settlement among signatories, including
the possibility of retaliation for noncompliance. Developing
countries have opposed protecting IPR in the GATT, principally
because they believe that IPR issues should be addressed not in the
GATT but in the World Intellectual Property Organization (WIPO),
which administers the major multilateral IPR agreements. However,
this impasse has recently been broken and prospects for the
substantive negotiations are reasonably good.
- 71 -
The United States has shown leadership in the protection of
microchip technology through enactment of the Semiconductor Chip
Protection Act of 1984 (SCPA), the world's first law to protect the
mask works of semiconductors (layout designs), an entirely new form
of intellectual property. SCPA provides rights-owners with 10 years
of exclusivity for making and distributing masks. A unique
provision of SCPA authorizes the Secretary of Commerce to issue
orders providing interim protection in the United States for mask
works produced in countries that are making good-faith efforts to
institute legal regimes for chip protection. This incentive has
resulted in efforts to develop laws providing mask work protection
in 19 countries.
b. Company Level Actions
In the software area, IBM filed lawsuits in the early 1980s against
Hitachi and Fujitsu for violating copyrights on its mainframe
operating systems. The company received support from the U.S.
Government in the Hitachi case when an undercover "sting" operation
of the Federal Bureau of Investigation caught Hitachi America
officials attempting to buy confidential IBM product information.
Hitachi agreed to allow IBM to inspect its mainframe operating
system enhancements and to make substantial compensatory payments.
IBM chose to resolve its legal action against Fujitsu by agreeing to
accept independent arbitration of the dispute. As in the Hitachi
case, IBM is receiving multimillion dollar annual payments over a
specified time period in exchange for access to some of its
operating system software technology.
In the semiconductor industry, several suits have been brought by
U.S. manufacturers of microprocessors against foreign suppliers over
alleged infringements in both copyrights and patents. In February,
1985, Intel filed a suit against Nippon Electric Corporation (NEC)
alleging the use of Intel's microcode from the 8088 and 8086
microprocessors in NEC's "V" series of microprocessors. In
February, 1989, the U.S. District Court in San Jose, California
reaffirmed a 1986 ruling that microcode may be protected by
copyright law, but ruled that NEC had not infringed Intel's
copyright.
In the beginning of 1989, Motorola filed suit against Hitachi,
accusing the Japanese firm of infringing certain patents covering
several designs in Motorola's 68000 microprocessor family.
5. Export Regulations
Establishment of the Bureau of Export Administration
In 1987, the new Bureau of Export Administration (BXA) was
established within the U.S. Department of Commerce giving U.S.
export control policy a higher profile. This marked an elevation of
the U.S. Government's export administration responsibilities in
managing export controls, strengthening enforcement of export laws,
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reducing administrative burdens on exporters, and enhancing the
United States' export competitiveness of U.S. exporters.
The Trade Act
The Omnibus Trade and Competitiveness Act of 1988 amended the Export
Administration Act of 1979 and extended it until October 1990. The
Trade Act liberalized the export control regime of the United States
by requiring the elimination of export controls on entire categories
of low to mid-level dual-use technologies to certain destinations,
by lifting some reexport controls, and by strengthening control list
and foreign availability review procedures with a view towards
decontrol. It also amended the Export Administration Act by
establishing sanctions for future national security violations of
regulations issued pursuant to COCOM agreement that are comparable
to the Toshiba/Kongsberg sanctions.
Relaxation of the Controls
BXA significantly revised export controls on low-level computers and
computerized equipment effective August 1, 1988. The most
significant changes affected exports to the People's Republic of
China (PRC). The action allowed computers with a processing data
rate (PDR) of up to 550 million bits per second to be exported to
the PRC with no disk drive and memory limitations. These
relaxations to the PRC eliminated the requirement to refer license
requests for this commodity to COCOM. By eliminating referral to
COCOM, export license processing time for this class of computer has
been cut by approximately 50 days. Other changes allowed the bulk
export of personal and business computers with PDRs of 136 million
bits per second for resale in the PRC.
In a separate action effective August 15, 1989, BXA as a result of a
determination of foreign availability removed validated licensing
requirements for AT compatible personal computers, for all
destinations except S and Z countries (Libya, Cambodia, Cuba, North
Korea, and Vietnam), and some sections of the South African
Government. The decontrol measure includes personal computers using
industry standard architecture at levels up to a PDR of 69 million
bits per second (equivalent to an Intel 80286 microprocessor with a
clock rate of 16 MHz), up to 4 MB of random access memory, and hard
disk capacity of up to 140 MB.
In September 1988, the decontrol of certain telecommunications
products was announced. The United States and COCOM raised the
level of decontrol for telecommunication transmission equipment from
a transmission rate of 8.5 million bits per second to 45 million
bits per second. In addition, the level of transmission and
associated test equipment that can be exported to the PRC at
national discretion has been uniformly raised to 140 million bits
per second for all types of communications media including fiber
optic installations. The regulations governing transmission
equipment have been entirely revised and shortened, thus reducing
the administrative and licensing burden on exporters.
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There were also a number of changes in 1988 affecting the exports of
microelectronics and instrumentation to the PRC. All test equipment
for bare printed circuit boards, certain single wafer dry-etchers,
steppers, and sample and hold integrated circuits are now Green Line
to the PRC and, thus, may be licensed without referral to COCOM.
Unilateral Controls
On February 23, 1989, BXA implemented the Trade Act provision that
required the removal of all unilateral national security controls,
except for controls on items for which the Secretary determined that
foreign availability did not exist, or where the administration was
negotiating to eliminate foreign availability.
Bilateral Discussions
The U.S. Government is continuing talks with a number of non-cocom
countries with the purpose of securing cooperation in controlling
exports and reexports of controlled goods and technology. Countries
that agree to institute controls equivalent to those of COCOM may be
eligible for the same licensing benefits granted to COCOM member
countries with respect to certain U.S. licensing requirements.
Foreign Availability
During fiscal year 1989, the Office of Foreign Availability (OFA)
completed 21 foreign availability studies, including studies on
array processors, low capacity hard disk drives, die bonders and,
AT-level IBM compatible personal computers. The OFA assessment on
AT-level IBM compatible personal computers resulted in the August
1989 decontrol for all destinations except S and Z countries.
The new Trade Act makes a number of changes affecting the foreign
availability program. OFA has been given the additional
responsibility for conducting assessments of availability of
controlled items to noncontrolled countries. Included are decontrol
assessments and denied license assessments. Positive determinations
of foreign availability following decontrol assessments will lead to
the decontrol of the item, unless the President issues a national
security override. Positive determinations following a denied
license assessment will lead to mandatory approval of the validated
license applications in question, unless the President issues a
national security override. In the event that the President
determines to maintain controls notwithstanding a positive
determination of foreign availability, he is required to begin
negotiations with the foreign source(s) to eliminate the
availability.
A new procedure, called "expedited licensing," was intended to
shorten the licensing process time for items that are similar to
items available to noncontrolled countries from non-U.S. sources.
Determination of eligibility for expedited licensing must be
completed within a maximum of 35 working days following receipt of
an allegation of such availability.
- 74 -
Rigid deadlines have been applied to foreign availability
determinations. Determination of foreign availability must be made
within four months following receipt of a claim. Other deadlines
apply to determinations of eligibility for the expedited licensing
procedure or determinations following Technical Advisory Committee
certifications. One additional month is allotted for interagency
review. For multilaterally controlled items, an additional four
months is allotted for consultation with COCOM. Failure to meet the
"claims" deadlines for publishing the determination (positive or
negative) of foreign availability results in automatic removal of
the requirement for a validated license.
Export License Processing
BXA's automation advances have added significantly to its time
response capabilities on both status inquires and application
processing. The establishment of a computerized voice response
system, System for Tracking Export License Applications (STELA)
provides the status of pending license applications for export,
reexport and amendment requests. In addition, STELA allows for
instant verbal authorization to ship on licenses approved without
conditions. On January 2, 1988, the Office of Export Licensing
began to accept and approve Free World license applications and
reexport requests electronically using the new Export License
Application and Information Network (ELAIN). ELAIN offers speed and
convenience in the submission of license applications. Applicants
with a licensing history can obtain clearance from BXA to submit
licenses electronically, using value added electronic mail networks.
In addition, our effort to provide exporters with quick, accurate
and timely information on changes in export licensing policy and
procedures has resulted in the installation of a new phone system.
This system includes an automated attendant, the Export License
Voice Information System (ELVIS). Recorded information is available
to callers on a range of topics such as commodity classifications,
regulations updates, emergency handling procedures and upcoming
seminars. In addition, forms and publications may be ordered
without waiting to speak to a consultant. This new system allows
exporters to obtain needed information quickly, while permitting our
export counseling staff to handle calls requiring more extensive
analysis or follow-up.
Overall average processing time has declined from 25 days in 1986,
21 days in 1987, 17 days in 1988, to 16 in 1989. The average
processing time in 1989 for applications not requiring referral to
other agencies in 1988 was 8 days.
Public Awareness Programs
In addition to our licensing activities, the Bureau of Export
Administration maintains an active public outreach program. BXA
sponsored Update 1989, the annual update conference of Export
Administration Regulations and Licensing Policy, held in Washington
- 75 -
from July 5-7. Last year's conference included working sessions on
computers, technical data, automation, and semiconductors,
discussions on recent changes in the Export Administration
Regulations as a result of the Omnibus Trade and Competitiveness Act
of 1988, and organized tours of our licensing and enforcement
offices. The number of exporters attending this annual conference
has been steadily increasing. Approximately 650 exporters
participated in this year's update, making it the most successful
conference to date. This year's Update conference is scheduled for
June 18-20, 1990.
6. Growing Dependence on Foreign Suppliers
The report in 1988 by the Defense Science Board (DSB) accepted the
fact that the U.S. electronics industries have lost leadership in
key technologies to foreign competitors. DSB offered several
options for action to address this slippage, including funding R&D,
and, if necessary, stockpiling key products that could only be
obtained from foreign suppliers.
In the private sector, the American Electronics Association (AEA)
has been the trade association that has spearheaded discussion and
study of the HDTV issue. A recent study from AEA asserts that U.S.
industry must be a significant player in the HDTV market or lose out
on billions of dollars in revenues and see related industries such
as computers negatively affected.
In addition, AEA also worked with the Semiconductor Industry
Association (SIA) to create a plan of action for the reentry into
DRAM production by U.S. suppliers. The plan would create production
consortia of U.S. memory users and makers, which would be able to
act as alternative sources to the Japanese of these vital chips.
These production consortia would require the amendment of U.S.
antitrust laws to allow joint production efforts without fear of
legal suits. As mentioned previously, such amendments have recently
been proposed by the Secretary of Commerce and the Attorney General.
In June 1989, seven U.S. electronics firms announced the formation
of a DRAM production consortium, which was named "U.S. Memories."
However, in January 1990, the consortium effort was cancelled after
an effort to raise required capital funding failed.
7. Increased Foreign Investment in the Sector
The U.S. Government's position on foreign direct investment has been
one of open investment within the United States, which flows from
the free trade position of the government. Open investment in all
countries is the most efficient in economic terms, since this allows
capital to flow to the most appropriate investment opportunities.
As in all major industrial countries, this policy is tempered by
laws that may limit or prohibit foreign direct investment in order
to protect the U.S. national security. Among these is Section 5021
of the Omnibus Trade and Competitiveness Act of 1988, which gives
- 76 -
the President the authority to seek appropriate relief, including
divestment, when the President finds, inter alia, that there is
credible evidence that a foreign person exercising control of a U.S.
person by means of a merger, acquisition, or takeover might take
action that threatens to impair the national security. The
Committee on Foreign Investment in the United States (CFIUS) is an
intergency group that may investigate the effects on national
security of mergers, acquisitions, and takeovers which could result
in foreign control of U.S. persons. Members of CFIUS are the
Secretaries of Treasury (chairman), Commerce, Defense, and State;
the Attorney General; the Director of the Office of Management and
Budget; the Chairman of the Council of Economic Advisors; and the
U.S. Trade Representative.
8. Export Financing
Bilateral foreign AID programs have been an integral part of the
conduct of the U.S. foreign policy for many years. Though the
underlying objectives have always been the same--to further U.S.
political, strategic, economic, and humanitarian goals--successive
administrations have adjusted the rationale and priorities in
response to changing conditions and public attitudes.
These changes have brought about a shift in program emphasis from
capital transfers in the form of large- and medium size capital
projects to projects of relatively modest size that: (a) are
designed to expand and enhance the role of the private sector; (b)
address the problems of poverty in an equitable growth context; and
(c) must be justified on development grounds. Against this
background, by 1982 large capital project assistance in such areas
as industry, energy, and transportation, among others, had declined
to 6.5 percent of total U.S. bilateral official development
assistance, compared with a figure of 11 percent for 1972 and about
25 percent in the early 1960s.
The following is a summary of the U.S. bilateral foreign assistance
programs and their objectives.
The U.S. Agency for International Development (AID) was established
by the Foreign Assistance Act of 1961 and given the major
responsibility for administrating and coordinating the U.S.
bilateral assistance program. This responsibility is jointly shared
with the Department of Agriculture in the case of food aid and the
Department of State in regard to country allocations of economic
support funds.
The Export-Import Bank of the United States (Eximbank) was created
in 1934 by Executive Order 6581 and was established as an
independent U.S. Government agency in the Export-Import Bank Act of
1945. Its major purpose is to facilitate U.S. exports by providing
loan, guarantee, and insurance financing support. Unlike the U.S.
Agency for International Development, its primary purpose has never
been to promote foreign economic development.
- 77 -
In fulfilling its role, the Eximbank offers a wide range of loan,
guarantee, and insurance programs designed to complement and
encourage private sector financing of U.S. companies' foreign
sales. Eximbank does not compete with private sector export credit
sources. Rather, its programs are designed to fill gaps left by the
private sector, such as the provision of longer maturities in the
face of commercial bank preference for short terms; assumption of
foreign credit risk that the private sector finds unacceptable on
creditworthiness grounds; and neutralization of the export credit
subsidies of foreign governments.
Eximbank funds its operations by constantly rolling over its capital
and reserves; quarterly borrowing of long-term debt at market rates
from the Federal Financing Bank of the United States Treasury; and
from revenues earned through payment of interest, fees, and
principal on its insurance, guarantees, and direct loans. Except
for tied aid credit transactions, no appropriated funds are used to
support its activities. Nevertheless, each year Congress sets
lending and guarantee limitations.
The Trade and Development Program (TDP) was created in 1980 and
established as an independent agency by the Omnibus Trade and
Competitiveness Act of 1988. TDP has two objectives: to assist in
the economic development of friendly developing and lesser-income
countries and to promote the export of U.S. goods and services to
those countries.
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IV. GOVERNMENT AND PRIVATE SECTOR ROLES IN THE
ELECTRONICS SECTOR
Introduction
In Section C of the Chapter I, "The Competitive Status of the U.S.
Electronics Sector," the relative position of eight countries and
the European Community (EC) was compared, using a set of parameters
ranging from production volume and growth to the number of
scientists and engineers in the country. Based on these parameters,
the U.S. electronics sector remained the largest in the world, but
was seriously challenged by other competitors, particularly the
Japanese and South Koreans. While the private sector has played an
important role in determining success in all of these countries, the
government has played significant roles in both Japan and Korea in
terms of fostering the growth of their respective electronics
sectors. Other countries, such as India and Brazil, have also had
significant government involvement in their electronics sectors, but
have not progressed as quickly. A question arises as to what were
some of the elements of success in the United States, Japan and
Korea. In comparison, why have other countries been less
competitive?
This section will discuss the role of government and the private
sector in the United States, seven other nations, and the EC,
highlighting those elements that appear to have been instrumental in
the successful development of electronics sectors. Appendix H
contains additional information and analysis to support this
section's conclusions.
A. Role of Government
The involvement of government in industrial development has ranged
from pure laissez faire economic policies to government ownership
and management of industrial units. The countries in this study lie
along this spectrum in terms of their treatment of the electronics
sector, from the relative hands-off policies of the United States to
the industrial micro-management policies of Brazil, where some
production is government owned.
Table 27 shows some of the elements of government involvement that
have contributed to the success of the electronics sectors in the
United States and major competitor nations. The U.S. Government's
approach has been largely ad hoc and fragmented over the years due
to the historic dominance of the U.S. electronics sector in the
world market and the prevailing philosophy that governments should
not pick winners and intervene in the marketplace. As noted
previously, the U.S. Government's support has been limited to
indirect stimulation of R&D and procurement, and strong promotion of
an intellectual property rights (IPR) regime both domestically and
internationally. The government's intervention has been confined to
promoting competition through antitrust regulation and preventing
the transfer of strategically important technologies to East Bloc
countries through export controls.
- 79 -
Table 27 Elements That Have Led To Success in Electronics
U.S.
Foreign
Government
Government
Coordination with industry across
broad policy spectrum;
Adaptive policy-making;
Strengthening IPR overseas
Use of economic policies to
through trade negotiations;
foster favorable business
climate for targeted industries;
Indirect stimulation through
Continuing support of joint
defense and space R&D, procurement;
commercial R&D; procurement favors
domestic firms;
Strong physical and human
Strong physical and human
infrastructure fostered;
infrastructure fostered;
Regulatory involvement largely
Broad regulatory involvement,
limited to antitrust,
including trade and investment;
export controls;
Strong domestic IPR in support of
Larger firms, with interfirm
innovation and new firm growth;
competition fostered;
Private Sector
Private Sector
Pioneers, "first on the block";
Strong technology transfer and
assimilation from foreign sources;
Vigorous competition in unregulated
industries among many firms;
Strong entrepreneurial character;
Few, large, vertically
transition to stable, larger firms;
integrated firms;
High rate of new firm creation;
Long-term strategic view of
market;
High levels of R&D investment;
Emphasis on product
development/manufacturing
High rate of innovation;
technology; quality control;
Large, sophisticated
Dumping, IPR infringement
domestic market;
sometimes used as tools to
enter/win markets;
Strong export orientation.
Strong export orientation.
- 80 -
Although the offshore manufacturing operations and the technology
transfer agreements of some U.S. firms have contributed to the
growth of foreign electronics industries, the progress of these
competitors has been aided by effective government targeting
policies and support mechanisms. The Governments of Japan and Korea
have played a key role in the development of their electronics
sectors through close coordination with industry across a broad
policy spectrum and through policies that have been flexible and
adaptive. They have used economic policies, particularly those
pertaining to the tax structure and fiscal incentives, to foster a
favorable business climate and have nurtured strong physical and
human infrastructures as the foundation for their skilled and
efficient labor forces and their technological advancement. Their
direct involvement in their electronics sectors initially focused on
protecting emerging firms, controlling imports and foreign
investment, and helping their firms to acquire foreign technology.
Over the years, they have favored larger firms, while allowing
inter-firm competition. They have also provided continuing support
for commercially-oriented joint R&D.
Many of these elements are missing in the nations that have made
less progress. Brazil, for example, while coordinating with
industry across a broad policy spectrum, has not been able to
develop a favorable business climate, nor a strong physical and
human infrastructure. In addition, Brazilian electronics companies
have not had a strong export orientation, which has meant that they
have not benefited from the rigors of international competition.
B. Role of the Private Sector
In the United States, the private sector has been the prime mover in
the commercial success of the electronics sector to date. As shown
previously, the private sector has been the major funder and
performer of R&D, a wellspring of innovation and new firm creation,
and has had a major presence overseas virtually since its commercial
beginnings. The sector also benefited from creating many of the
early electronics technologies, that were commercialized by these
U.S. firms establishing themselves as leaders in the world
marketplace.
By the early 1980s, the competitive situation began to change for
the U.S. electronics sector. Foreign governments had concluded
earlier on that electronics was critical to their future economic
growth and intervened to foster the development of indigenous
industries. That intervention and the growing strength of foreign
firms brought a fundamental change in the world market. U.S.
electronics firms found themselves in an international arena where
certain markets were closed to them and foreign rivals now were
competitive in technology, price, and quality in an increasing
number of products.
Foreign companies had reduced the U.S. lead, benefiting from joint
R&D, active technology transfer and assimilation from U.S. sources,
and a strong emphasis on product development and manufacturing
- 81 -
technology. Based on previous successes in such products as
typewriters, television sets, and calculators, Far Eastern suppliers
became a visible competitive force in more sophisticated electronics
technologies. Japanese computer printer suppliers rapidly gained
dominance in the world personal computer market. Korean companies
progressed to computer displays, and eventually personal computer
systems--the first clones.
Most of these Far Eastern firms are large, vertically integrated
companies, which have taken a long-term strategic view of the
electronics market. Some of these firms have entered and won
markets through such unfair trade practices as dumping and IPR
intellectual property rights infringements (see Chapter III---
Actions Taken on Behalf of the Electronics Sector). In some cases,
the smaller U.S. electronics suppliers in these markets were no
match for foreign conglomerates, with greater financial and
technical resources. As a result, they were often forced to leave
the market or were acquired by larger domestic or foreign firms.
C. Conclusions
The involvement of foreign governments in their electronics sectors
is unlikely to diminish in the future. The sector is too vital to
their economic growth and national security.
Clearly, the history of government and private sector roles in the
development of electronics in the United States and overseas has
been different. There appear to have been few common elements, save
for the importance of having a strong physical and human
infrastructure and a strong export orientation. However, some of
the elements of success in the case of foreign government and
private sector involvement may be adaptable to the U.S. environment
in order to stop the erosion of the U.S. competitive position. The
challenge will be how to preserve those elements that have made the
U.S. electronics sector preeminent in the past and to select and
modify those elements of foreign success that will help to ensure
its survival in the future.
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V. FUTURE COMPETITIVE TRENDS
Introduction
Unfair trade practices at the company level will likely spread to
new segments of the sector. For example, dumping of computer
software and integrated systems is likely to occur as foreign
suppliers progress technically and begin to move into these markets.
Overseas, violations of intellectual property rights (IPR) will
continue where foreign governments do not institute effective
intellectual property laws or do not adequately enforce existing
laws. In the U.S. market, IPR violations could increase, if both
the U.S. Government and industry do not remain diligent in
addressing any perceived violations. Smaller U.S. electronics firms
will be most vulnerable, since they do not have sufficient internal
resources to support the legal costs associated with IPR litigations.
The main competition in the world's electronics markets should come
from the Far East and Europe. Japanese suppliers are becoming more
multinational in character, establishing manufacturing facilities to
serve local customers in the United States and key European
nations. They are also expanding their R&D operations overseas to
take advantage of foreign research talent. The Europeans are hoping
to emerge as a stronger force in the world market for electronics
products through their national and regional R&D projects and the
1992 initiatives. The developing countries generally have targeted
the production of low-end equipment (personal computers,
peripherals, and customer premises equipment). However, as their
technological know-how improves, they should move upstream into more
capital-intensive areas (semiconductors) and knowledge-intensive
areas (software and services).
Table 28 indicates which of the countries discussed in this chapter
will be major players in the various parts of the sector.
A. Computers
Japan is already the United States' main competitor in almost all
product segments. The United States is still ahead in
some--microcomputers, workstations, and high performance computer
systems; Japan leads in others--optical storage, video displays, and
Table 28 Principal U.S. Competitors in the Future
Ind Brz Sng Twn Kor Frn Jpn EC
Computers
X
X
X
X
Software
X
X
X
X
X
Systems Integration
X
X
X
Telecommunications
X
X
X
Semiconductors
X
X
X
Elect. Instruments
X
X
Medical Electronics
X
X
- 83 -
laser printers. South Korea and Taiwan are becoming very
competitive in microcomputers and peripherals. The EC may play a
significant role in several areas, such as parallel processors, but
much of this will depend upon the outcome of their R&D efforts, such
as ESPRIT.
B. Software
Japan may also emerge as the leading competitor in software, based
on the amount of resources it is putting into the TRON and SIGMA
projects and into software engineering research. Japan is seeking
to exploit the synergism between microprocessors and software
through these R&D efforts and through becoming a leading force in
the important area of technical and market standards. To obtain the
necessary programming talent, Japanese companies are linking up with
software firms in the United States and Europe, while the Japanese
Government is revamping Japan's educational system, including closer
relationships between industry and academic research.
Singapore and India have targeted software for domestic
development. Both benefit from low-cost labor and close ties with
U.S. and European firms which, in turn, are transferring technology
and serving as major customers. India has a large number of trained
software developers available for contract programming. Singapore,
committed to becoming the leading center for software and computer
services in South East Asia, has expended substantial resources on
increasing the technical capabilities of its work force. (The
Europeans have always had a sound research base and have
demonstrated particular skill in developing custom software. In
recent years, they have become more interested in overseas markets.)
Systems integration (SI) can be viewed as a software-based activity,
in that SI suppliers generally select computer and
telecommunications equipment from a variety of vendors, develop
software for specific applications, and sell the complete system
directly to the users. These systems can be microcomputer-based,
e.g., a personal computer system for doctors or dentists, or very
large systems, e.g., an air traffic control system. U.S. firms are
currently leaders worldwide in the large systems. The smaller
systems often have to be customized for geographic and cultural
differences, and, thus, U.S. suppliers frequently compete with
domestic suppliers in each country.
Both the Japanese and the Europeans should draw on their strengths
in custom software development to make them very competitive with
U.S. firms in systems integration. The leading Japanese computer
suppliers are also major telecommunications suppliers and can bring
to bear a broadly based expertise in competing for large-scale
information systems projects.
C. Telecommunications
Japan, France, West Germany, Sweden, and Canada are the major U.S.
competitors in telecommunications. These nations are seriously
- 84 -
challenging the U.S. lead in networking equipment. Japan, in
particular, has become a primary rival in terminal equipment while
Taiwan and South Korea are now the dominant suppliers in certain
low-end telecommunications products like telephone handsets.
Japanese and European firms have also mounted a significant
challenge in the newer fiber optics, satellite, and cellular
radiotelephone technologies.
D. Semiconductors
Japan, the current world leader in DRAM memory chip production, is
vying with the United States for the technological lead in all
segments of the semiconductor industry, especially in the latest
generation of memory devices and application-specific integrated
circuits (ASICs). Japan is also making a strong effort to catch up
in microprocessors. Other challengers are on the horizon. Most of
the major Asian and European players in the electronics equipment
market realize the importance of domestic semiconductor production
to their long-term strategies of competing more effectively at the
systems level and are actively promoting this sector. For example,
Korea has made significant strides in DRAM production, while the EC
is using its internal rules-of-origin directives to improve its
capabilities in semiconductor production. Notable EC R&D efforts in
this area are the Joint European Submicron Silicon Initiative
(JESSI) and the MEGA Project.
E. Electronic Instruments
In process controls, the Japanese have replaced the Europeans as the
major competitor of the United States. The principal Japanese
supplier, Yokogawa, rose from obscurity during the 1980s to become
one of the world's three major manufacturers in this area. The
other two are U.S. companies. A Japanese firm, Advantest, has also
become a major challenger in electrical test and measuring
instruments, having benefited significantly from the
government-sponsored VLSI research project during the 1970s. In
laboratory instruments, which is populated by smaller firms, the
market is divided among American, Swiss, West German, British, and
Japanese companies. Because the electronic instruments sector is
characterized by specialized markets and customized products that
are less applicable to low cost or mass production, the newly
industrialized countries have made little headway in capturing
market share.
F. Medical Electronics
West Germany has historically been the leading U.S. competitor in
the medical electronics field and should remain so in the near
future. Siemens, the largest German manufacturer, has moved
aggressively into the U.S. market by establishing manufacturing
plants and purchasing U.S. medical device firms. Siemens is active
in pacemakers, lithotripters, hearing aids, and all modes of
diagnostic imaging.
- 85 -
Japan has just begun challenging the United States in this industry,
but will probably be the leading contender over the long run.
Unlike West Germany, Japan has a number of small competitive firms
that traditionally have been OEM (original equipment manufacturers)
suppliers of components and devices to U.S. and European firms.
However, these firms are now marketing their products under their
own brand names. Japan has been strong in X-ray apparatus, and
ultrasound and CT scanners; it also is becoming very active in
low-cost magnetic resonance imaging.
- 86 -
VI. OPTIONS FOR ADDRESSING THE ISSUES FACING THE U.S.
ELECTRONICS SECTOR
The previous pages of this study established the importance of the
electronics sector, explored the issues facing the sector, and
reviewed actions already taken to address these issues by the
government and the private sector. Based on this previous material,
this chapter will highlight some areas for additional actions that
could be helpful. In addition, Chapter IV, "Government and Private
Sector Roles in the Electronics Sector," highlighted some elements
of success in fostering the growth and health of electronics sectors
both in the United States and overseas. These elements have been
considered in drafting this chapter.
Chart 9 represents the major issues and the government agencies
primarily responsible for each issue. The chart illustrates the
breadth of the issues facing the sector and the diversity within the
government of responsible agencies. The issues cover both domestic
and international trade policy arenas. These formerly distinct
arenas are increasingly intertwined and thus a coordination of
policies across traditional dividing lines is necessary. For
example, the growing erosion of the international market presence of
U.S. electronics suppliers is having an effect on the Defense
Department's procurement needs in the United States. Collaborative
R&D and production arrangements taken by foreign suppliers have
important antitrust implications in the U.S. market, which has
become only one segment of a broader global marketplace.
A fundamental issue that clearly emerged during the drafting of this
study was the lack of consensus on the extent to which the sector's
competitiveness has eroded, the reasons for this erosion, and what
actions should be taken to address the erosion. Sufficient
consensus has developed to form the basis for such diverse
cooperative efforts as Sematech and the report by the Federal
Coordinating Committee on Science, Engineering and Technology
(FCCSET) on strategies for the supercomputer area. However, the
electronics sector and the issues affecting it are much broader and
deserving of more extensive attention.
Although several of the national level problems facing the
electronics sector are critical to the future of many other
industries in the U.S. economy, the solution of these problems could
be particularly critical to both the short- and long-term viability
of the U.S. electronics sector. Some observers feel that many of
the sector's current problems could be greatly eased by focusing on
the national level issues at least as much as those on the sectoral
level. For example, earlier in the study, the analysis illustrated
the capital intensive nature of the industries in the electronics
sector. All the electronics industries have capital expenditures
per production worker at or well above the level of all
manufacturing. Thus, efforts to remove the competitive disadvantage
that U.S. manufacturing firms face in both the cost and
- 87 -
Chart 9
Competitiveness Issues
and U.S. Government Agencies Responsible
IPR
USTR
ANTI-TRUST
Commerce
(PTO & ITA)
TRADE
Justice
R&D
88 I I
State
Justice
USTR
Defense
EDUCATION
Commerce
NASA
State
NSF
and the Work Force
Labor
Energy
Justice
Commerce
Labor
FOREIGN
Treasury
Education
DIRECT
USDA EXIM
NSF
INVESTMENT
CEA OMB
Defense
Treasury
Commerce
CAPITAL COSTS
EXCHANGE
Treasury
RATES
Federal Reserve
Treasury
Source: Science & Electronics
availability of capital relative to their foreign competitors would
be of major significance to the electronics sector.
Representatives of the U.S. semiconductor industry have stated that
higher capital costs in the United States have been a fundamental
reason for the erosion of their leadership relative to their
Japanese competitors. The acute nature of this problem is
heightened for the sector as a whole, since the Japanese have
specifically targeted most of the industries in the sector for
market leadership, and they are emerging as the strongest foreign
competitors that the United States faces in electronics.
In order for the U.S. electronics sector to match the Japanese in
capital investment, the capital cost issue must be resolved. The
solution would address the relatively lower savings rate in the
United States versus Japan, as well as the federal budget deficit,
and tax policies that encourage investment. In the United States,
debate at the national level continues on the question of the higher
costs of capital and underlying causes. A solution to the deficit
problem will require a national consensus. The electronics sector
has added its voice to those asking for such a solution.
This section is divided into two sets of proposals that would
continue federal involvement with the private sector on matters
relating to the competitiveness of the electronics industry: 1)
those that the Department of Commerce could consider on its own and
2) those that the Department could explore with other federal
agencies and the private sector.
The proposals are designed to insure that the Executive Branch
remain attentive to opportunities to promote U.S. competitiveness.
However, they are made with the recognition that the private sector
has the primary responsibility for leadership in this area.
A. Department of Commerce Initiatives
Those proposals within the mission of the Department of Commerce
have been segmented into those that can be considered in the near
term (category I) and those requiring a longer term for
consideration (category II).
Category I
Research and Development
O Establish a Foreign Technology Assessment Specialist in Tokyo to
provide U.S. electronics companies with early warning and
strategic assessments about foreign R&D breakthroughs likely to
affect the market.
O Meet with chief executive officers in the exporting industries to
stimulate the increased use of supercomputers in the design,
simulation, and testing functions to match increased use by
Japanese competitors.
- 89 -
Export Development
Build on current efforts--the MITI-Commerce Industrial
Cooperation Initiative, aimed at giving Commerce Department
analysts a better understanding of MITI and its relationship with
Japanese industry and providing a channel to promote industrial
cooperation and two-way technology transfer with Japan, and the
Export Promotion Initiative--to ensure that U.S. business is
better equipped to pursue opportunities in the Japanese and
third-country markets.
Education and the Work Force
Continue outreach programs designed to encourage women and
minorities to study science and mathematics and highlight the
linkages to high technology business.
Consider the possibility of establishing cooperative education
programs with colleges and universities to encourage long-term
study of Japanese and international trade beginning in the
student's initial year.
Category II
Research and Development
O. Consider ways to establish Commerce Department/industry
committees to develop a strategic plan to increase the flow of
technology to the United States from Japan and Europe.
Consider ways to expand the efforts of the Office of Japan
Technical Literature.
Consider ways to expand the efforts of recruiting scientists to
regularly visit Japanese Government research labs, reporting back
to U.S. Government and industry.
Explore ways to expand efforts to improve the commercialization
of research breakthroughs resulting from federal R&D.
Unfair International Trade Practices
Review dumping, subsidies, and intellectual property rights
policies based on strategic view of technical and market trends
in electronics, to anticipate foreign threats (e.g., software
dumping).
Increased Foreign Investment in the Sector
Assess ways to improve the provision of a more detailed industry
breakdown of foreign investment in the U.S. electronics sector.
- 90 -
B. Proposals for Consideration by Other Organizations
In discussions with other U.S. Government agencies and the private
sector during the course of the study, the following suggestions
were made for consideration by other organizations.
Education and the Work Force
Examine the status of federal data collection of statistics on
science and engineering educational programs.
Explore the possibility of creating a clearinghouse to coordinate
science and engineering educational programs which are supported
by private, federal, state and local agencies.
Continue to encourage states to develop action plans to address
critical problems in science and electronics education using
committees of university/college officials and representatives of
local school districts and teacher associations.
Continue to encourage local school districts to establish
standards for the number of science and mathematics courses
required for high school graduation. Stress teaching the
practical applications of these subjects where possible and more
reasoning/problem-solving activities.
Encourage local school districts to consider establishing
"provisional teacher" programs that would ease restrictive
teacher certification requirements and attract recent college
graduates and people from industry with strong science and
mathematics background into schools on a full- or part-time basis.
Explore the possibility of increased support for graduate
fellowships and trainee programs in science and engineering.
Explore expanded support for teacher training and informal
education in science and mathematics.
Work with corporate university donors and leading business and
engineering schools to encourage greater emphasis in master of
business administration and engineering programs on manufacturing.
Based on the findings of the Workforce 2000 study, develop
policies to increase the availability of skilled workers.
Consider the means by which firms in the electronics sector could
expand in-plant job training to develop multiskilled rather than
single skilled workers through apprenticeship programs, job
rotations, off-the-job training using company centers or
correspondence courses, and worker involvement in quality circles.
Consider ways to encourage state and local governments to offer
incentives to firms that emphasize the development of
multiskilled labor forces and continuous job training.
- 91 -
Encourage partnerships among unions, companies, and state and
local governments to develop vocational training programs within
high schools and community colleges that are directly relevant to
the needs of local employers.
Short-Term Corporate View
Encourage firms within the sector and the financial community to
establish new measures of productive performance such as
indicators of quality, productivity, product-development time,
and time-to-market, rather than merely indicators of short-term
financial performance.
Research and Development
Encourage increased emphasis on manufacturing R&D and continuous
improvements in manufacturing process technology through seminars
with trade associations on latest domestic and foreign advances.
Encourage universities to establish or expand "incubator"
programs for those firms that require R&D facilities and support
as well as management expertise.
R&D Tax Credits
Consider making R&D tax credits permanent.
Consider broadening R&D tax credits to cover new technology
ventures.
Consider the effect of broadening R&D tax credits to cover
nonexperimental product development and nonlaboratory process
technology R&D.
Consider establishing a fixed-historical base period for
calculation of R&D tax credits.
Examine the possibility of recommending a change in Treasury
regulation 1.861-8 on allocation of U.S. R&D expenses by treating
67 percent of U.S. R&D spending as a "set-aside" and not
characterizing it as foreign.
- 92 -
Appendix A
Semiconductor Case Study: Memory Market *
INTRODUCTION
Due to the semiconductor industry's close linkages to other
high technology industries, a strong U.S. semiconductor
industry is regarded as an important national asset. The
memory market, in particular, has a bearing on the competitive
health of the U.S. semiconductor industry. Memory devices are
the key components for computers, consumer electronics,
telecommunications, industrial electronics, and defense
electronics. They account for almost one-half of semiconductor
consumption in the United States. Memories also serve as a
semiconductor "technology driver," pushing a broader range of
semiconductor device technology to the limits and perfecting
manufacturing processes.
STATE OF U.S. MEMORY PRODUCTION
Since 1983, U.S. market share in the metal-oxide semiconductors
(MOS) memory area has fallen from almost 50 percent to less
than 30 percent. Japan has assumed a commanding lead and now
holds about a 65 percent world market share (see Charts 10 and
11). Within the MOS memory market, dynamic random access
memories (DRAMs) are the dominant memory device. The major
customer industries and their respective shares of the DRAM
market are featured in Chart 12.
By 1982 the Japanese captured over half of the DRAM market and
currently account for almost three-quarters of world DRAM
production (see Chart 13). Chart 14 illustrates that Japanese
DRAM shipment revenue has grown at a much greater rate than
U.S. shipment revenue since 1978: 42 percent compounded
annually versus 7.6 percent in the United States. With only
three U.S.-owned DRAM manufacturers remaining, U.S. users of
leading-edge memory devices acquire an increasing share of the
product offshore--principally from Japan.
For the early generation memory devices such as the 4K and 16K
DRAMs, the United States held the dominant market share.
However, the Japanese cornered the market in such later
generations as the 64K and 256K DRAMs. At the time of their
introduction, the Japanese held 100 percent of the market
shares; they have maintained their dominant position throughout
the production of these devices. In the 1M DRAM market, the
Japanese maintain a worldwide market share of 98 percent.
* This paper is based in large part on a report prepared for
the International Trade Administration, U.S. Department of
Commerce, by Quick, Finan & Associates of Washington, D.C. in
October 1988.
- 93 -
Chart 10
MOS Memory World Market Share
80
70
60
94 I I
U.S.
50
Japan
Europe
40
Percent
ROW
30
20
10
0
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
Source: Dataquest
Chart 11
Worldwide MOS Memory Market Share of Sales
ROW
Europe
Europe
Japan
95 I I
U.S.
Japan
U.S.
1978
1987
Source: Dataquest
Chart 12
1987 Worldwide DRAM Demand
By End-Use Product Type
Industrial
Electronics &
Instruments
Business/
(10%)
Retail (7%)
Government/
Military
(5%)
Communications
(20%)
Computers
(28%)
Consumer
Electronics
(30%)
Source: Gnostic Concepts, 1986
- 96 -
Chart 13
DRAM Market Share
80
70
60
97 I I
50
Percent
40
30
U.S.
Japan
20
Europe
Asia Pacific
10
0
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
Source: Dataquest
Chart 14
DRAM Revenue by Region of Production
2500
2000
U.S.
Japan
98 I I
Europe
Revenue ($M)
1500
Asia Pacific
1000
500
0
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
Source: Dataquest
The Japanese and U.S. firms are now vying for the technological
lead in newer generation devices. The successor to the 1M, the
4M DRAM, is not yet in volume production, so a market leader is
not yet established. At least three Japanese firms and one
U.S. company, Texas Instruments, are in the early sampling
stages for these DRAMs. In December 1988 Texas Instruments and
a major Japanese DRAM producer, Hitachi Ltd., entered an
agreement to develop a future-generation memory product, 16M
DRAMs.
JAPANESE COMPETITIVENESS
Several factors contribute to Japan's ascendancy in the global
memory market, and by implication, the decline of the U.S.
memory production. These factors include the Japanese
semiconductor industry structure, the role of the Japanese
Government, and macroeconomic considerations. In addition, the
growth of the Japanese market, which is the world's largest
market for all types of semiconductors, helped erode U.S.
market share. U.S. producers would have welcomed this growth,
had they been able to supply the Japanese market with their
products. In contrast to their U.S. counterparts, Japanese
memory producers thrived on a stable source of unit demand.
The U.S. firms were not, and still are not able, to penetrate
the Japanese market to any significant extent.
Japanese Semiconductor Industry Structure
Japan's semiconductor industry is more integrated than the U.S.
semiconductor industry. Its horizontal and vertical
integration can provide advantages in gaining market share and
a technological lead. With more captive production in Japan (a
degree of vertical integration), a Japanese in-house producer
is more likely to supply devices than a U.S. merchant producer.
The vertically integrated Japanese firms that dominate Japanese
memory circuit (and semiconductor) consumption also dominate
memory (and semiconductor) production, and some develop
semiconductor materials and equipment in-house. These close,
vertical relationships prove important in developing and
implementing manufacturing techniques needed to sustain
competitiveness.
A degree of horizontal integration has helped the Japanese gain
and maintain the significant market share in their home
market. For example, "keiretsu" 1/ member companies favor the
products of other members of the Keiretsu, thereby reducing the
opportunity for U.S. producers to supply memory circuits and
semiconductors to Japanese end-use markets.
The Role of the Japanese Government
Programs sponsored by the Japanese Government have featured
joint R&D laboratories and extensive collaboration among
industrial participants. Japan's Ministry of International
- 99 -
Trade and Industry (MITI) was an active sponsor in the VLSI
(very large scale integration) project, which was begun in the
mid-1970s. According to a federal interagency staff working
group, "The major factor in Japan's success in VLSI development
was that it put its R&D efforts on the footing of a national
project, in which government and industry worked together, at a
much earlier date than the United States or European countries
did." 2/
Due to the commercialization of process and device technology
developed in the MITI VLSI project, Japan eventually captured
about 70 percent of the world market for the 64K DRAM device.
This was a major setback for the U.S. memory producers who
previously dominated the world DRAM market.
Implications of these Factors
With adequate funding available due to the strong and visible
presence of the government and the keiretsu along with a
profitable domestic market, Japan reinvested in the production
of all semiconductor devices. Japanese producers' aggressive
capital and R&D investment policy enabled them to accelerate
new product introductions; in fact, the Japanese were the first
to market the 64K and 256K DRAMs. Early market entry is
critical to memory device producers, since relative cost
advantages accrue to the firm reaching a given production
volume first. U.S. firms, faced with waning demand and
Japanese pricing pressure, were forced to curtail investment.
Intense capital spending has also enabled the Japanese to
expand capacity substantially, even during market downturns.
Japan's capacity levels in manufacturing have enabled it to
sell memory devices (and other commodity devices) at prices so
low that the United States cannot easily compete. With excess
capacity, Japan gained substantial worldwide market share
through low-cost production.
MACROECONOMIC FACTORS
In addition to factors specific to the semiconductor industry,
macroeconomic factors have contributed to the shift in memory
competitive advantage from the United States to Japan. Factors
that influence the competitive advantage to varying degrees are
the exchange rate, the national savings rate, the cost of
capital, human capital, and cultural differences.
In the early 1980s, when the dollar was high relative to the
yen, the Japanese were able to increase their sales at home and
abroad. Since the fall of the dollar in 1986, Japanese
producers elected to offset exchange rate changes through price
reductions rather than lose market share.
With a savings rate higher than most other countries, including
the United States, Japan has a pool of savings, which allows
for high rates of capital investment in DRAM production. The
- 100 -
availability of capital and high rates of investment in the
semiconductor industry enable higher yields and greater
equipment-use rates, thus lowering unit costs.
The savings pool also relates to the cost of capital, a factor
that is much debated in the discussions of DRAM
competitiveness. The availability of capital affects the cost
of capital because the Japanese Government has significant
discretion in the control of investment funds. As a recent
report written for the U.S. Department of Commerce notes, "Most
analysts conclude the relative cost of capital is lower for
Japanese firms, including semiconductor firms, than for U.S.
firms. But there is far from a consensus on the size and
importance of the gap. The relevance of this difference in the
cost of capital is its translation into a competitive advantage
for capital intensive sectors, such as semiconductors, through
capacity expansion and the selection of relatively more capital
intensive manufacturing methods. "
Human capital also plays a role in competitiveness. As Japan
began its challenge of the U.S. position in DRAMs, Japan
benefited from a low-cost, high-quality labor force. Due to
Japan's promotion of education, Japan's semiconductor industry
has a highly skilled work force, critical to developing
Japanese advantage in the manufacturing process. Japanese
management's widely asserted long-term view emphasizing market
share rather than profitability may also contribute to Japan's
competitive position in the DRAM industry.
ECONOMIC FACTORS RELATING TO MEMORY PRODUCTION
Besides the above-noted factors, economic factors also impact
the structure and participation of the memory market. These
are discussed below.
Learning Economies and Scale Economies
Early market entry is critical to the success of memory device
producers, as cost advantages accrue to the first firm reaching
a given production volume. As production experience (measured
by cumulative unit volume) rises, unit costs decline rapidly in
the early part of the product life cycle. This exemplifies the
learning curve in DRAM production. Scale economies are gained
by firms operating at full capacity, since costs of production
can be spread across more units. These factors hold
significant implications for U.S. companies. When faced with
waning demand and Japanese pricing pressure, U.S. firms had to
cut their investment. Eventually, their learning and scale
economies diminished.
Entry Barriers/Other Factors
The complexity of the memory manufacturing process is a
significant entry barrier, since it is based upon
state-of-the-art design and production technology. Potential
- 101 -
market entrants must also weigh substantial capital investment
outlays with the prospect of losses, such as those incurred
over the life cycles of the particular products, such as 64K and
256K DRAMs.
Supply/demand imbalances and external benefits, both associated
with production of memory devices, also impact the
participation and structure of the market. The external
benefits include the fact that memory devices serve as
technology drivers, forcing production of leading-edge,
cost-competitive products, and employing technologies used to
produce other products. In addition, the mutual dependence
between memory producers and users has consequences for memory
producers. Offshore memory producers are typically part of
highly diversified firms, producing computer equipment and
consumer electronics. If offshore suppliers withhold
leading-edge memory devices from the United States, or sell
them in limited quantities or at inflated prices, they can hurt
the competitiveness of downstream U.S. industries. Loss of
market share in the memory market may also hurt U.S. equipment
and material suppliers, engineering expertise, and institutions
conducting basic and applied research in semiconductor
process/product technology.
Overcapacity, Declining Prices, and U.S. Government
Investigations -- 1985 to Present
The year 1985 was marked by severe overcapacity and associated
price declines. To keep equipment and production lines
running, Japanese manufacturers sustained high production
levels, and witnessed a smaller decline in factory shipments
(about 9 percent in value) than did U.S. firms (a 30 percent
decline). Memory prices, led by the price of DRAMs, plummeted,
with both 64K and 256K DRAMs reaching lows of under $1.00. On
the basis of reports that Japan was selling its memory devices
in the United States at less than fair value, the U.S.
Government in 1985 instituted antidumping cases on the Japanese
imports.
The difficult market conditions, including dumping by Japanese
firms, altered the U.S. semiconductor industry. Two major U.S.
semiconductor firms, Advanced Micro Devices and National
Semiconductor, aborted plans to sample and manufacture two
types of DRAM devices in volume. The pricing situation also
encouraged another U.S. company, Intel Corporation, to focus on
a stable niche in the memory marketplace, rather than on a
mainstream device. Pricing considerations led Mostek, formerly
the second largest U.S. DRAM producer, to withdraw from the
market. Texas Instruments and Micron Technology were the only
2 of the 12 U.S. merchant DRAM manufacturers to survive the
Japanese dumping strategy. Only Motorola has reentered the
market since 1985--through an agreement with Toshiba. 4/
In 1985 antidumping cases were filed on the following memory
devices from Japan: 64K DRAMs, 256K and above DRAMs, and
erasable programmable read-only memories (EPROMs). Eventually,
- 102 -
antidumping duties were assessed on imports of Japanese 64K
DRAMs. As part of the 1986 U.S.-Japan Semiconductor Trade
Arrangement, the United States suspended the antidumping
investigation of EPROMs and 256K and above DRAMs.
The arrangement also addressed the problem of lack of foreign
access to the Japanese semiconductor market. Besides
suspending the two antidumping cases, the arrangement suspended
the U.S. Government's Section 301 investigation, a key
objective of which was to open the Japanese market to foreign
semiconductors.
The arrangement and the antidumping monitoring system, which
arose from the arrangement, stemmed the Japanese dumping of
EPROMs and DRAMs in the U.S. market. However, Japanese dumping
of memory devices in third country markets ended only after the
President imposed sanctions against certain Japanese imports.
Due to foreign suppliers' continued lack of access to the
Japanese semiconductor market, tariffs on $165 million worth of
Japanese imports remain in effect.
FORCES ACTING ON INDUSTRY STRUCTURE
The DRAM market will generally remain the domain of the
high-volume, commodity chip manufacturer. For such large-scale
operations, the following factors will shape the operating
environment:
To obtain an adequate return on capital, some of the current
producers will exit the market, because investment costs are
growing faster than projected revenues.
Some firms will have to pay royalties to utilize the key
technologies. Firms not controlling the technologies must
have other advantages to offset the cost of paying
royalties. This may limit future entry.
O
Economies of scale will play an increasingly greater role.
Some firms are contemplating larger scale production
facilities, as measured by the number of wafers started per
month. With new facilities, investment costs would increase
as firms purchase new equipment capable of producing not
only larger wafer sizes, but also smaller line geometries.
These conditions indicate that the number of companies
producing DRAMs may decline in the future.
However, Japanese and U.S. DRAM producers must also keep a
watchful eye on the South Koreans and Taiwanese who are
striving to gain market position in the memory market. With
additional players, excess capacity may well emerge in the
1990s. Due to the Koreans' experience as contract producers
for some American firms, many are now independent merchant
producers. Currently, the Koreans are limited by: 1) the lack
of manufacturing disciplines related to the cutting-edge
- 103 -
technologies and 2) the fact that key DRAM technologies are
under patent by Japanese and American firms. The Taiwanese are
now building one large memory facility and have another under
contract.
IMPLICATIONS FOR U.S. COMPETITIVENESS
Increasing U.S. DRAM Production
The prospect of losing its DRAM production capability has
forced the U.S. electronics industry, both semiconductor users
and producers, to consider its strategy for remaining
competitive. In January 1989 the Joint Steering Committee of
the American Electronics Association and the Semiconductor
Industry Association endorsed an initiative to develop a
proposal to spur new DRAM production in the United States.
This initiative was followed six months later by an
announcement that a $1 billion DRAM manufacturing consortium,
U.S. Memories, would be formed. However, in January 1990, the
consortium was closed due to insufficient capital funding.
Loss of Memory Production Capability
As mentioned earlier, DRAMs drive a broader range of
technology. Foreign firms utilizing DRAM technology as a
driver may increasingly threaten the U.S. position in other
memory markets, as well as other product lines. For example,
nonmemory products such as application specific integrated
circuits (ASICS) and microprocessors development may be slowed
if more firms withdraw from memory markets.
Losing memory production capability may also have national
security implications. To meet military needs, the United
States must increasingly rely on foreign producers of
leading-edge memory devices. This poses the risks of: 1) supply
disruptions, not only of memory devices but also the technology
used in their manufacture and 2) the loss of semiconductor
process and product technology.
Marguerite Markey
Office of Microelectronics and
Instrumentation
- 104 -
Footnotes
1/ Keiretsu refers to the large Japanese groups of firms tied
together by interlocking directorates, by some
cross-ownership of each other's stocks, and by regular
meetings of chief executive officers. The keiretsus are
particularly beneficial during a downturn, as they reduce a
company's risk.
2/ Quick, Finan & Associates, Semiconductor Case Study:
Memory Market, a report prepared for Science and
Electronics, International Trade Administration, U.S.
Department of Commerce, October 1988, p.54.
3/ Ibid., p. 63.
4/
Ibid., p. 79.
- 105 -
Appendix B
Workstation Case Study
Introduction and Overview
The workstation area of the computer industry exhibits many
characteristics of the electronics sector as a whole. A new
multibillion dollar market has grown from a need recognized by
a handful of dynamic computer entrepreneurs. These
risk-takers, with their talent for systems design, used
existing technologies to create and commercialize innovative
products. This activity has stimulated growth in the computer
industry. It has also given scientists and engineers
throughout electronics new tools to increase their productivity
and develop their own new products and markets.
The sector's rapid growth has attracted larger, more
established computer manufacturers, intensifying an already
high level of competition based on price and technology. Among
the recent entrants are Japanese computer firms, which are
leveraging their strengths in electronics manufacturing and
financial resources.
Nine years after the first workstation hit the market in 1981,
some of the companies that started the sector are still its
leaders. They have grown to be multi-million enterprises,
serving a global market whose potential remains virtually
untapped. High levels of R&D and a rapid rate of product
innovation have kept them ahead of their larger, more
diversified competitors. But are these advantages enough to
sustain their growth over the long term? The innovation edge
that they currently have may be eroded by larger U.S. and
Japanese firms that have resources to develop or acquire the
latest technology. These smaller firms and the U.S.
workstation sector as a whole face a growing dependence for
critical components from the same Japanese suppliers that they
compete with in the workstation marketplace. Several other
crucial questions need to be answered in the future. Will they
also be forced to give up their system design and software
secrets for these key components and, as a result, their only
remaining competitive advantage?
Definition
Workstations are single-user, high performance computer
systems, with advanced graphics capabilities, whose principal
use has been in computationally intensive scientific and
engineering applications. A basic 32-bit desktop system
includes at least 4 million bytes of semiconductor memory, a
large, high resolution, monochrome or color monitor, and has
sophisticated software to handle more than one task at a time
and communication with other computers (networking), at a price
of about $5,000. At the high end, a new class of 64-bit
workstations, called graphics supercomputers, was introduced in
early 1988, with a price tag of around $100,000.
- 106 -
Price and performance distinctions between workstations and
other types of computer systems are blurring at both the low
and high ends of the market (see Chart 15). Entry level
systems have experienced a 60-fold reduction in price since
1981, placing them in the cost range of personal computers. At
the same time, high-end personal computers from Apple, Compaq
and IBM have begun to match the performance of these
entry-level workstations. At the high end of the workstation
wedge, superworkstations have shown a 70-fold increase in
performance over the past six years, placing them in the realm
of superminicomputers (see Chart 16).
These dramatic improvements in the price and performance of
workstations are expected to continue over the next five
years. By 1993, entry-level workstations will have the power
of some of today's mainframes, for under $2,000. At the high
end, graphics supercomputers could have five times the
performance of the most powerful mainframes available today.
Markets
Workstation pioneers exploited a growing need for low-cost high
performance computing in science and engineering during the
early 1980s. At that time, personal computers lacked many of
the capabilities--such as high processing speed, large memory,
and a high resolution display--necessary for these tasks.
Minicomputers had these capabilities, but they were too bulky
and expensive to dedicate to a single user. The first
workstation products bridged this gap.
Workstation suppliers initially targeted two markets where they
felt their systems could be used as tools to speed up design,
analysis and testing in hardware and software development,
while dramatically lowering costs. At the high end, Apollo
initially addressed CAD/CAM/CAE (computer aided design/computer
aided manufacturing/computer aided engineering) applications,
undercutting established minicomputer suppliers., Early uses
included printed circuit board and integrated circuit design.
At the low end, Sun Microsystems focused on CASE (computer
aided software engineering), where cost was the major concern
of users.
While these two applications still remain their principal
revenue sources, traditional workstation suppliers have
branched out into commercial markets, such as electronic
publishing, financial services, and office automation markets.
At the high end, the graphics supercomputer and
superworkstation suppliers are emphasizing sophisticated
applications in computational chemistry, animation,
computational fluid dynamics and image processing.
The potential market for workstations is virtually untapped.
Current penetration of the technical market is only about 3
percent of the estimated 8 million scientists, engineers,
programmers, and systems analysts worldwide, and demand for
- 107 -
Chart 15
EVOLUTION OF COMPUTER ARCHITECTURES
Recent Fragmentation by the Workstation Wedge
Performance
Mainframes &
Supercomputers
Mainframes
Minisupercomputers &
&
Superminicomputers
Supercomputers
IBM 360
1964
IBM 370
Superworkstations
1971
SILICON
GRAPHICS
IRIS
Minicomputers
Minicomputers &
1984
High-End
Workstations
DEC PDP-11
1968
DEC-VAX
1978
Low-End
Workstations
Workstations
APOLLO DOMAIN
1981
SUN-1
PC-Based
1982
Workstations
The Workstation Wedge
Personal Computers
APPLE II
1978
IBM-PC
1982
PCs
IBM PC-AT
1984
COMPAQ
Deskpro 386
1986
Time
Source: Apollo Computer
- 108 -
Chart 16
SELECTED U.S. WORKSTATION PRODUCTS: PRICE AND PERFORMANCE
MARKET
ENTRY
PERFORMANCE
DATE OF
SEGMENT
PRICE
RANGE*
COMPANY
MODEL
INTRODUCTION
Entry-level
$5 K **
1 2 MIPS
Apollo
DN 3000
2/86
Apple
MacIntosh II
3/87
DEC
Vax Station 2000
2/87
HP
HP 9000 Model 319C
12/87
IBM
PS/2 Model 80
4/87
Sun
3/50M
7/87
Mid-range
2-D $18K to $20 K
3 5 MIPS
Apollo
DN 580
6/86
3-D $30K to 40K
DN 4000
8/87
DEC
Vax Station 3500
9/87
HP
HP 9000 Model 350
11/86
IBM
RT/PC 6151
2/87
Sun
386i/150
4/88
3/260
9/86
High-performance $50K to $75K
7 - 14 MIPS
Apollo
DN 590 T
6/87
DEC
Vax Station 8000
2/88
HP
HP 9000 Model 825 SRX
6/87
HP 9000 Model 835 SRX
3/88
Silicon Graphics
Iris 4D/50
4/88
Iris 4D/60T
3/87
Sun
4/110
7/87
4/260
7/87
Very high-
performance
$73 to $100K
10 - 120 MIPS
Apollo
Series 10000 Personal
3/88
Supercomputer
16 - 140 MFLOPS
Ardent
Titan
3/88
Stellar
GS 1000
3/88
* Vendor's performance claims
(MIPS = Millions of instructions per second,
MFLOPS = Millions of floating point operations per second)
** Diskless
Sources: Sandy Friedman, "A New Dawn for Workstations," Mini-Micro Systems, May 1988; Morgan Stanley and
Montgomery Securities research reports, Datapro Research, and company product literature.
- 109 -
these systems has been mushrooming. In 1987 U.S. suppliers
shipped over 113,000 workstations, valued at $2.5 billion,
matching shipped. in one year alone the total number of units previously
Although the United States remains the largest single
workstation market in the world, both Europe and Japan have
emerged recently as significant sources of revenues for U.S.
suppliers. Apollo, Digital Equipment Corporation (DEC),
Hewlett Packard (HP), and Sun Microsystems together held a 90
percent share of the $765 million European market in 1987.
Several of these companies have established manufacturing
plants there to serve their European customers more effectively
and have forged alliances over the past few years with leading
European electronics firms such as Ericsson of Sweden and
Siemens of Germany to increase their market penetration. In
Japan, they faced some competition from Japanese suppliers who
have their own well-developed distribution channels, but still
anaged to gain a 67 percent share of a market worth roughly
$500 million last year, based on their technological
superiority. Their long-term prospects in these markets appear
less bright. They can expect growing competition in Western
Europe and a struggle for control of the Japanese market once
their Japanese rivals reach technical parity.
Industry Structure
The U.S. industry is relatively concentrated, with four
manufacturers accounting for 80 percent of the revenues and
nearly 85 percent of the units shipped worldwide in 1987
(see Chart 17). These four companies offer a board range of
workstations. Apollo and Sun are dedicated workstation
suppliers while Digital Equipment and Hewlett Packard produce
other types of computers. The remaining major competitors are
niche players at present. Silicon Graphics has a strong
position in the market for superworkstations, with the first
3-D graphics systems. IBM has begun to challenge suppliers of
lower performance workstations with its high-end personal
computers. Japanese suppliers may emerge as the U.S.
industry's only significant foreign competition. Both NEC and
Sony have entered the U.S. market and shipped systems out of
U.S. production facilities during 1988. Fujitsu, Toshiba, and
Hitachi are other likely entrants.
Entrepreneurial Origins
The U.S. workstation sector embodies the strong entrepreneurial
character that has characterized the rest of the electronics
industry. Several of the sector's key executives, after
gaining management and technical experience at established
computer firms, left to form workstation companies. Others in
academia were engaged in research on related technologies that
they decided to commercialize. For example, Bill Poduska, a
MIT graduate and Honeywell alumnus, began his entrepreneurial
endeavors by co-founding Prime Computer, then workstation
- 110 -
Chart 17
Technical Workstation Vendor Market Share
IBM - 3.1%
Others
Hewlett-Packard
12.6%
16.0%
Sun
111 I I
Microsystems
28.4%
19.5%
Digital
20.4%
Apollo
Source: Dataquest
1987 Shipments - 113,000 Units
pioneer Apollo, and most recently graphics supercomputer
supplier Stellar Computer. Sun Microsystems founders came from
Berkeley, Stanford, and Xerox's renowned Palo Alto Research
Center (PARC).
Introduced in February 1982, the Sun-1 was an outgrowth of a
Stanford doctoral project, aimed at building a high
performance, single-user computer with strong networking
capabilities, based on standardized components, software, and
communications technologies. This open architecture approach
contrasted sharply with the proprietary emphasis of the first
workstations. Sun's first operating system was a version of
AT&T's UNIX, enhanced by co-founder Bill Joy at Berkeley. The
"windowing" software and Ethernet networking technologies were
developed at Xerox PARC.
Silicon Graphics has an equally interesting history. After
working closely at Stanford with Dr. Ivan Sutherland,
considered the father of 3-D graphics, chairman and co-founder
James Clark created a proprietary graphics processing chip
(called the "Geometry Engine") and introduced the first
workstation based on that technology in 1983. He recruited a
management team consisting largely of executives from Hewlett
Packard and Xerox's Office Products Division to run his
fledgling company.
Key Components
A workstation's performance characteristics are partly a result
of an unique combination of various components and
subassemblies. At the heart of most workstations is a 32-bit
microprocessor. The earliest workstation models from Apollo,
Sun, and other major suppliers used standard chips from
Motorola and Intel to provide scientists and engineers with
minicomputer power on their desks. While this trend has
continued, some manufacturers over the past few years have
introduced systems with increased processing capability that
incorporate microprocessors of their own design. Examples
include DEC's VAX 8250, Hewlett Packard's Precision
Architecture, and Sun SPARC chips.
SRAMS and DRAMS (static and dynamic random access memories) are
critical to satisfying the substantial internal memory required
to handle multitasking and sophisticated applications
programs. These chips currently represent up to 25 percent of
the total cost of a workstation.
The exceptional graphics performance of these systems over
personal computers is due to high-speed, bit-mapped color
displays with extremely high screen resolutions in the
megapixel range. At the high end, superworkstations and
graphics supercomputers perform real-time, 3-D modeling and
simulation through the use of video RAMS and dedicated graphics
procesors based on custom chips.
- 112 -
Systems software and networking are other important elements in
workstation performance. Suppliers offer extensive software
programs, including operating systems that manage the
interaction between semiconductor and disk-based storage and
support the processing and viewing of more than one task at a
time; sophisticated graphics and applications software
development tools; and networking software that links users
over high speed networks.
Supplier Dependencies
The degree to which workstation suppliers provide their own
system elements varies widely. Workstation suppliers such as
Sun Microsystems and Apollo, rely heavily on outside sources
for components and subassemblies, which they combine in final
assembly and testing operations. They feel it is more cost
effective to source from specialized, outside producers than to
have in-house manufacturing. They argue that they can more
profitably direct the investment to R&D that maintains their
innovative edge.
By contrast, DEC, HP, and IBM are larger, more vertically
integrated suppliers and are less dependent on outside
suppliers. To varying degrees, they often produce internally
the microprocessors and semiconductor memory, printed circuit
boards, power suppliers, and certain peripheral units.
Microprocessors and operating systems software are key areas
that the United States still has technological leadership over
the Japanese (see Chart 18). U.S. workstation firms usually
produce microprocessors of their own design or buy these chips
from U.S. suppliers. However, several are currently sourcing
their internally designed RISC (reduced instruction set chips)
microprocessors from Japanese companies that are manufacturing
these chips under license. They recognize that the Japanese
are important players due to their prowess in semiconductor
manufacturing technology.
Operating systems, whether proprietary or UNIX derivatives, are
developed in-house along with other kinds of system software.
This software is not only a competitive advantage for U.S.
workstation suppliers over their Japanese competitors, but it
is also regarded as a primary contributor to the value that
they add to a workstation system.
Much of the highly competitive workstation market is solutions
oriented, i.e., users expect suppliers to offer "one stop
shopping"--complete systems (equipment and software) --tailored
to their needs. To meet this demand, many suppliers depend on
third-party software houses to develop applications software
for their systems, e.g., CAD/CAM, CASE. U.S. companies depend
upon third-party suppliers to develop applications software
worldwide, but source the bulk of their software from U.S.
companies.
- 113 -
CHART 18
U.S. Versus Japanese Competitive Advantages
Competitive Advantage
U.S.
Japan
1. Hardware Design:
Overall system
X
Critical Components
-
Microprocessors
X
-
Graphics processors
X
- Buses
X
-
Random access memories
X
-
High resolution displays
X
2.
Software Development:
Systems software
-
Operating systems
X
-
Communications
X
-
Graphics
X
-
Applications development
X
-
tools
3.
Manufacturing Process Technology:
Overall system
X
X
Critical components
-
Semiconductors
X
-
Displays
X
4. Distribution Channels:
Direct to end user
X
OEMS
X
VAR/Dealers
X
Distributors
X
- 114 -
In other component and subassembly areas, the dependence of the
U.S. industry has been growing. U.S. manufacturers obtain a
high percentage of their DRAMS and all of the color monitors
used in their workstations from Japanese suppliers. Monochrome
displays come from subsidiaries of Philips of the Netherlands
in Canada and Italy. Several executives in these companies
claim they would like to have U.S. sourcing but are concerned
about the poor quality of American-made color monitors and the
lack of interest among U.S. semiconductor houses in producing
DRAMS to their specifications. Their dependence on the
Japanese for high performance disk storage is lessened by the
availability of such products from U.S. suppliers, many of whom
produce offshore in Singapore and Mexico.
Standard Versus Proprietary Technology
Early workstation models from Apollo, Daisy Systems, and Valid
Logic were designed as closed system architectures using
proprietary operating systems, graphics, and networking
technologies. This situation began to change in late 1982 when
Sun Microsystems entered the market, promoting the concept of
an open system architecture that would allow workstations to
connect to a wide range of equipment and to run applications
software written for other systems. Today the battle among
workstation suppliers over standards has created some confusion
in the marketplace and raised questions about the advantages
and inherent dangers in promoting standards over proprietary
technologies. Microprocessor and operating systems have become
the principal focus of this standards activity thus far.
In the microprocessor arena, standard complex instruction set
chips (CISC) from U.S. semiconductor houses remain the
microprocessors used in most of the U.S. and Japanese
workstations (see Chart 19). RISC microprocessors have been
designed by Apollo, HP, IBM, MIPS, and SUN over the past few
years, but are currently used in superworkstations and graphics
supercomputers. However, there are signs that the RISC
architecture may replace CISC in the near future. Some U.S.
suppliers have expressed considerable interest lately in
promoting their proprietary RISC designs as industry standards
and incorporating this technology eventually throughout their
product line.
Some of this RISC technology has been licensed to several U.S.
and Japanese semiconductor houses to create second sources for
these chips, to stimulate competition among suppliers to
produce the fastest microprocessor, and to obtain the lowest
cost chips. Through these arrangements they aim to lower
production costs at the systems level. Other workstation
suppliers are concerned that these arrangements constitute the
transfer of critical technology to competitors, particularly to
Japanese firms that lag behind the United States in
microprocessor technology but are working feverishly to close
the gap.
- 115 -
CHART 19
Major Workstation Microprocessor Architectures
Workstation
Selected Workstation
Company
Microprocessor
Architecture
Vendors
Products
DEC
Micro VAX 78032
CISC
DEC
VAX Station 2000
CVAX 78134
CISC
VAX Station 3000
VAX 8250
CISC
VAX Station 8000
Intel
80386
CISC
IBM
PS/2 Model 80
NEC
ND5311
Sun
Sun 3861 Model 150
Motorola
68020
CISC
Apollo
DN 3000, 4000, 580, 590
Apple
MacIntosh II
Fujitsu FACOM
SIGMA Station
HP
HP 9000 Model 300 Series
NEC
EWS 4800 Models 10, and 50
Silicon Graphics
IRIS 3000 Series
Sony
NEWS 711 and 841
Apollo
PRISM
RISC
Apollo
Series 10000 Personal
Supercomputer
Hewlett Packard
Precision
RISC
HP
HP 9000 Models 825
Architecture
and 835 SRX
IBM
ROMP
RISC
IBM
RT/PC 6151
MIPS
R 2000
RISC
Ardent
Titan Series
Silicon Graphics
IRIS 4D Series
Sun
SPARC
RISC
Sun
Sun 4 Series
Sources: Datapro Research and company product literature.
- 116 -
Although Apollo and DEC proprietary operating systems have
large customer bases, AT&T's UNIX has rapidly gained strong
support in the workstation market in recent years, with
virtually every supplier offering its own version. However,
rather than a defacto standard emerging, which would allow
software compatibility across the workstation spectrum, the
result is a proliferation of incompatible versions of UNIX. An
effort to create a standard version of UNIX had led to the
emergence of two separate camps in the U.S. workstation
sector. One is an alliance between Sun and AT&T to develop a
UNIX version around Sun's RISC microprocessor (SPARC)
architecture. The other is a UNIX development consortium
called the Open Systems Foundation which was informed in
mid-1988 under the leadership of Apollo, DEC, HP, and IBM.
The lack of a UNIX standard may offer the Japanese an
opportunity to become players in the competition to establish a
standard operating system for workstations. Recognizing their
weakness in software, the leading Japanese computer
manufacturers have been emphasizing software R&D. For example,
since 1985, the Software Industrialized Generator and
Maintenance Aids (SIGMA) project, jointly funded by the
Government Japanese and industry, has focused on developing a
Japanese version of UNIX. This version will include software
development tools, data base and networks. The project has
already produced a workstation.
Since 1984, a second Japanese effort, TRON (The Real-Time
Operating System Nucleus), has developed a family of operating
systems and related 32-bit and 64-bit microprocessors. The
operating systems will have versions dedicated to uses in
industry, business, and communications. Japanese companies
have begun producing the first TRON 32-bit microprocessors,
which can also run UNIX. One of the first products anticipated
from the TRON effort is a 32-bit workstation. As a consequence
of these two R&D programs, the Japanese could enter the U.S.
workstation market with yet another version of UNIX or the TRON
system, incorporating their own microprocessors.
Marketing and Distribution
As in other sectors of the electronics industry, workstation
suppliers use a variety of distribution channels to market
their products: direct sales forces, OEMs (original equipment
manufacturers), VARs (value added resellers), and industrial
and retail distributors.
Workstation firms originally emphasized direct sales forces and
OEMs to focus on serving the technical user. But competitive
pressures and technological developments have caused them to
enter commercial markets and begin to build up VAR channels.
Such alliances have played an important role in the industry's
recent moves into new end-use sectors such as aerospace,
financial services, home building and telecommunications. They
have also greatly expanded their presence in Western Europe
- 117 -
and Asia through marketing and manufacturing agreements with
major foreign partners (see Chart 20).
Access to these other distribution channels is a critical
competitive factor for these suppliers if they are to continue
to grow by reaching smaller accounts and penetrating new
commercial markets. This is particularly true in any
competition with leading personal computer manufacturers that
already have highly developed commercial VAR and retail
distributor channels.
In early 1988, the Japanese launched a concerted effort to
penetrate the U.S. workstation market and targeted the
CAD/CAM/CAE, software development, and electronic publishing
sectors. They are concentrating on the price sensitive
commodity end of the market where they can use their strength
as high volume, low cost producers. They will eventually
migrate into the higher performance sectors as they acquire
some of the technologies that they need through licensing,
joint development agreements, and minority investments in U.S.
component and system suppliers.
In addition to suffering from a lack of applications software,
the Japanese have few established distribution channels for
their products. Their software offerings total no more than a
few hundred applications packages compared to more than 1,000
each for Apollo and Sun and roughly 6,000 for DEC's VAX
stations. They must convince advantages of their workstations
outweigh the lack of applications software.
The Japanese are working hard to overcome these obstacles and
have the financial resources to buy into this market. Several
companies are actively recruiting independent software houses
in the United States to develop a wide range of applications
software for technical users. Another Japanese supplier has
established in-house development projects using U.S. and
European programming. In addressing their distribution
weaknesses, the Japanese have decided not to begin with direct
marketing in the United States. For example, NEC plans to go
through the 1,000 U.S. VARs that carry its personal computer
lines since a high percentage of them currently sell into
technical markets. As a new entrant to the computer systems
business, Sony must start from scratch to build a U.S.
distribution and customer support network. In May 1988,
Symbolics, a U.S. artificial intelligence computer supplier,
signed a $60 million, three-year contract with Sony to become a
distributor of Sony's NEWS workstations.
Outlook for the U.S. Workstation Sector
Recognizing the challenges facing them in the 1990s, U.S.
workstation manufacturers are convinced that the key to
continued competitiveness is to maintain their technological
edge. R&D budgets average 12 percent of total revenues
annually to support this lead. As a result, U.S. workstation
- 118 -
CHART 20
Major Strategic Alliances of U.S. Workstation Suppliers
Number of
Selected Examples
Type of Alliance
Partnerships
Partnerships
Comments
Technology Licensing
1 India
Apollo/HCL, Ltd
Kit assembly for Indian market
Agreements
2 PRC
Apollo/Shanghai computer market
Kit assembly for Chinese market
Apollo/Fujian computer factory
=
=
4 Japan
Apollo/Toshiba; Ardent/Kubota;
RISC microprocessor and
Stellar/Mitsui; Sun/Fujitsu
workstation manufacture
10 U.S.
Sun/BIT/Cypress/LSI Logic;
RISC microprocessor manufacture
Sun/Microsoft
System software development
1 Japan
SAE, Inc./Matsushita
64-bit microprocessor and
workstation
Technology Development
7 U.S.
DEC/Evans & Sutherland
Graphics systems
Agreements
Sun/AT&T/Microsoft
Systems software
Marketing Agreements
1 Italy
Sun/Olivetti USA
Legal and medical markets
1 Sweden
Sun/Ericcson
CAD/CAM/CAE
1 - West Germany
Apollo/Siemens
CAD/CAM/CAE; CASE
1 - Netherlands
Apollo/Philips
CAD/CAE
2 France
Sun/Matra
CAD/CAM/CAE
2 - United Kingdom
Sun/ICL
CIM and public administration
6- Japan
Apollo/Mitsubishi Electric;
CAD/CAM/CAE; CASE
Ardent/Kubota,
Computational chemistry;
Stellar/Asahi Chemical;
molecular modeling; fluid
dynamics
22 U.S.
Sun/Toshiba
CAD/CAM/CAE; CASE
Apollo/Mentor Graphics
CAE
DEC/McDonnell Douglas
CAD/CAM
Sun/Daisy Systems
CAE
Minority Investments
2 Japan
SAE/Matsushita
$10 million investment
Ardent/Kubota
25% investment from Kubota
3 - U.S.
Silicon Graphics/Control Data
20% investment from CDC
Sun/AT&T
Up to 20% investment planned
- 119 -
manufacturers they have accelerated the rate at which they
develop and introduce new products to the market, reducing this
period to only six months for lower performance workstations
and around two years for high end models.
More generally, Chart 18 compares competitive advantages of
U.S. and Japanese workstation suppliers, from hardware design
through distribution channels. U.S. firms currently are quite
strong in most areas, lacking only access to or manufacturing
prowess in certain critical components. Their Japanese rivals
have a design advantage only in DRAM's and high resolution
displays. Japanese workstations now on the market are
considered to be two generations behind U.S. offerings
technologically. The rapid pace of U.S. product introductions
and shortened product life cycles make it difficult for the
Japanese to reduce the U.S. lead.
But the Japanese dominance in the DRAM market poses a problem
for U.S. firms since this component plays such a prominent role
in workstation performance. If the current shortages of these
chips are not alleviated, U.S. workstation suppliers will be
severely constrained. Such effects are already evident. Sun
Microsystems states that it has lost $100 million in sales
during 198 because of DRAM supply shortfalls. Some U.S.
suppliers have stated that they are concerned that they may be
forced to transfer proprietary design technology to Japanese
suppliers in return for adequate supplies of DRAMs in the
future.
While the Japanese have a clear lead in their ability to
produce semiconductors and displays, they may not have as
strong competitive advantage in manufacturing process
technology at the system level. Several U.S. suppliers believe
their assembly, testing, and quality control operations match
any in Japan. In one U.S. supplier's domestic plant, for
example, the assembly of high-end workstations consumes only 90
minutes and half that for low-end models, Testing is so
thorough that the company boasts of yields exceeding 98 percent
for initial output coming off its assembly lines.
The U.S. industry has a strong hold on distribution channels in
the United States, which poses a significant but not
overwhelming barrier to the Japanese. In addition, U.S.
strength in software is currently unchallenged. But if the
Japanese can develop a substantial number of VARs, offering
them attractive price discounts, good performance, and
high-quality products, they will begin to solve this problem.
VARs and third-party software houses will help them overcome
their applications software deficiency and become powerful
players in the booming workstation market of the 1990s.
Tim Miles
Office of Computers and
Business Equipment
- 120 -
Appendix C
Major R&D Facilities of Foreign Electronics
Companies in the United States
R&D Activities
Company
Location of Facility
in Electronics
Cambridge
Chicago, IL
Semiconductor
Instruments (U.K.)
manufacturing equipment;
instruments
Ericsson (Sweden)
Richardson, TX
Central office
switching equipment
Nixdorf
Santa Clara, CA;
Computers
(Germany)
Burlington, MA
Richmond, VA
Software engineering
Northern Telecom
BNR Ann Arbor, MI;
Telecommunications
(Canada)
Dallas, TX;
network products;
Mountain View, CA;
PBX systems, integrated
and Research Triangle
data and voice products.
Park, NC
Philips
Briarcliff Manor, NY
Integrated circuits;
(Netherlands)
computers (AI,
multiprocessor
architectures, software
engineering) ; HDTV;
electronic materials.
SGS Thomson
Mostek (sub.),
Integrated circuits
(Italy/France)
Montgomeryville, PA;
Carrollton, TX
Siemens
Research and
High-speed electronic and
(Germany)
Technology Labs,
photonic devices and
Princeton, NJ
special IC's for
advanced computers and
communications equipment;
CAD; artificial
intelligence (expert
systems, machine
perception and speech
recognition).
- 121 -
R&D Activities
Company
Location of Facility
in Electronics
Siemens
Siemens Components,
Power MOS-FET wafers;
(Germany)
Iselin, NJ
optical sensors; IC's
(continued)
for industrial use
(MPUs, micro-
controllers) , tele-
communications and
consumer electronics;
and memories.
Siemens
Central office switching
Communications
equipment
Systems,
Boca Raton, FL
Databit (sub.),
Packet switched data
Hauppauge, NY
network equipment
and software. High-
speed fiber optic links.
Crystal Technology
Optics
(sub.), Palo Alto, CA
Siecor (sub.),
Fiber optics
Hickory, NC
Microwave
High speed, sub-micron
Semiconductor Corp.
Gallium Arsenide
(sub.), Somerset, NJ
and silicon components
Hell Graphics Systems,
Graphics
Inc. (sub.),
Port Washington, NY
Knoxville, TN
Custom integrated
circuits for TV's
Thomson-CSF (France)
David Sarnoff Research
Displays; HDTV;
Center, Princeton,
CAD/CAM; integrated
NJ*
circuits; TV
receivers;
manufacturing
technology
Indianapolis, IN
TV receivers;
integrated circuit
design; CAD/CAM;
VCR and Camcorder;
electronic materials
*Owned by Stanford Research Institute and on contract to Thomson.
- 122 -
R&D Activities
Company
Location of Facility
in Electronics
Thomson-CSF (France)
Lancaster, PA
TV components
(continued)
Los Angeles, CA
Software
Canon (Japan)
Lake Success, NY
Desktop publishing and
workstations (1988)
Epson (Japan)
Epson Technology Center,
Personal computers
Silicon Valley, CA
(1988)
Fujitsu (Japan)
Fujitsu Microelectronics,
Custom gate array
Boston, MA; Dallas, TX;
design
Santa Clara, CA
Fujitsu Business
Voice and data
Communications Systems
communications
Anaheim, CA
Fujitsu America,
Disk storage devices
Longmont, CO
(1989)
Fujitsu Systems,
Software engineering
San Diego, CA
Hitachi (Japan)
Hitachi Microsystems,
Software engineering;
San Jose, CA
design and engineering
support
Detroit, MI
Electronic components
for automotive use
(1989)
San Francisco, CA;
Semiconductors (1989)
Boston, MA
Software and
workstation
development (1989)
Matsushita (Japan)
Microelectronic
Integrated circuits
Technology Corp.,
Palo Alto, CA;
Santa Barbara, CA
Speech acoustics
Burlington, NJ
Video broadcasting
Woodwide, IL
POS terminals;
computers (1987)
- 123 -
R&D Activities
Company
Location of Facility
in Electronics
Mitsubishi (Japan)
Horizon Research,
Computers
Boston, MA
NTT (Japan)
Photonic Integration
Optical integrated
Research
circuits (1987)
NEC (Japan)
NEC Information Systems,
Workstations
Boxboro, MA
NEC Home Electronics,
Laptop personal
San Jose, CA
computers
NEC Home Electronics,
Semiconductors
Natick, MA
(ASICS) (1987)
NEC Research Institute,
AI (1989)
Princeton, NJ
Ricoh (Japan)
American Software,
Software
San Jose, CA
Advanced Technology,
Office automation
West Caldwell, NJ
(1987)
San Jose, CA
Semiconductors
(1989)
Sharp (Japan)
Vancouver, WA
Semiconductors
(1988)
Sony (Japan)
Sony Technology
HDTV
Engineering Operations,
San Jose, CA
Sony America,
TV components
San Diego, CA
Sony Telecommunications
Telecommunications
Technology Center,
Paramus, NJ
TDK (Japan)
Components Engineering,
Microwave-related
Torrance, CA
components
Sources: Dataquest, Inc., The Structure of the Japanese Electronics,
Industry, Technomic Dodwell Consultants, Tokyo, Japan,
December 1988; and company annual reports.
Tim Miles
Office of Computers and
Business Equipment
- 124 -
Appendix D
SEMATECH
In 1987, a group of chief executive officers (CEOs) from
leading U.S. semiconductor production companies agreed that the
rapid erosion of the U.S. semiconductor industry's market was a
threat to the survivability of that industry and to the
long-term competitiveness of the U.S. electronics sector. That
group of CEOs, led by Charles Sporck of National Semiconductor,
also agreed that while unfair trading practices by leading
foreign producers had been a major cause for this market
erosion, high costs and duplication of research and development
efforts coupled with the U.S. industry's lack of focus on
improved semiconductor processing technologies, had also been
major contributors to the U.S. industry's decline. In order to
reverse that decline, the group decided to establish a center
that would concentrate on improving semiconductor manufacturing
processing and where companies could pool their R&D resources.
The center's existence would be made possible through joint
funding from companies participating in this effort and from
governments (federal, state, and local).
SEMATECH (Semiconductor Manufacturing Technology) is a publicly
sponsored consortium of 14 U.S. semiconductor producers aimed
at achieving global leadership in semiconductor manufacturing
technology by 1993. The consortium will develop advanced
manufacturing technology and transfer this technology to member
firms. It is barred by its charter from producing
semiconductors for sale. This consortium also has an adjunct
organization, SEMI/SEMATECH, which represents the U.S.
semiconductor manufacturing equipment and materials industries
and is a member of the SEMATECH board of directors.
SEMATECH's strategic objectives are fourfold: developing and
disseminating advanced manufacturing technology; strengthening
the supplier base; strengthening the technology base; and
supporting national security.
The consortium's long-term strategic plan focuses on
high-yield, factory-scale production of 64Mb DRAMs and
comparably complex integrated circuits in their own facility by
1993. The timeframe for this device has been estimated to be
12 months ahead of foreign competitors and three years in
advance of U.S. producers (without SEMATECH).
An integral facet of this plan will be to strengthen the
supplier base. As an initial step, it will provide a framework
and incentives for cooperation between U.S. semiconductor
producers and their suppliers in the equipment and materials
industry. This will be conducted through the auspices of
SEMI/SEMATECH.
To strengthen the technology base, SEMATECH will work through
the Semiconductor Research Corporation (SRC), a joint
- 125 -
government-industry-academia effort based in Research Triangle
Park, NC, to finance dedicated research at U.S. universities
and federal laboratories. This effort is expected to help
generate new technical knowledge and contribute to the nation's
electronics, science, and engineering expertise.
By achieving accelerated production of advanced devices,
strengthening the supplier base, and increasing the nation's
expertise in high technology, the consortium's goal of a
stronger commercial electronics sector should be realized.
Since semiconductor producers in the United States supply both
the merchant market and the defense establishment, a stronger
commercial sector will undoubtedly benefit the defense sector
as well as bolstering our national military preparedness.
The SEMATECH consortium is a joint industry-government funded
effort. The annual budget for this five-year activity is
estimated at $200 million, with the Department of Defense
contributing $100 million for the first two years and industry,
state, and local governments contributing the remaining
amounts. Future U.S. Government contributions will be
considered during legislative sessions, although it is tacitly
understood that government will continue to participate over
the life of the project. The Defense Advanced Research
Projects Agency (DARPA) has been charged with oversight
responsibilities, but the consortium retains independence in
the selection and management of the projects.
SEMATECH's ability to attain all its objectives remains to be
seen although it already has made significant progress towards
meeting many of the goals outlined in its strategic plans.
Construction of a state-of-the-art fabrication facility was
completed in less than half the time normally needed to build
such facilities and with credible cost savings. This
construction technology will be transfered to SEMATECH
members.
Several concerns still exist, however. These concerns include:
(1) The potential of premature technology transfer to
foreigners through normal international business
alliances in the semiconductor and equipment
industries;
(2) Ownership of intellectual property developed in
SEMATECH;
(3) The erosion of critical segments of the semiconductor
infrastructure (e.g., the materials industry) ;
(4) Future U.S. government involvement; and
- 126 -
(5) The extent to which SEMATECH's effort will help the
U.S. industry regain its competitive leadership in
semiconductor production as well as in the
semiconductor manufacturing equipment and materials
industries.
Peggy Haggerty
Office of Microelectronics
and Instrumentation
- 127 -
Appendix E
Digital Central Office Switches
Product Description and Overview
The central office switch is the core of any telecommunications
network and constitutes a critical portion of the
telecommunications equipment market. Telecommunications
service providers purchase central office switches to perform
the signaling, switching, and control functions essential to
operation. The central office switch completes connections and
routes information, in the form of voice, data, printed text,
or images, from one caller to another.
Digital switching systems are expected to be the dominant
switching technology through the 1990s. Digital switches offer
service providers the greatest variety of features at the
lowest operational cost. By continuing to upgrade their
digital switches through new system software developments,
service providers will be able to furnish users with additional
value-added services at attractive prices. Advancements in
digital switching technology are leading toward the evolution
of an integrated services digital network (ISDN), which would
allow users to transmit voice, data, and video over the
telecommunications network.
Where the sole function of the central office switch was
formerly to complete connections for verbal communications
between callers, today's digital central office switches are
expected to perform a much wider range of applications. In
addition to voice connections, today's switches are expected to
route data, printed text, and images. Besides telephone sets,
they now connect computers, facsimile, telex, and videotext
units to the telecommunications network, as well as security
alarm systems and automatic meter reading equipment. Digital
networks allow worldwide electronic funds transfer, access to
remote data bases, and customer-controlled network management.
As a result, the telecommunications network has become a vital
link in the operations of a broad spectrum of manufacturing and
service industries in the United States and throughout the
world. Telecommunications networks are also a vital element in
any nation's national defense, and most major central office
switch manufacturing companies develop products for sale to
defense agencies.
As the world's telecommunications networks evolve toward ISDN,
greater standardization of network architecture and equipment
design is emerging to ensure compatibility with other
networks. Digital central office switches tend to feature
multiprocessor, distributed functionality with modular hardware
and software. This design provides for more efficient growth
and change. As technology spawns improved features, or the
customer base is expanded, new components can be plugged in to
existing systems to provide upgraded service.
- 128 -
While digital central office switches constitute a key, but
only a small fraction of the U.S. economy, they represent a
significant portion of the telecommunications market. The U.S.
telecommunications equipment market was estimated at over $30
billion, of which digital central office switches constituted
$2.83 billion in 1987.
The Companies and the Marketplace
Central office switch manufacturing is an integral part of not
just the telecommunications sector, but the electronics
industry as a whole. Most of the world's major digital switch
manufacturers are engaged in manufacturing a wide range of
telecommunications hardware as well as a number of related
electronics products, including computer equipment and
microelectronic components. The activities of these companies,
both in terms of in-house operations and through alliances with
other companies, illustrate the convergence of the
telecommunications and computer industries and the integration
of the electronics industry as a whole.
The major digital central office (CO) switch manufacturers are
located in North America, Europe, and Japan. Although many
countries initially attempted to develop digital CO switches,
few succeeded. In the short history of digital central office
switches, there has already been a significant shakeout in the
industry, and this process is expected to continue. Industry
analysts generally agree that there is already a surplus of
world production capacity. Approximately 20 companies
currently produce digital switches, but that number should
shrink to about 12 over the next few years. Smaller companies
will merge, be absorbed by larger manufacturers, or cease
production.
The combination of high development costs and a relatively
inelastic market effectively limits the number of equipment
manufacturers able to compete profitably in the digital central
office switch arena. Many national networks are too small to
justify the investment required to develop a native product or
technology. Since existing manufacturers are well advanced in
product development and well entrenched in particular
geographic markets, new manufacturers find it extremely
difficult to break into the world market.
Nevertheless, certain newly industrialized and developing
countries--such as Brazil, India, and South Korea--are working
to develop an indigenous manufacturing capability. Government
policies in these nations strongly support these efforts. The
Korean Government has financed the development of a digital
office switch and has transferred this technology to four
domestic manufacturing concerns. While its production is not
yet significant when measured as a percentage of the world
market, Korea is already pursuing export sales and has
reportedly won a contract from the Philippines for delivery of
its digital switching system.
- 129 -
The Table 1 lists the world's larger digital office switch
manufacturers. Note that there have been numerous alliances,
mergers, and joint ventures in recent years.
Table 1
Manufacturers of Digital Central Office Switches - 1988
North America
AT&T (U.S.)
Northern Telecom (Canada & U.S.)
GTE (U.S. & Canada)
Stromberg-Carlson (U.S. based, owned by GPT,
U.K.)
Europe
Alcatel (France) Note: Includes ITT
APT (Netherlands) Note: Phillips & AT&T joint
venture.
CGCT (France) Note: Ericsson (Sweden) holds
20% interest.
Italtel (Italy)
Telettra (Italy)
GPT (U.K.) Note: Formerly GEC-Plessey
Siemens (Germany)
LM Ericsson (Sweden)
Nokia (Finland)
Japan
NEC
Fujitsu
Hitachi
OKI
Table 2 lists world market shares of major switch manufacturing
companies in 1987, recognizing alliances and joint ventures
between various manufacturers:
Table 2
WORLD MARKET SHARE OF DIGITAL CO SWITCH MANUFACTURERS - 1987
(based on lines shipped)
AT&T
19%
Northern Telecom
17
Alcatel-ITT
16
LM Ericsson
11
NEC
8
Siemens*
6
GPT
6
GTE
3
All others
14
* Siemens' total includes sales by former international plants
of GTE.
- 130 -
AT&T, in addition to its wide-ranging telecommunications
equipment line, is also a major manufacturer of semiconductors
(electronic components) and software, both for in-house use and
for sale outside the company. Since its divestiture in 1984
and the lifting of certain restrictions on its operations
outside the field of telecommunications, AT&T has made a major
commitment to becoming a world class competitor in the field of
information movement and management, including computer
applications.
Siemens of Germany is a significant manufacturer of both
telecommunications and computer equipment. Also, the company
produces a wide range of other electronic and electrical
capital goods, including electronic components, medical
engineering equipment, and power generating equipment.
Ericsson of Sweden is also an important manufacturer of
electronic components and power supplies in addition to being a
producer of a wide range of telecommunications products.
However, Ericsson sold its data systems and office equipment
divisions in 1988, abandoning its effort to establish itself in
the computer field in favor of strengthening its position in
the telecommunications sector. Ericsson still recognizes the
importance of linking computer and telecommunications
technology, but the company has decided to meet these
objectives through cooperative agreements rather than
internally. As an example, Ericsson has signed an agreement
with IBM to cooperate in finding ways to interface IBM systems
with Ericsson switches.
Telephone companies demand that digital central office switches
be adaptable to offer the value-added services that their
customers demand. Custom-tailored services provide telephone
companies with increased opportunities for generating service
revenues as well as helping to reduce costs, which in turn
reduce bypass incentives. As digital switches make these
services more widely available, business and residential user
expectations will increase, and user demands for information-
based services will expand.
Competitiveness in the digital central office switch industry
centers on the production of a switching system that meets the
demands of the world market in price as well as performance.
The complex nature of digital central office switch
manufacturing usually requires that certain production
processes, especially software development, take place in the
market in which the switch is to be installed. Purchases
require large capital investments and are expected to have a
long life span. Therefore, purchasers of central office
switches buy not just the switching system, but the supplies as
well. Purchasers expect suppliers to be responsive to their
needs. Customer support can often be the determining factor in
a carrier's decision to purchase switching equipment. Digital
switches are expected to last for 20 years. When analyzing
bids, procurement officers perform in-depth analyses of the
- 131 -
long-term viability of suppliers. Carriers expect customer
support services to extend over the life of the equipment.
This is a critical factor with digital systems because future
software development is the key to improved performance and the
development of enhanced features.
Switch purchasers are also concerned about reliability,
maintenance, and repairs. They prefer regional service centers
with adequate qualified technicians to provide immediate
support and assistance. Delays weaken service to the system
user, reducing revenues and eroding the customer base.
Traditional Industry Structure
Historically, most industrialized countries were able to
support an indigenous central office switch manufacturer.
Usually, the central office switch manufacturer was closely
linked to a monopolistic telecommunications service provider
(i.e., the telephone company). There were, and still are,
significant differences in this relationship in North America
versus Europe and Japan, which are explained below. However,
in most cases, a close working relationship between the service
provider and equipment manufacturer meant that the service
provider was assured that the equipment manufacturer would be
responsive to the service provider's needs and the equipment
manufacturer was guaranteed a market for its product. The
service provider was not concerned if equipment from
competitive suppliers was offered at a lower price, because the
service provider was reasonably able to pass its equipment
costs on to ratepayers.
In North America, where telecommunications service providers
are usually private companies, the large equipment
manufacturers tended to be vertically integrated with a service
provider. For example, AT&T owned Western Electric, Bell
Canada owned Northern Telecom, and GTE owned the GTE operating
companies. In such relationships, there was a strong economic
incentive for the service provider to purchase central office
switches from the related manufacturer rather than from another
manufacturer with which there was no corporate affiliation.
Prior to divestiture, AT&T established de facto standards for
telecommunications equipment in the United States based upon
its own needs and interests. Other U.S. manufacturers produced
switches with the AT&T system standards in mind in order to
assure equipment compatibility with the dominant Bell System.
In Europe and Japan, telecommunications service providers were
traditionally government monopolies, commonly called PTTs
(Post, Telephone and Telegraph administrations), which, as a
matter of public policy, purchased their equipment from a
limited number (one to four) of favored domestic
manufacturers. Government procurement through the PTT was
utilized as a tool to promote the development of the domestic
telecommunications industry and, by association, the domestic
electronics industry. In Japan, Nippon Telephone and Telegraph
- 132 -
encouraged competition among Japanese suppliers, but rarely
purchased switches from foreign suppliers. In Germany, the PTT
favored Siemens and other German manufacturers over foreign
equipment suppliers. Standards in these countries were usually
developed by the PTTs in cooperation with domestic equipment
manufacturers. While national standards nominally conformed to
international standards, individual nations usually varied
their standards sufficiently to deny market access to foreign
manufacturers.
Certain market forces in addition to the economics of vertical
integration supported the favoring of domestic switch
manufacturers by telephone service providers. Location
in-country enables the switch manufacturer to be more readily
available to deal with product difficulties and make repairs.
Domestic manufacturers are usually familiar with their national
market and are better able to accommodate the needs of the
buyer. They also understand fully national standards and can
design their equipment from scratch to meet those standards.
When a switch manufacturer sells its product abroad, it must
usually modify equipment designed for its home market to meet
foreign standards. This often results in a more costly and
less capable switch compared to those designed from the outset
to meet the standards of the market in which it is being
installed.
Political reasons also favored this traditional market
structure. Telephone networks were recognized as critical to
national defense, industrial growth, and innovation, and most
governments very carefully fostered the development of a
domestic telecommunications industry. Those countries that
were too small to develop their own technology often licensed
technology from foreign companies for domestic manufacture.
Governments protected domestic manufacturers from imports that
might erode the domestic manufacturers' market share and
threaten the domestic industry. A wide variety of formal and
informal barriers to market entry, such as high tariffs,
national standards, buy national policies, and cultural
preferences, evolved to ensure the dominant position of the
domestic equipment manufacturer. Governments generally
accepted the proposal that the telecommunications industry
should be exempt from most free trade agreements. An excellent
example of this is the refusal of European governments to
subject their PTTs to the strictures of the GATT Government
Procurement Code.
This lack of competition often resulted in the service provider
paying more for central office switches than if procured
competitively. These higher costs were ultimately passed on to
ratepayers. Government regulatory agencies usually recognized
and accepted the fact that ratepayers were effectively
subsidizing their domestic telecommunications industries, but
considered it preferable to the alternative of not having a
domestic industry. In cases where home markets were too small
to justify a domestic telecommunications industry, ratepayers
- 133 -
had to subsidize even greater inefficiencies in product
development and manufacturing costs.
Forces for Change
There are several problems inherent in the traditional,
noncompetitive market structure. Since manufacturers are
effectively guaranteed a market for their products, few
incentives exist for product innovation or improvements in
productivity. While AT&T, through its subsidiary Bell
Laboratories, was (and is) a major force for innovation in the
telecommunications and electronics industries, critics argued
that new products were introduced into the AT&T system more
slowly than they would have been in a competitive
environment. Sheltered markets limit the equipment choice
available to telecommications service providers, resulting in
higher consumer prices and deprivation of new products and
services. In some European countries, users, led by the
business community, are now demanding access to services
available elsewhere at competitive rates.
The development, manufacture, and installation of digital
central office switches is an enormously expensive
undertaking. Researching and developing a digital central
office switching system costs between $0.5 billion and $1.5
billion. Additional costs involve updating the hardware and,
especially, the software of digital switching systems.
Software, by various estimates, currently accounts for between
30 and 50 percent of the cost of digital switches and could
rise between 75 and 80 percent by the 1990s. By comparison,
software amounted to only 20 percent of the cost of older
electronic switches. Most manufacturers work continuously to
improve their product and periodically update software packages
to improve operating efficiencies and provide new features.
But the rising development costs of digital switching systems
require that manufacturers attain higher sales volumes to
recoup higher R&D expenses. Under the traditional market
structure, only advanced industrial economies with large,
comprehensive and well-developed networks have the resources
necessary to foster central office switch manufacturing
capabilities. Higher R&D costs reinforce efforts to maintain
protected home markets and increase competition for third-
country markets while new technologies create conflicting
pressures.
The advent of new technology, typified by the digital central
office switch, and the availability of new services have tended
to promote competition and liberalize restrictive
telecommunications environments. The traditional relationship
between monopoly service provider and favored domestic supplier
is increasingly subject to competitive pressure. In most, if
not all instances, user demands for a wider variety of services
at less cost have been most effective in bringing about change.
- 134 -
The U.S. Model
The most important development contributing to worldwide
telecommunications liberalization occurred in the United
States, which accounts for 30-40 percent of the Free World's
market for telecommunications equipment and services. The
divestiture of AT&T in settlement of an antitrust suit brought
against the company by the Justice Department resulted in the
creation of seven Regional Bell Operating Companies (RBOCs).
Each of these newly created, independent telephone companies
was responsible for operating a telecommunications network
which was comparable in size to the network of any of a number
of European countries. Under the terms of the divestiture
agreement, the RBOCs were prohibited from manufacturing
telecommunications equipment and were legally required to
develop competitive procurement procedures. They were
specifically prohibited from favoring their former parent,
AT&T, as a source of supply.
The AT&T divestiture and the attendant U.S. telecommunications
industry restructuring, coupled with deregulation that had
begun in 1968, effectively resulted in the unilateral opening
of the U.S. telecommunications equipment market to
international competition. Faced as they were with the terms
of the AT&T Consent Decree and the Modified Final Judgement,
the RBOCs were forced to look for new sources of supply for
equipment. The RBOCs have encouraged competition in the
central office switch market because it increases their
leverage in negotiating with equipment suppliers to obtain
better equipment at lower prices. Foreign manufacturers of
digital central office switching equipment, recognizing the
opportunities and economies of scale inherent in the U.S.
market, have wasted no time in courting the RBOCs.
Northern Telecom, a Canadian equipment manufacturer, had a head
start on other foreign manufacturers because its equipment was
originally designed and built to North American standards and
its digital switching apparatus had been approved by the former
Bell System in January 1980. Northern Telecom had also made a
firm corporate commitment to digital switching technology and
aggressively marketed this technology to prospective customers
in the United States. As a result, Northern Telecom surpassed
even AT&T in U.S. sales of digital switching equipment in the
period immediately following divestiture. At one stage,
Northern Telecom reportedly held a 70 percent share of the U.S.
digital central office switch market, based on number of lines
shipped.
Other foreign switch manufacturers, notably Ericsson of Sweden,
Siemens of Germany, Alcatel of France, and Nippon Electric
Corporation (NEC) and Fujitsu of Japan, recognizing the
importance of gaining a foothold in the major markets
represented by the RBOCs, are working to develop the hardware
and software sought by the RBOCs and have achieved some success
in making sales to these companies.
- 135 -
Tables 3-5 illustrate the shifting market shares, based on
lines shipped, of central office switch manufacturers competing
in the U.S. market and the increasing inroads being made by
foreign manufacturers:
Table 3
1979 U.S. Central Office Switch Market Share
(Digital & Analog)
Company
Share
AT&T
82%
GTE
8
Stromberg-Carlson
3
Northern Telecom
3
ITT
2
TRW/Vidar
1
NEC
<1
Table 4
1984 U.S. Central Switch Office Market Share
(Digital & Analog)
Company
Share
AT&T
47%
Northern Telecom
28
GTE
22
Stromberg-Carlson
2
ITT
1
NEC
<1
Table 5
1987 U.S. Central Office Switch Market Share
(Digital)
Company
Share
AT&T
47%
Northern Telecom
39
GTE
7
Stromberg-Carlson
2
Alcatel
2
NEC
1
Ericsson
<1
Siemens
<1
Note: Sums may not equal 100 due to rounding errors.
Europe and Japan
The divestiture of AT&T in the United States increased pressure
on other developed countries to liberalize their
telecommunications environments. U.S. equipment manufacturers,
faced with the loss of market share in the United States to
foreign manufacturers, complained that they were being denied
- 136 -
access to foreign markets. U.S. Government officials, in
response to these complaints and recognizing a turnabout in the
U.S. telecommunications equipment balance of trade from a
surplus to a steadily increasing deficit, began seeking to
eliminate foreign barriers to trade in telecommunications
equipment. In the Congress, Senator Danforth was the principal
sponsor of telecommunications trade legislation while the
administration engaged in telecommunications MOSS
(market-oriented sector specific) talks with Japan and MAFF
(market access fact finding) discussions with a number of
countries in Europe and Korea. At the same time, the
convergence of telecommunications and computer technologies and
an expanding array of information-based industries resulted in
more strident demands from users (primarily business users) in
foreign countries for access to new equipment and services at
reasonable rates.
The result of these pressures has been a gradual movement
toward the easing of monopolies and a shift towards increased
competition in the provision of telecommunications equipment
and services in a number of countries throughout the world.
Nevertheless, most European countries still maintain
significant barriers to prevent penetration by foreign
manufacturers of central office switches.
While user demands and the rise of alternative service
providers present the European PTTs with greater economic
incentives to purchase equipment competitively, nationalistic
policies still constitute a major hurdle to a more open and
competitive market. European countries have recognized the
technological importance of developing digital central office
switches and their governments have placed great emphasis on
maintaining the strength of their respective telecommunications
equipment industries, often at heavy cost. A European Economic
Commission-Information Technology Task Force conducted a study
of the expenses incurred in developing digital switching
systems and determined that while Japan had spent about $1.6
billion to develop this technology and the United States had
spent about $2.5 billion, EC member states had spent more than
$7 billion competing against each other in developing this
technology. The report concluded that the lack of cooperation
between member states had resulted in a wasteful duplication of
scarce technical expertise and financial resources while
contributing to delays in development of common standards and a
compatible telecommunications infrastructure. Other studies
have shown that the European PTTs pay 60 to 100 percent more
for comparable equipment than telephone companies in the United
States do. Ultimately, it is the ratepayer who must bear these
costs in the form of higher use rates.
While European governments have long provided financial support
to finance telecommunications research and development, they
have only belatedly recognized the importance of cooperation in
developing digital central office switch technology. The
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creation of the Information Technologies and Telecommunications
Task Force within the EC Commission in 1983 has led to the
creation of two programs to promote cooperation in this area:
The European Strategic Program for Research in Information
Technology (ESPRIT) was founded in 1984, followed by
Research-development in Advanced Communications-technologies
for Europe (RACE) in 1985.
The benefits expected from this collaboration are a reduction
of research costs, an improvement in overall performance, a
contribution to the definition of European or international
standards, and a reduction of component costs through
standardization. European manufacturers believe these types of
initiatives are necessary to maintain their positions in the
new competitive market environment. Through such agreements
they can expect to expand their potential markets and share the
load of the extremely high development costs of the new
generation digital voice/data and ISDN products.
The EC Commission is working to harmonize standards and network
technologies within the EC with the objective of eliminating
barriers to trade in equipment and services between member
countries. Ultimately, the EC hopes to achieve a unified
internal market by 1992. However, such an objective implies
that less efficient manufacturers will surrender market share
to competitors from other nations, and it remains to be seen
whether nationalistic pride will intervene at some point to
prevent this from occurring.
While a unified EC market would offer improved economies of
scale to U.S. manufacturers hoping to sell in Europe, it could
also present a serious obstacle to entry by manufacturers
located outside the EC. AT&T has entered into a joint venture
with the Dutch manufacturer, Phillips, in an effort to crack
the European market, but this alliance has achieved very little
in sales outside of the Netherlands.
The Government of Japan has long recognized the benefits of
cooperation and planning. The Ministry of International Trade
and Industry (MITI) was established after World War II with the
authority to plan fundamental policies for production,
distribution, consumption, and foreign trading of commodities.
In recent years, MITI has relied on "administrative guidance"
in implementing policy, a process that consists of a government
ministry giving suggestions or advice to private business or
jurisdiction. public organizations over which the ministry has regulatory
Japan's telecommunications equipment market is dominated by
Nippon Telegraph and Telephone (NTT), a government entity prior
to its privatization in 1985, which utilized several aspects of
Japanese Government procurement practices to restrict imports
into Japan. NTT manufactures none of its own equipment, but
instead relies on outside equipment manufacturers. NTT
traditionally followed a "Buy Japan" procurement policy,
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developing close relationships with four major Japanese firms
which became known as the "family" - NEC, Fujitsu, Oki, and
Hitachi. NTT's research and development programs have involved
joint R&D of the products purchased by NTT with the members of
the manufacturing "family." Thus, R&D and procurement were a
closed loop, denying access to foreign manufacturers.
Japan's accession to the Government Procurement Code and the
inclusion of NTT under code procedures improved access of
foreign manufacturers to NTT procurement. However, actual
equipment sales by foreign manufacturers to Japan remain at low
levels.
Third-Country Markets
In order to be price competitive, a switch manufacturer must be
able to distribute the high research and development costs of
digital switch technology over a large sales volume. Producers
in small countries where the telecommunications network does
not afford this scale minimum must look to foreign markets.
Historically, this meant developing or underdeveloped
countries, since most industrialized countries had a domestic
switch manufacturing industry, generally were protected by a
variety of trade barriers. A protected home market gave the
equipment manufacturer a secure base from which to launch
export sales, often with negligible profit margins or even at a
loss.
As a result, strong competition has developed among major firms
to establish themselves in third-world markets. Most switch
manufacturers receive some form of government support for their
export efforts. In most instances, U.S. companies are at a
disadvantage in this regard compared to producers in other
countries.
Many foreign governments provide attractive financing packages
to support the sales of their domestic manufacturers to
third-country markets. For example, the Governments of France
and Japan reportedly offer equipment financing at interest
rates as low as 3.5 percent, over a 30 year term with a 10 year
grace period. A typical U.S. Eximbank financing package offers
interest rates at 8-9 percent over a 10-year term with a
6-month grace period.
Switch manufacturers will often sell equipment below cost in
order to establish a presence in a foreign market. Once
committed to a particular switching system, the service
provider finds it difficult and expensive to change suppliers.
In some cases, the switch manufacturer can finance sales below
cost in foreign markets by selling equipment at inflated prices
in its protected home markets. As an example, competitors
claim that the German manufacturer, Siemens, is selling its
digital switches in China at prices as low as $100 per line.
China has placed great emphasis on expanding and modernizing
its severely underdeveloped telecommunications network and
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represents a huge potential market for central office
switches. Many equipment manufacturers are competing furiously
to establish themselves in the Chinese market. In the United
States, which is a more competitive market, Siemens reportedly
sells its switching equipment at about $200 per line, which
experts estimate is a fair market price. In Germany, where
Siemens enjoys a protected market, Siemens reportedly sells its
switches at prices equivalent to about $400 per line.
Northern Telecom of Canada also enjoys a protected home market
which competitors claim it uses to advantage in achieving
export sales. Under the terms of its preferred supplier
relationship with Bell Canada, the operating company with which
it is corporately related, Northern is obliged to sell
equipment to Bell Canada at prices that are as low or lower
than the prices it charges to any other companies in Canada.
However, Canadian regulatory agencies have specifically
exempted export sales from this comparison, thus allowing
Northern Telecom to sell its products in foreign markets at
prices lower than it charges in its home markets. Competitors
allege that Northern Telecom is thus subsidizing export sales
by charging higher prices for its equipment in Canada.
Switch manufacturers whose domestic markets have never been
large enough to support an indigenous manufacturer have more
experience in pursuing export sales. Ericsson of Sweden is an
example of a company that has historically depended on its
foreign marketing efforts to sustain it because sales in its
home market could not sustain its operations. The Swedish
Government recognized this situation and supported Ericsson in
its overseas efforts, thus helping Ericsson to achieve a
significant international presence in the telecommunications
equipment industry.
In the United States, AT&T was banned from selling equipment in
export markets from 1924, at which time its foreign operations
were sold to form the basis of ITT, until its divestiture in
1984. AT&T is therefore a relative newcomer to the exporting
game and has been forced to play catch-up with more entrenched
and experienced international competitors.
Cooperation and Competition
Telecommunications has become a global industry, and national
telecommunications networks are no longer guaranteed the luxury
of existing as insular entities. Fueled by the increasing
growth of multinational firms and their attendant desires for
improved voice and data communications technology, there has
been a general trend, noted earlier, toward an integration of
telecommunications and computer technologies. In many
instances, firms are relying on acquisitions, mergers or
cooperative agreements rather than internal development to
achieve this integration.
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In the case of digital central office switches, recent
alliances include joint ventures between AT&T (U.S.) and
Philips (Netherlands) Siemens (Germany) and GTE (U.S.) Alcatel
(France) and ITT (U.S.) CGCT (France) and Ericsson (Sweden) and
GTE (U.S.) and AT&T (U.S.).
The reasons for these partnerships vary depending on the
individual countries involved and the markets in which the
companies operate. Firms may cooperate in standards
development, product research and development, licensing of
technology, or manufacturing. In many cases, it is impossible
for a foreign manufacturer to enter a particular market except
through a joint venture with a domestic firm. In other
instances, joint ventures allow partners their only access to
new technologies. Cooperation generally allows partners to
combine market shares and reduce production costs by better
exploiting economies of scale. In the case of GTE and ITT, the
companies wanted to withdraw from the international
telecommunications business because of the high R&D costs of
remaining competitive in the world market.
The AT&T-GTE agreement is interesting in several respects. It
is somewhat unusual in that it is between two U.S. vertically
integrated companies that have traditionally insisted on
developing their own switching systems for internal use. GTE
is by far the smaller of the two companies and had already sold
its international equipment business to Siemens of Germany.
Because of its fairly limited market share in the United
States, it was questionable whether the company could afford to
continue to compete in the digital central office switch
business, and several foreign manufacturers were positioning
themselves to supply CO switching equipment to the GTE
operating companies. The joint venture arrangement with AT&T
could allow GTE to maintain a share of the U.S. market while
helping AT&T to regain some of the market share that it lost as
a result of divestiture. The agreement would also appear to
stiffen competition against foreign manufacturers in the U.S.
market.
While cooperation between switch manufacturers offers the
financial benefits of shared R&D costs and standardization,
competition is the driving force of technological development.
Even as cooperation between manufacturers has concentrated
capacity in fewer companies, competition between these
companies for market share has increased. The advent of
digital technology has spawned a variety of value-added
services, and more companies have moved into this field to
challenge the traditional monopoly service provider. Faced
with this new competition in providing the additional services
that users demand, traditional service providers come under
pressure to meet customer needs while maintaining competitive
rates. Competitive equipment procurement is one means by which
the service provider can lower costs and keep charges down.
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At the same time, digital technology gives service providers
more flexibility in operating different switching systems in
the same network. This also increases the potential for
competition in equipment procurement, opening any single
network to multiple switch sources. In the United States, the
RBOCs have for several years utilized both AT&T and Northern
Telecom digital central office equipment within their
networks. In recent years, they have encouraged additional
suppliers, such as Siemens and Ericsson, to adapt their
switches to the U.S. market and thus provide additional
competition to AT&T and Northern Telecom. The RBOCs report
that this has reduced further the per-line procurement cost of
central office switches.
Summary and Conclusions
The manufacture of digital central office switches is an
expensive and complex industry that relies heavily on other
segments of the electronics industry such as software,
high-capacity semiconductors, and microprocessors. Other
industries, such as manufacturing, banking, and travel, have
become increasingly dependent on the services provided by the
telecommunications industry to operate economically and
competitively.
The increased cost of developing digital central office
switching equipment has intensified the battle for market share
among the world's equipment manufacturers. The structure of
the industry has changed dramatically as a result of
acquisitions and joint venturing between some manufacturers and
the disappearance of others from the market. While industry
restructuring has resulted in a reduction in the number of
companies producing digital central office equipment, it has
increased the competition between the remaining companies.
Joint ventures and movements by manufacturers into new markets
has in some instances resulted in a blurring of national
identification of producers. Northern Telecom has been so
successful in the U.S. market that it is often assumed to be a
U.S. company. It has established a significant manufacturing
presence in the United States and its U.S. sales exceed its
sales in its home market of Canada.
Central office switch manufacturers are heavily dependent on
government policy both in their home markets and abroad.
Government policies can help to preserve domestic market share
for domestic manufacturers or promote international competition
in the domestic market. Government policies can also assist
domestic manufacturers in gaining access to foreign markets.
Deregulation and the divestiture of AT&T opened the U.S. market
to international competition while freeing AT&T to compete
abroad. However, while market access barriers in the United
States were eliminated, there was no corresponding opening in
foreign countries. Additionally, the terms of the Modified
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Final Judgement--requiring the RBOCs to develop competitive
procurement policies that did not favor AT&T--effectively
stripped AT&T of a significant share of the U.S. market.
Northern Telecom has been the principal beneficiary of this
policy, increasing its share of the U.S. central office switch
market from less than 3 percent in 1979 to over 30 percent in
1986. The other principal U.S. central office switch
manufacturers, GTE and Stromberg-Carlson, did not capitalize
appreciably on the AT&T divestiture, either domestically or in
international markets. In fact, Stromberg-Carlson was acquired
by the U.K. firm Plessey, while GTE sold 80 percent of its
international telephone-transmission business to Siemens of
Germany (now expected to purchase the remaining 20 percent in
the near future).
The other major foreign switch manufacturers continue to jockey
for position in the U.S. market. Ericsson, Siemens, Alcatel,
NEC, and Fujitsu have all established "beachheads" and are
expected to steadily increase their share of the U.S. market,
while still enjoying protection from foreign competition at
home.
In the race for third-country sales, AT&T has routinely lost to
these same foreign manufacturers, whose governments offer
attractive concessionary financing packages, which AT&T and the
U.S. Government have been unable or unwilling to match.
The U.S. Government has recognized the inequities in market
access between the United States and most of the rest of the
world and has actively negotiated to open foreign markets to
competition. U.S. Government pressure has achieved some
success, but principally in the area of customer premises
equipment, not with such network equipment as central office
switches. Also, while many of these agreements have looked
good on paper, few concrete results (i.e., increased U.S.
exports) have materialized.
Increased competition in the central office switch market in
the United States has presented users with a greater variety of
services and lower costs. But deregulation of the U.S. market
without reciprocal access abroad will have detrimental
long-term effects on U.S. manufacturers of central office
switches.
John Henry
Office of Telecommunications
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Appendix F
History of U.S. Government Involvement in Research and
Development
The level of U.S. Government support for R&D has varied over
the last four decades. Prior to World War II, the U.S.
Government funded 15-20 percent of the national R&D effort.
During the war, it supported an increasing portion of the
nation's R&D for military applications, with the majority going
to industrial and university laboratories. After the war, the
U.S. Government funded about half of the nation's R&D, which
increased to almost two-thirds of total R&D by 1960. From the
late 1960s onward, federal support of R&D dropped off until the
mid-1970s when its support began to steadily increase once
again.
U.S. Government Support of Electronics R&D
The beginnings of the U.S. electronics sector can be traced to
the research and development of various analytical machines for
military and intelligence uses during the Second World War.
Between 1949 and 1959, the U.S. Government supported almost 60
percent of computer R&D, with companies funding 20-25 percent.
The Department of Defense (DOD) was the key U.S. Government
agency in this effort during this period. Industry leaders
such as National Cash Register (NCR), Remington Rand, and IBM
were the principal performers of the R&D. *
Academic institutions were also important R&D performers. For
example, the University of Pennsylvania's Moore School of
Engineering built the first large-scale electronic digital
computer under Army contract, which ultimately led to the
Univac 1, the first computer for the commercial market. The
Massachusetts Institute of Technology worked with IBM, Bell
Telephone Laboratories, and Burroughs to produce the Air
Force's SAGE air defense system and also made important
advances in computer graphics, timesharing, and digital
communications.
Successful developments in high performance computers during
the 1950s influenced computer design well into the 1960s.
Solid state computers, built in the mid-1950s, benefited from
government-funded R&D on advanced electronic components.
* U.S. Government R&D effort is characterized by intramural
and extramural performers. Intramural performers are the
agencies of the federal government whose work is carried out
directly by agency personnel. The extramural performers
include all organizations outside the federal sector that
perform with federal funds under contract or grant. The
main extramural performers include industrial firms,
universities and colleges, other nonprofit institutions,
federally funded research and development centers, state and
local governments, foreign performers, and private
individuals. Most federally funded R&D is performed by
extramural performers.
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National Aeronautics and Space Administration
Research for the space program of the National Aeronautics and
Space Administration (NASA) influenced the development of the
electronics industry during the 1960s. Much of the space
program's research was applicable to the development of
software and programming. Since most of NASA's hardware
efforts focused on redundant fault-tolerant computers, later
computer systems incorporated these concepts and techniques in
the design of non-stop transaction processing and processors
used in systems that needed to be highly reliable. The STAR
(self-test and repair) computer established the leading edge
for fault tolerant techniques in the 1960s. By the end of the
1960s, the space program had peaked and most NASA-funded
research in computers came to a halt.
National Institutes of Health (NIH)
By 1965, the U.S. Government-funded share of industrial R&D
declined to approximately a third of total spending and
continued to fall for the rest of the decade. Support of
artificial intelligence by the National Institute of Health
(NIH) during this period led to the construction of the DENDRAL
system, the first successful application of artificial
intelligence and probably the first system to enter the
commercial market. Major spin-offs resulting from DENDRAL
included the SUMEX experimental computer, the MYCIN, CASNET,
PUFF, and INTERNIST expert systems.
Department of Energy
The Department of Energy (DOE) has been an important funder of
electronics R&D. For example, the agency's requirement for
connecting incompatible computer systems from various
manufacturers led to the development of the first local area
network (LAN).
As a result of DOE funding, Control Data Corporation produced a
supercomputer that dominated supercomputing throughout the
1960s. By 1976, private industry commercialized supercomputer
technology with the development of the CRAY-1 by Cray
Research. In addition, DOE laboratories aided Cray in
developing its timesharing operating system and some of the
applications software for the CRAY-1.
Department of Commerce
The National Institute of Standards and Technology (NIST),
formerly the National Bureau of Standards (NBS), within the
U.S. Department of Commerce has been involved in the U.S.
electronics sector since the 1920s, when it developed new
measurement methods and instruments to support radio
technology. Over the past few decades, the NIST programs have
evolved rapidly to keep pace with advances in electronics.
Work on integrated circuit line width measurement, wire bonding
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integrity, and semiconductor materials characterization at NIST
helped the U.S. semiconductor industry to move into the
large-scale integration era, significantly increasing
productivity and quality control within that industry.
Defense Advanced Research Projects Agency
In 1958, the Department of Defense created the Defense Advanced
Research Projects Agency (DARPA) to foster and manage advanced
research programs for military applications. An early focus on
space science and technology broadened to encompass strategic
and tactical weapons development, nuclear test verification
technology. techniques, basic sciences research, and information processing
Due to DARPA funding in the early 1960s, advances were made
in timesharing systems and computer graphics, and the field
of artificial intelligence came into existence. By the
mid-to-late 1960s, DARPA funding supported the development of a
complex, secure operating system, called MULTICS. Other DARPA
projects like SOLOMON advanced computer architecture by linking
multiple processors together to execute simultaneously small
parts of a single large program. SOLOMON led to the
development of the ILLIAC IV, the first parallel-processing
supercomputer.
From the timesharing research conducted, computer aided design
(CAD) and computer network technology advanced. CAD techniques
such as STRUDL, CIRCAL, MACSYMA, and SCHEME were descendants of
the MULTICS program. Computer network advances appeared in the
early 1970s. Although military support of R&D declined
dramatically thoughout the 1970s, important advances in
electronics were achieved. Advances in parallel processing
pioneered the use of high-performance emitter coupled logic
(ECL) chips, constructed circuitry design for CAD techniques,
and developed technology for printed circuit board (PCB)
fabrication.
DOD's R&D funding in the late 1970s and 1980s was directed
toward the development of very high-speed integrated
circuits--the so-called VHSIC program. This effort began at
the Office of the Secretary of Defense (OSD) but was
transferred to DARPA in 1988. Another DOD research effort, the
Monolithic Microwave Integrated Circuit (MIMIC) program, was
devoted to gallium-arsenide (GaAs) -based chips in place of
silicon. After the initial R&D phase produced prototypes, DOD
instituted a program to speed the introduction of these
circuits into weapons systems.
Through the Strategic Computing Initiative, DOD has funded R&D
in innovative parallel architecture for symbolic computing
applications, artificial intelligence, and advanced
microelectronics. Its Strategic Defense Initiative emphasizes
research in parallel architecture and optical computers.
Maria de la Guardia
Office of Computers and Business Equipment
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Appendix G
Directives for EC 92
The EC 1992 program has raised concern within the U.S.
electronics sector about issues as divergent as the rules
of origin of semiconductors to the safety and health
requirements for visual display terminals to EC medical
and telecommunications equipment standards.
1. Rules of Origin of Integrated Circuits
Since 1968, the EC rule of origin has become increasingly
product specific. The EC claims that stricter interpretations
have been needed to keep pace with technological developments
and evolving trade patterns. Recently, as a result of certain
countries' circumvention of antidumping provisions related to
electronic products, the requirements for confirming EC origin
have been tightened for integrated circuits (IC's).
Such new requirements necessitate complete fabrication to be
carried out in the EC, where as previously assembly and testing
were sufficient to confer EC origin. By making market access
to the EC conditional on local production, such measures
encourage direct investment to be substituted for imports,
thereby challenging established trade patterns. Since the
announcement of the new directive, Japan is the leading
investor in EC fabrication facilities, changing the competitive
situation of a market traditionally dominated by the United
States.
The indirect affect of the reinterpretation of the EC rule of
origin is of more immediate significance to the U.S.
electronics sector. Being that the United States implements a
similar rule of origin for IC's, the main issue of contention
is not over the EC rule of origin by definition, but in the
context of regulating dumping, there is vaguely defined
interplay among product-specific rules of origin in
"downstream" application. Some U.S. semiconductor suppliers
claim that the use of the anti-circumvention provision in the
IC ruling, combined with use of the rule of origin for TV
receivers as a guide to determining the origin for printed
circuit boards, has resulted in the replacement of U.S.
components in photocopiers by European suppliers.
Some Japanese firms have interpreted the rule of origin under
the dumping provisions to stipulate the increase of EC content,
at the expense of U.S. content. Thus, even though U.S.
semiconductor suppliers were not under allegations for dumping,
their components were "designed-out," because of the lack of
transparency in the application of the EC rule of origin.
Judee Mussehl
Office of Microelectronics
and Instrumentation
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2. Health and Safety Requirements for Visual Display Units
An EC directive on the health and safety requirements for
visual display units (VDU) has been proposed by the European
Community Commission. It is part of a health and safety action
program with primary support from European socialists and labor
to achieve a more uniform "social work environment" for workers
among the European countries.
Although the EC prepared the original draft directive in March
1988, which included minimum equipment and physical environment
standards, vision programs, training, and time limits on work,
it has yet to be adopted by the European Parliament. In
December 1988, the European Parliament voted through a series
of substantial amendments to the original directive that came
as a surprise to the EC Commission and to industry as well.
The amendments would add stronger codetermination rights,
training, specific radiation standards, significant time limits
(four hours) on VDU work, mandatory alternate work for pregnant
women, and many controversial minimum equipment standards.
Given the progress being made on international VDU standards,
U.S. industry, European employers, member states United Kingdom
and Ireland, and standards groups have voiced varying degrees
of concern and even opposition to the VDU directive. The major
point of contention is over the need for such a directive,
given the lack of evidence from both European and international
scientific organizations that VDUs and VDU work constitute a
priority health and safety risk for workers.
The directive would result in new, perhaps unreasonable,
requirements for VDU workstation equipment beyond those
generally recognized in the United States or being considered
for international standards. The additional investments that
would be required in implementing VDU requirements would divert
funds that might otherwise have been spent on R&D for VDU and
related equipment. The VDU directive might well discourage or
slow down overall acceptance of computer technology in the work
place based not only on cost but also on unproven fears for the
safety of working with this equipment--a result which would
have repercussions in the United States as well.
Maria de la Guardia
Office of Computers and
Business Equipment
3. Principal EC Measures for Telecommunications Sector
The Green Paper
In June 1987, EC Commission published the "EC Green Paper on
the Development of the Common Market for Telecommunications
Services and Equipment." The Green Paper establishes as the
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"overriding aim" of the EC Commission the development of market
conditions that provide "users with a greater variety of
telecommunications services, of better quality and at lower
cost." It then lists a series of proposals designed to increase
competition in the EC market for telecommunications services
and equipment. For example, it states that the regulatory and
operational functions of "Telecommunications Administrations"
(common carriers) must be separated, and it recommends that all
telecommunications services except for voice telephony be
opened to competition.
The U.S. Government presented the EC Commission with its
official response to the EC Green Paper in the form of a
15-page paper delivered to the EC Commission in December 1987.
The United States welcomed the overriding aim of the Green
Paper, which is similar to the policy objectives underlying its
own liberalization. However, the United States also noted that
the U.S. experience with liberalization leads it to conclude
that the objectives enumerated in the Green Paper can best be
achieved in a market that emphasizes competition from all
sources, both intra- and extra-European. The EC Commission
responded that "the European approach is being decided with
due respect to the internal European context, and Community
markets for telecommunications equipment will be progressively
opened to international competition." However, the EC
cautioned that "the pace and conditions of this change should,
in our view, take account of the international context,
including the Uruguay Round and genuine improvements in the
conditions of access to markets of export interest to the
Community."
Principal Telecommunications Measures Adopted by the EC
a. Community Resolution on Common Market for Telecommunications
Services and Equipment by 1992: The EC Council of
Telecommunications Ministers approved this resolution on June
30, 1988, outlining the 11 major goals of EC telecommunications
policy. In addition, this resolution constitutes the EC
Council's approval of the action program announced on February
9, 1988, to implement the EC Commission's Green Paper of 1987.
b. Pan European Digital Cellular Network: The EC Council of
Ministers recommended in 1987 the coordinated introduction of
public pan-European digital cellular communications by 1991.
In addition, a directive reserves specific radio frequency
bands for this pan-European system. Eighteen European
countries have already signed a memorandum of understanding
(MOU) to implement this system, for which 11 countries have
already started procuring equipment.
C. Directive on the Initial Stage of the Mutual Recognition of
Type Approval for Telecommunications Terminal Equipment:
Approved in 1986, this directive establishes agreement to seek
common standards (NETs) for terminal equipment (customer
premises equipment) and to recognize other European countries'
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laboratory tests concerning whether a certain type of equipment
conforms with those standards. The directive implements an
MOU between the EC and the Council of European Post and
Telecommunications Organizations (CEPT), which includes
European Free Trade Association (EFTA) countries. The newly
established European Telecommunications Standards Institute,
which represents 21 EC and EFTA member countries, has already
approved NETs for the interface between data terminals and
public data networks, and it is currently drafting an NET for
integrated services digital network (ISDN) terminal equipment.
d. Recommendation on the Coordinated Introduction of ISDN: The
EC Council recommended in 1986 that EC telecommunications
administrations coordinate with each other concerning how they
will introduce ISDN, especially on the subject of standards and
the interface between the user and the network. Although ISDN
is already starting to be introduced into commercial service in
such countries as France and Germany, there is no indication
that any significant coordination has been accomplished yet.
Nevertheless, 18 members of the CEPT signed a MOU in March
1989, which was effective immediately, concerning common
standards for public ISDN services by 1992.
e. Directive on Standardization in Information Technology and
Telecommunications: Effective February 1988, this directive is
intended to establish standards for information technology
systems and functional specifications for information and data
services provided over public telecommunications networks. The
objective is to promote the preparation and use of standards to
ensure the exchange of information and data as well as systems
inter-operability, and thereby to create an EC-wide market for
products and services.
f. Directive on Competition in the Markets for
Telecommunications Terminal Equipment: By 8/88, EC member
states were required to propose measures to abolish special or
exclusive rights for the importation, marketing, connection,
bringing into service, or maintenance of terminal equipment.
This directive is intended to allow private suppliers to
compete with telecommunications administrations by 1990 in
offering equipment for direct or indirect connection to the
network. It requires that the development of specifications
and rules for type approval be the responsibility of an
organization independent of the network operator or any other
terminal equipment supplier. France, Germany, Italy, and
Belgium are contesting the EC Commission's authority to
implement this directive under Article 90 of the Treaty of Rome
(which provides for competition) without submitting it to the
EC Council of Ministers for approval, but they are required to
implement the directive until their cases are decided by the
European Court of Justice.
g. Radio Interference: Adopted in May 1989, this directive is
intended to prevent harmful electromagnetic emissions, such
as those which interfere with the operation of radio and
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television equipment, by a wide range of products. It
establishes a provisional mutual recognition procedure for
member state standards and plans for eventual establishment of
a harmonized standards development process in the EC.
Principal Telecommunications Proposals Pending
a. 18th Value-Added Tax Directive: This directive would abolish
the exemption of telecommunications administrations from EC
value-added taxes.
b. Opening of Public Procurement in the Telecommunications
Sector: Proposed in October 1988, this draft directive would
introduce procurement procedures to open up purchases of
supplies, software services, and public works by public network
operators, whether publicly or privately owned. The directive
would cover entities that are granted special and exclusive
rights by member states to operate public telecommunications
networks or offer one or more telecommunications services to
the public. The directive would replace the 1984 Procurement
Recommendation with a requirement that such common carriers
open to competition at least 70 percent of the value of such
procurement during 1990 and 1991 and all such procurement
thereafter. Covered entities will be permitted to exclude
offers containing less than 50 percent EC content and must
grant a 3 percent price preference to equivalent offers
containing at least 50 percent EC content. The benefits of the
directive can be extended to non-EC countries via international
agreements.
C. Open Network Provision: On June 23, 1989, the EC Commission
proposed a "framework directive" on open network provision
(ONP) for the progressive establishment of harmonized
conditions for open access to and open use of the public
telecommunications network infrastructure and public
telecommunications services. ONP is a prerequisite for
creating an open EC-wide market for telecommunications
services, particularly value-added services, by 1992. This
framework directive establishes procedures for the EC
Commission to submit specific directives on subjects such as
ISDN and the use of leased lines to the Council of Ministers
for the progressive definition and implementation of ONP
conditions.
Other Telecommunications Proposals Planned:
a. Draft EC Directive on Competition in the Markets for
Telecommunications Services: In July 1989, the EC Commission
circulated this draft proposal to eliminate all special or
exclusive rights to supply telecommunications services other
than real-time, switched voice telephony, and telex, as well as
provision of the underlying network infrastructure. The
directive is also intended to ensure that any operator is
entitled to supply such services. Member states that make the
supply of such services subject to a licensing procedure to
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ensure compliance with essential requirements would be required
to ensure that licensing criteria are objective,
nondiscriminatory, and transparent. Member states would be
allowed to require until the end of 1992 that operators must
not supply to the public the simple resale of leased line
capacity. The EC Commission plans to issue this draft under
Article 90 of the Treaty of Rome. The proposal is being
delayed by a procedural dispute over the legal basis of the
directive (Article 90) as well as by a substantive dispute over
whether public data communications services should be included
or excluded from its provisions. Certain telecommunications
administrations seek to reserve such data services as monopoly
offerings in order to protect their managed data network
services from competition, at least during their first few
years of operation. This directive will enter into effect on
April 1, 1990, unless the Council reaches a common position on
the ONP directive by that time, in which case the two
directives will be implemented simultaneously, as the EC
Commission prefers.
b. Proposal for a Council Directive on the Approximation of the
Laws of Member States concerning Telecommunications Terminal
Equipment, Including the Mutual Recognition of Their
Conformity: On June 16, 1989, the EC Commission circulated a
preliminary draft of this proposal to require EC member states
to introduce measures for the mutual recognition of type
approvals throughout the EC by January, 1990. This directive
would replace the 1986 directive on the mutual recognition of
testing required for type approval, which was the first step
towards full mutual recognition of type approval. However, the
implementation date may be postponed for about a year because
the directive is not expected to be approved before April
1990. The directive proposes that manufacturers be allowed to
choose between two procedures to establish conformity of a
terminal with relevant EC technical regulations: EC type
examination or EC declaration of conformity. Both procedures
would be performed by a "notified body," but the latter
procedure would allow a manufacturer to declare conformity,
based on its own quality system for design, manufacture, final
inspection, and testing if the quality system were approved by
the notified body. The notified body would be chosen by EC
member states and could not be a supplier or installer of
terminal equipment.
Effect of EC Measures on U.S. Competitiveness
Directives to integrate the EC market by 1992 focus primarily
on the internal EC market and rarely specify how they will
apply to third-country suppliers, because the EC does not want
third countries to benefit from EC 92 unless they offer similar
access to their markets. This reciprocity requirement is
explicit in the proposed telecommunications procurement
directive, which requires third countries to agree to offer
comparable access to telecommunications procurement in order
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for their suppliers to obtain the same preference as products
with over 50 percent EC content.
In addition, the EC Commission has taken a similar position in
refusing to recognize U.S.-generated test data on conformity to
EC standards for terminal equipment, on the grounds that this
is a matter for trade negotiations. Nevertheless, EC measures
on both standards and procurement could improve U.S. suppliers'
access to the EC market because it should be easier to satisfy
one set of requirements for the EC than to satisfy each of the
12 member states' requirements. The establishment of the
European Telecommunications Standards Institute (ETSI) in April
1988 increased the transparency of the standards development
process by allowing manufacturers and users to join network
operators as participants.
However, U.S. firms can participate in ETSI only as observers
unless they have an EC subsidiary. EC interconnectivity
requirements could impede access for U.S. suppliers, unless
exceptions are allowed for genuinely innovative or
cost-effective systems. The proposed EC directives on services
may increase the access of U.S. providers of telecommunications
services, especially value-added services, if adequate
competitive safequards are provided. However, the prohibition
on resale of leased lines until 1993 handicaps the efforts of
private providers of data communications services to compete
with telecommunications administrations in offering the same
services.
In conclusion, the EC Commission has made progress in its
efforts to promote competition in terminal equipment by 1990
and to gradually open the market for telecommunications
services, except voice telephony and telex. However, the
benefits of such liberalization will be offset to some extent
by such factors as the following:
The EC has not agreed to define terminal equipment as
everything that is attached to transmission equipment,
whether analog or digital;
It has not provided for adequate transparency and openness
at every stage of the standards development process,
including the exchange of draft documents;
It has not recognized testing and certification in third
countries to EC standards;
The current draft services directives would allow EC member
states to impose burdensome obligations on competitive
service providers, such as mandatory standards to assure
interconnectivity.
The proposed directive on telecommunications procurement is a
good step towards establishment of an open, nondiscriminatory
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procurement market, consistent with the provisions of the GATT
Government Procurement Code. This should facilitate extension
of the code to cover European telecommunications
administrations. Such an agreement could obtain the same
preferential treatment for U.S. suppliers as for EC suppliers.
However, any subjects not covered by a multilateral agreement,
such as government subsidies and discriminatory specifications,
may need to be addressed in a bilateral agreement. In every
area of the EC program for telecommunications, there still
remains some latitude for member states to offset the momentum
towards liberalization by footdragging in the implementation
phase. For example, there continue to be 14 exclusive supply
arrangements of telecommunications administrations for certain
kinds of terminal equipment. Close monitoring of
implementation is necessary to assure that U.S. suppliers'
market access concerns are not neglected.
Myles Denny-Brown
Office of Telecommunications
4. Medical Equipment
At present, the main barrier for creating a single market for
medical equipment is the lack of harmonized standards. The U.S.
industry is represented primarily by the National Electrical
Manufacturers Association (NEMA) and the Health Industry
Manufacturers Association (HIMA). These associations have been
actively involved in EC harmonization issues since standards have
been among the most significant non-tariff barriers for the access
of the U.S. medical equipment industry in the European market.
The U.S. industry is aware that a liberalized EC medical equipment
environment may benefit both the U.S. firms already situated in the
Common Market as well as firms exporting to the Common Market.
However, the trade associations fear that EC harmonization may be
implemented in such a way as to favor European companies. To
prevent the latter scenario from occurring, the U.S. associations
prefer to see the establishment of open and consistent communication
links with the EC Commission prior to implementation of directives.
Other areas of concern include the use of CEN and CENELEC (two
European standards organizations) standards as opposed to ISO and
IEC (two international standards organizations) standards,
flexibility of EC harmonized regulations to allow for current and
future negotiations with the rest of the world, and maintenance of a
transparent system in the process of developing directives.
Michael Fuchs
Office of Microelectronics and
Instrumentation
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5. Information Technology
The Directive on Standardization in Information Technology &
Telecommunications which went into effect in February 1988
should have a positive impact on U.S. industrial competitiveness
as long as it is not used to force manufacturers to abandon
proprietary standards, such as those for value-added networks.
The goal is to establish EC standards for information
technology systems and functional specifications for
information and data services provided over public
telecommunications networks. The objective is to promote the
preparation and application of standards in the EC that are
deemed necessary to ensure the exchange of information and data
as well as systems inter-operability. The end result would be
a larger market for products and services.
The directive covers both private information technology
systems and services offered over the public telecommunications
network (value-added network or VAN services). The application
of these standards in public procurement is a fundamental
component of this directive in order to prevent the potential
anti-competitive effects of national and proprietary
specifications on both public procurement and on the entire
market.
This directive should allow U.S. companies to increase exports
to the EC. New-to-market companies will benefit most from the
directive. As long as the directive does not become a tool of
an individual member state's industrial policy, the directive
will facilitate market access for most U.S. firms.
Ivan Shefrin
Office of Telecommunications
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Appendix H
Comparison of Electronics Policies in Selected Countries
The electronics industries in eight countries (Brazil, India,
Singapore, South Korea, Taiwan, France, Japan, and the United
States) and one regional group (the European Community) are
examined here. Although these countries differ considerably in
size, level of industrial development, and socio/political
structures, each has an established electronics industry that,
while differing in scope, has experienced relatively rapid
growth. Each government has also undertaken various kinds of
targeted intervention to promote or support its electronics
sector.
While these countries share similar goals and assessments
regarding the strategic importance of having a domestic
electronics industry, development experiences have differed. A
mixture of conscious policies and unique economic, technical,
and social circumstances in each country has resulted in
distinct developmental strategies and, consequently, different
levels of success. Even when similar policies have been
adopted, outcomes have differed due to these factors. Policies
and ambitions also have been bound by the realities of global
technologies and markets. The relentless march of technology
has provided both opportunities and constraints on countries
trying to establish or maintain a share of the global
electronics market.
Sections I, II and III of this appendix compare the electronics
industries in these countries in terms of the level of
government involvement, the kinds of developmental policies
pursued, and the degree of industrial development achieved.
I. Levels of Government Involvement
On an absolute scale, the level of government involvement in
any industry can range from pure laissez faire economic
policies to government control and ownership of all industrial
units. The countries in this study lie somewhere on the
continuum between these two extremes in terms of governmental
intervention in the electronics sector. Government roles range
from the relative hands-off policies of the United States to
the industrial micro-management policies of Brazil, which
include some government ownership of production. For
comparison purposes, five points along the involvement
continuum were identified:
Abstinence (A) Within broad macroeconomic structural and
regulatory constraints, the government follows a basically
noninterventionist industrial strategy. If policies are
adopted to assist industry, they are not sector specific.
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Guidance (G) : The government provides general guidance to
industry and may adopt supportive measures, such as
preferential procurement procedures or funding and other
incentives for general research, education, or development of
the domestic infrastructure.
Oversight (0) : In addition to guidance, the government
monitors specific behavior and results in the industry and
provides detailed recommendations, incentives, supports, and
controls to induce firms in the industry to take preferred
actions.
Management (M) In addition to the above, the government may
issue specific directions to individual firms regarding
detailed management decisions. Trade and foreign investment
may also be strictly regulated.
Control (C) : The government owns a significant portion of
the industry or effectively controls all management decisions.
Table 1 classifies each country in terms of the level of
government involvement in the electronics industry. Most
regimes use guidance or oversight or a combination of the two.
Only France, Brazil, and India use management or control, and
they appear to be gradually moving away from this pattern.
Table 1 Level of Government Involvement
India Braz Sing Taiwan S. Korea France Japan E.C. U.S.
M/C
M
O
O
o
O/M
O/G
G
A/G
National Government Roles
INDIA. The Indian Government, since independence in 1947, has
played a predominant and controlling role in the development of
that country's electronics sector. This is consistent with an
industrial policy that has been formulated within the context
of a strong socialist philosophy and very inward looking
economic policies. Beginning with the Industrial Policy
Resolution of 1948, the government was granted the authority to
control or regulate industries that were identified as critical
to the national interest. Nationalization, it was thought,
would increase the country's bargaining power with foreign
suppliers, provide control over the local market, and generate
government revenue. One of these early industries was
telecommunications, and today, a substantial segment of India's
electronics sector is government owned. The public sector's
involvement is manifested in an elaborate web of laws,
programs, and Five-Year Plans that gives it control over key
facets of the industry, such as production, pricing,
distribution, imports, and foreign investment. But because of
the global nature of the electronics industry, it appears that
this sector has been treated more liberally than other
industries.
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India was an early entrant in the electronics policy field.
In 1963, the government established an Electronics Committee to
review the industry and advise it on how to achieve
self-sufficiency. In 1964, India was also among the first
countries to build a national computer, the ISIJU, which was
fabricated jointly by the Indian Statistical Institute and the
Jadavpur University. However, it was not until 1970, during
its Fourth Five-Year Plan, that a separate Department of
Electronics reporting directly to the Prime Minister was
established, along with a high-level Electronics Commission to
formulate policies and guide industry development. The
commission established policies to promote greater control and
ownership of technology and production by indigenous firms.
Ironically, this thrust eventually caused IBM, one of the
foreign companies that led India into the computer age, to
abandon its market presence there.
The other traditional aspect of India's industrial policy,
which is characteristic of other large developing countries,
is an inward looking economic strategy that emphasizes import
substitution over export promotion policies. Such policies
result in a larger government role and more intervention in
industrial affairs. India's approach has paralleled that of
Brazil in its pursuit of independence from the influence of
multinational suppliers and in its use of strict market reserve
policies to protect indigenous companies. Although there was a
significant reorientation of economic policy in the early
eighties leading to a reduction in electronics regulations,
there is an indication that this trend is being reversed at
least in terms of protecting locally made computers.
The government has placed special emphasis on developing an
international caliber software industry with the adoption of a
new software policy in 1986. To promote software exports, it
is establishing export technology parks to act as centers for
software development that use satellite links to foreign
customers. This approach has proved successful in obtaining
business from abroad, particularly from the United States.
BRAZIL. The Brazilian government has played a key role in the
development of its electronics industry since the early 1970s,
when it created a government agency (CAPRE) to oversee
development and established a national company (Cobra) to
produce a domestically designed computer. (Cobra began as a
joint venture with Feranti, a British firm.) Although the
government has provided tax and credit preferences and funding
subsidies, its main role has been to regulate trade, foreign
investment, government procurement and technology transfer in
order to promote and protect its nascent firms from foreign
competition. These market reserve policies have been
successful to the extent that a number of national firms have
been created, some through licensing and joint venture
arrangements, along with a sizeable technical work force.
However, since 1987 many of these firms have incurred
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substantial losses, and the government has had to intervene to
rescue them. Brazil has not been successful in creating an
internationally competitive industry. Besides computers and
telecommunications equipment, Brazil is actively promoting the
semiconductor and software sectors.
SINGAPORE. Singapore has embarked on a policy to promote its
electronics industry that is based on maintaining an open
market for foreign investment, while building a technically
superior work force. It has attempted to move away from the
low-skill assembly operations that have characterized its
economy. (The industry is dominated by U.S. and Japanese
firms. Less than 5 percent of the electronics firms
manufacturing in Singapore are domestically owned.) The
government is seeking to improve value added by moving into
more knowledge intensive areas like software. The National
Computer Board (NCB) was charged with promoting software
exports and making Singapore an international software center
by the end of the 1980s. As part of this effort, the NCB has
established training institutes that have been cosponsored by
foreign computer firms seeking additional software capabilities
in Asia, such as IBM.
A National Information Technology Plan was launched in late
1986 to promote electronics exports. At the same time, the NCB
set up an Information Technology Institute to work on software
engineering, communications technology and knowledge systems,
and in 1987 established a Software Development Assistance
Scheme to stimulate innovative product development by local
firms. The NCB has also encouraged local software firms to
form strategic alliances with foreign firms.
The Government of Singapore has also played an activist role in
accelerating the growth of local semiconductor technology.
Although Singapore has been a base for assembly for two
decades, with $1.68 billion in exports in 1987, Chartered
Semiconductors, a joint venture between state-owned Singapore
Technology Corporation and two U.S. manufacturers, is the first
effort at locally owned fabrication. It will concentrate on
ASICs (application specific chips) that will not compete with
DRAMs that dominate Japan's and South Korea's production.
TAIWAN. Taiwan's 1980 Economic Plan emphasized the promotion of
high technology industries, with large-scale integrated (LSI)
semiconductors, computer technology, and laser technology
receiving particular emphasis. Domestic industry is to be
aided by export and local content requirements for foreign
direct investment. A Ten Point Plan for high technology
development was adopted in 1983, with the Industrial
Development Bureau providing the funding for new technological
know-how. Taiwan's Institute of Information Industry promotes
software development and has been very involved in training
programmers and software engineers. The Electronics Research
Institute (ERSO) has focused on VLSI (very large scale
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integration) technology, computer technology and automation.
Through ERSO, the government has targeted a number of areas
ofapplications software for local development.
Taiwan has recently adopted a Communications Industry Plan to
last from 1987 to 1991. Its main goals include developing
memory boards and switching software. The government of Taiwan
has also intervened in the semiconductor industry to develop a
market that is based on custom designed chips, since there are
few large volume producers as in South Korea. Although the
government had funded ERSO to make semiconductors in the late
1970s, it was not until it set up the Taiwan Semiconductor
Manufacturing Co. (TMSC) with Philips as an entity to produce
chips for Taiwan's 40 chip design houses and foreign
manufacturers that the industry began to grow.
SOUTH KOREA. South Korea has been committed to building firms
that can compete in international markets, a goal that is
reflected in the support offered to its electronics industry.
Although the country is best known for the rapid growth of its
consumer electronics industry, it was not until 1981 that the
government modified its Electronics Industry Promotion Law to
begin focusing on industrial electronics.
The Korean Government has played a major role in nurturing its
domestic electronics companies. It has protected the local
market through import licensing, high tariffs, and strong
buy-national policies, especially for the telecommunications
sector. Imports of computers, software, semiconductors and
communications equipment have had to be approved and usually
were only certified if a domestic source was not available.
While most import licensing restrictions were eliminated in the
early 1980s and some tariffs have been reduced, buy-national
policies remain important. To facilitate the acquisition of
foreign technology, capital and know-how, the Korean Government
has offered investment incentives, including exemption from
Korean income, property, and corporate taxes for up to five
years to multinational firms.
The government has also been given strong support through the
use of direct public funding. The Ministry of Trade and
Industry (MTI) has provided funds to electronics firms to
develop semiconductors and computers, while the Korean
Institute of Electronics Technology (KIET) has conducted
research and played an active role in building the early
production lines for large-scale integrated circuits. In 1983,
the Ministry of Science and Technology adopted a four-year R&D
program for semiconductors and computers budgeted at $44
million. The Korea Development Bank (KDB) and other sources
have provided investment loans to firms. A KDB-sponsored
Technology Development Fund assembled $214 million for
long-term loans to firms commercializing technology products or
purchasing equipment for research labs.
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South Korea has had a Software Development Center since 1967.
The Center provides consulting and design assistance to public
and private entities. In 1984, IBM established a software
engineering center in Korea that was modelled after the
Institute of Systems Science it helped establish in Singapore.
Its aim is to graduate 900 professionals a year. While not
much progress has been made in making Korea a major center for
software, the government expects the large local base of
computers to stimulate software development.
FRANCE. French industrial policy in the postwar period has been
characterized by nationalization and industrial restructuring,
state intervention at all levels, "planification"
(administrative guidelines for production, investment, etc.),
the promotion of "national champions," the regulation of
foreign investment, industry subsidies, and preferential
government procurement. This approach was followed with the
computer industry beginning in 1967 with the first Plan Calcul,
which was designed to direct development of an independent
electronics industry and to form a national computer
manufacturer. Current policies for the electronics industry
are shifting away from placing an emphasis on the development
of national champions and other targeting efforts.
The French Government has also initiated and funded large
research efforts. The Filiere Electronique, or Electronics
Sector Program, started in 1982, included computer hardware and
software design projects. A five-year electronics plan was
launched in 1983, where the government invested $26 billion to
improve the electronics industry's competitiveness, to create
200,000 new jobs, and create an electronics trade surplus.
While the four largest electronics firms were to receive most
of the funds in the program, it was focused on export promotion
and increasing cooperation with other nations in Europe. Much
of the R&D effort has targeted the development of VLSI
technology and large-scale computers.
French policies appear to have had their greatest success where
French firms are the strongest competitors, in the
telecommunications and software sectors. This is less so in
computers where in the mid-1960s France tried to create a
national champion and failed after a number of efforts, which
involved extensive subsidies (more than $1 billion from 1964 to
1979). During this time, the government also invested
substantial amounts in new firms ($1.1 billion to create
Unidata, which failed as a trans-European computer venture in
1975) and to promote mergers ($957 million from 1977 to 1980
for the creation of CII-Honeywell Bull). When French computer
firms were nationalized in 1981, the government adopted a new
plan to accelerate the development of Fifth Generation
computing, advanced programming, and artificial intelligence.
It also created a new agency, the ADI, or Computing Development
Agency, to spearhead computer-related research.
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France has a strong software industry, one of the largest in
the world, and has recently adopted several policies to foster
the development of new languages (GRECO), advanced software
engineering (EMERAUDE and CONCERTO), and speech synthesis
(GRECO PAROLE). France's early policies for the computer
industry in the late 1960s had included an effort to create
market entry barriers for U.S. software firms, but these have
not been incorporated in recent programs.
JAPAN. The Japanese electronics industry was established in the
late 1950s, and it was actively promoted by the government
because of the sector's perceived commercial and strategic
importance. In the 1960s and early 1970s, the government
mainly played a regulatory role to ensure the growth and
development of indigenous manufacturers. By the mid-seventies,
the role began to switch to one of financier (for major
research programs) and industry defender (in trade complaint
and intellectual property cases). From 1972 to 1991, the
Japanese Government will have provided nearly 400 billion yen
through its Ministry of International Trade and Industry (MITI)
for a number of highly visible computer and semiconductor
research programs. Government and industry also reportedly
spent $45 million in a recent year on public relations to
improve its image in the United States. These public outlays
and programs are the visible elements of an extensive
pro-business, pro-high technology policy environment.
The Japanese Government has played a key role in each segment
of the electronics industry by providing early research funds,
nurturing private research, creating vehicles for direct
government support during critical periods, and creating
mechanisms to support state-of-the-art development and to
maintain technological advantage once companies have become
competitive. Major legislation was passed in 1957, 1971, and
1978 to establish support mechanisms for Japanese electronics
firms and to create an organizational structure to guide and
coordinate the industry's activities, which brought together
government agencies, industry councils, trade associations, and
joint research groups. The government's role in supporting
research activities was especially important. In the early
seventies, as Japanese computer companies faced an enormous
competitive threat from IBM, substantial government support
probably saved the industry from succumbing to this pressure.
EUROPEAN COMMUNITY. The objective of the EC has been to promote
cooperation and integrated efforts among the national
electronics industries, research centers, and governments in
Europe. The primary means has been by initiating and funding
cooperative research projects, including RACE
(telecommunications), BRITE-EURAM (industrial technology,
CAD/CAM, advanced materials), ESPRIT (microelectronics), and
EUREKA (high tech areas, including information technologies and
robotics). The first three programs are funded through the EC
Community, but EUREKA is European-wide with funding provided by
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national corporate, university, and government participants.
The EC has budgeted over 4 billion ECUs over the next five
years for the three programs it is sponsoring. In addition to
these undertakings, there are a number of research programs
sponsored by individual governments. Through these efforts,
the EC has established a means of promoting large projects that
have several important features: (1) These activities link
together key national firms with some of Europe's leading
universities and research centers in joint research efforts.
This is the first time such extensive cross-border research has
been undertaken, (2) They place a community-wide emphasis on
pre-competitive research, while previous national programs had
emphasized basic research or used national procurement and
incentives to create strong national firms in certain segments
of the industry, as in France's case.
UNITED STATES. The industrial policy of the United States has
been largely ad hoc and fragmented over the years primarily
because of two factors: the sector's continuing (although
declining) dominance of the industry worldwide and the dominant
free market philosophy that governments cannot pick winners as
well as the private sector. Although the United States used
targeted policies (government research funding and procurement)
to promote the emergence of the computer industry in the 1950s,
it has not expanded this role, and until recently, its
involvement had declined, except in certain state-of-the-art
technologies important for military or strategic applications.
(For example, during the 1950s, the Department of Defense
procured about 70 percent of the output of the computer
industry, but by the mid-1960s, this had fallen to 10
percent.) In the 1960s, much of the research for commercially
viable products had been taken over by the private sector.
Consequently, little direct assistance has been offered to
industry. Overall, U.S. policies have been much less targeted,
coordinated, and integrated than those employed by its major
competitors.
In the early 1980s, U.S. Government interests and involvement
in the sector has increased substantially due primarily to the
military and economic implications of the loss of dominance in
many electronic product areas. This has resulted in a variety
of efforts, mainly in funding research, but also in the trade
and intellectual property protection areas. Through the
liberalization of antitrust law, the government has encouraged
a number of cooperative research ventures.
II. Strategies of Industrial Development
While every country follows its own unique path toward
development, similar policies and strategies are often
adopted. In terms of national strategies or a group of related
policies with common objectives regarding the electronics
industry, countries can be placed into one of three broad
categories: intrinsic (I), extrinsic (E), or technological (T)
(see Table 2). The first two apply to newly industrializing
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countries where the objective is to create and nourish a
fledgling industry. The third model applies to more mature
industries, characterized by the United States, the European
Community, and Japan, where the emphasis is less on protective
trade and investment regulations than on efforts to create
technological advantage.
In practice, these abstract models are not mutually exclusive.
Countries, although leaning in one direction, demonstrate
elements of each model as they respond to internal and external
pressures. Moreover, policies in some countries have changed
dramatically over time in response to shifts in competitive
positions and changes in global technologies and markets. As
Japan's electronics industry matured, policy moved from direct
protection of local firms to promoting global technological
competitiveness. India has shifted its policy focus toward a
more open policy regarding foreign investment and technology.
Also, because of its importance, the electronics industry has
been exempted at times from general economic and trade policies
that are applicable to other industrial sectors. Brazil is
rated as moderately trade oriented in many product areas, but
is extremely restrictive in its electronics sector.
Intrinsic Strategies (I)
The intrinsic model represents the more traditional inward
looking, import substitution policies followed by Brazil, India
and at times France. The objective is to protect an infant
industry, in this case the electronics sector, from foreign
competition while encouraging local firms to produce complete
systems with minimal foreign input. These policies, although
historically effective for certain traditional industries, have
proven to be less successful for the electronics sector that
relies heavily on the international flow of technology and
global markets. This approach requires a major role for
government and a high degree of industrial planning. The
intrinsic strategy has the following characteristics:
(1) Imports that compete with actual or planned local
production are heavily regulated or banned. This is
accomplished through an assortment of restrictive trade
instruments, including prohibitive tariffs, import licenses,
technical standards, and other non-tariff barriers. While
the focus is on creating locally owned plants, protection can
also be extended to foreign manufacturers who meet government
criteria.
(2) Foreign investment is either prohibited or discouraged.
Both new and existing investment is subjected to numerous
restrictions regarding equity ownership, income remittance,
technology transfer, trade and local content. Existing
foreign investment for the expansion and modernization of
plants and production is strictly regulated.
- 164 -
(3) There is less emphasis on using stimulants like
subsidies and fiscal incentives. When available, they
are usually applied only to national companies, unless
strict conditions are met by foreign producers. National
treatment is generally not accorded to foreign suppliers.
(4) A backward integration strategy is followed in which
domestic firms are encouraged to design and produce complete
systems as the quickest way to import substitution. Critical
components, subassemblies, and software are acquired through
imports, although there is pressure to buy locally when these
products are available. It is assumed that the human and
capital infrastructure thus created will facilitate movement
back along the input chain.
(5) The focus is on developing technology locally and,
thereby, reducing foreign influence and control. If foreign
technology is needed, then the intent is to acquire its
ownership rather than engage in cooperative endeavors with
foreign companies. The attempt is to create a comparative
advantage based on national technology.
(6) Policies favor production for the domestic market over
exports. It is assumed that the internal market will provide
adequate opportunities for economies of scale. Protection of
local producers discourages exports by increasing the price
of imported inputs and raising the relative costs of domestic
inputs.
(7) Sector targeting practices are extreme. The selected
sector is exempted from cross-sectoral or macroeconomic
considerations, such as user needs, inflation, or general
industrial competitiveness.
Extrinsic Strategies (E)
This outward looking, export-oriented strategy is epitomized by
the Asian NICs (South Korea, Taiwan, and Singapore) and Japan
prior to the 1980s. This approach also requires heavy
government input, but policies are designed more to exploit
foreign technology and to promote production in areas where
comparative advantage can be created.
(1) The domestic industry is protected from foreign
competition through the usual tools of import restrictions
and foreign investment regulations. But internal competition
is promoted in order to maintain internationally competitive
firms.
(2) Policies are designed to facilitate exporting by not
discriminating between production for domestic and foreign
markets or between domestic and foreign products, such as in
local content regulations. The usual result of
nondiscriminatory trade policies is increased trade. Market
promotion policies are used to encourage yet control domestic
competition in order to promote exports.
- 165 -
(3) There is a forward integration strategy, which is based
on existing production capabilities. This model follows more
closely the logic of comparative advantage. Taiwan and Korea
built their systems capabilities upon a strong industrial
base competitive in the production of consumer electronics
and parts. The movement down the input chain is facilitated
by a sound production base. This model assumes that
governments can successfully pick winners in the
international marketplace.
(4) There is less emphasis on local design and control over
technology and more encouragement of foreign investment.
Foreign manufacturers play a greater role in this model,
particularly in terms of technology transfer.
(5) Macroeconomic policies are stressed to restructure
industry away from declining sectors toward higher
value-added areas. Policy is more aligned with
cross-sectoral considerations, and user requirements are
considered.
Technological Strategies (T)
The technology model is used to describe the policy initiatives
of Japan, the European Community, and generally of the United
States. The emphasis in these more mature industries is less
on protective trade and investment restrictions than on efforts
to create technological advantage. Unlike the developing
nations, which are merely trying to remain at the periphery of
global competition, the advanced countries are engaged in
strategic efforts to sustain their industries and to compete at
the leading edge of technology. Elements of this model are
listed below.
(1) National projects target priority R&D areas and create
cooperative research organizations that are supported by
government, industry and academia. The kinds and levels of
support vary from project to project. This requires adopting
exceptions to antitrust regulations that balance
anti-competitive concerns with the need to pool resources.
(2) The nationally supported projects tend to focus on areas
where results, if any, are long term, payoffs are more
speculative, and research is more basic and pre-competitive.
Research that is closer to the product development and
commercialization stage is generally left to private
companies and laboratories.
(3) The shared research activities of these national
projects minimize costs and reduce risks of this kind of R&D
for industry. They also act as technology transfer vehicles
for pre-competitive research. Companies share the results,
then develop the technology further in corporate labs to
produce commercial products. If the research fails to
achieve beneficial results, then the blame is shared.
- 166 -
(4) Government and private efforts are directed toward
ensuring that adequate and affordable sources of capital are
available to all innovative and commercially productive
companies. Mechanisms must meet the needs of small start-ups
as well as large multinationals.
(5) The government focus is less on protecting domestic
markets than on protecting the technological secrets and
know-how of national companies. When foreign technology is
acquired, it is usually advanced, not mature technology.
(6) Sources of technological discovery and innovation are
coveted. Policies are directed toward fostering advanced
technological training in the universities and retaining
technological talent at home.
Table 2 Current Strategy of Industrial Development
India Braz Sing Taiwan .Korea France Japan EC U.S.
I
I
E
E
E
T
T
T
T
National Policies
Brazil and India. These countries have long and somewhat
similar traditions of industrial development policy. Many of
these policy biases have been carried into the electronics
sector. Brazil's economy, of nearly continental size, has long
been inward looking with relatively small dependence on
international trade. India has also had a very inward looking
economic policy with strong socialist leanings and state run
enterprises. Industrial and trade policy has tended to focus
on promoting domestic production through strong import
substitution, rather than by encouraging exports of domestic
products, leaving exporters of many goods at a severe
disadvantage.
Faced with strong foreign competition and increasing imports,
these countries have erected trade barriers to shelter local
firms, which were then encouraged to design and assemble
complete systems with minimal foreign input. As the
infrastructure of trained labor, industrial know-how and
capital goods expanded, it was felt that the industry could
integrate backwards into components and move into ever higher
levels of technology. It was hoped that local technological
development could prosper under these conditions and that
needed technologies could be appropriated from abroad in return
for access to the local market. Both nations have employed
most of the restrictive and preferential policies available to
promote their industries, including import and investment
barriers, production and capital remittance controls, export
subsidies, incentives for national firms, and resistance to
adequate intellectual property protection.
- 167 -
One notable difference has been a decided shift recently in
official policy in India, while Brazil's Government, although
appearing sympathetic to liberalization, has as yet not
affected meaningful change. Under India's 1985 Seventh
Five-Year Plan, restrictions on most imports of electronics,
including computers, were lifted, and policies changed to a
more open market orientation, including incentives for
multinational firms that establish subsidiaries in India. This
resulted in accelerated growth for the industry. However,
three years after lifting the import restrictions, the
Export/Import Policy for 1988-91 again called for restrictions
on all computers, except high-end minicomputers and
mainframes. The official justification was that the government
had to protect the capability of its firms to produce at the
low end of the equipment spectrum.
Taiwan and South Korea. Taiwan and South Korea are often
compared regarding economic development. Both countries have
relatively similar economic circumstances and strategies,
although with different nuances. Both governments have played
an active role in shaping economic development using export
growth as the major impetus for success. The focus on
electronics, though important in consumer areas in the 1970s,
became targeted in the early 1980s on informatics, as the
principal high skill and technology intensive industry to
spearhead economic growth into the future. In order to achieve
these goals, these governments have used a combination of
traditional, indirect approaches to industrial policymaking and
a variety of direct initiatives targeted on specific sectors.
All components of the industry are viewed as an integrated
complex of industrial and service sectors that are mutually
supportive of expansion and growth. Sector-specific targeting
plans are designed as part of the overall economic planning
process and emphasize the integrated nature of the industry.
Policies are integrated to exploit cross-sector linkages and
market/production relationships. For example, Korea's planned
state-wide telecommunications network will require substantial
amounts of custom software development. Similarly, these
integrated networks will create substantial demand for
computing power at remote locations and will enforce the
standardization features. of communication protocols and other system
The development strategy of Taiwan and Korea has been built
upon the following elements: promoting economic growth through
the acquisition of foreign technology; tightly controlling
imports to protect domestic producers, while providing
preferential access to cheap imported inputs; creating
internationally competitive firms that are independent of
government support; promoting exports; and identifying market
niches that offer opportunities for creative comparative
advantage. Overall, this strategy has been highly successful.
A key aspect has been the establishment of technological
relationships with foreign multinationals. Various policies
have been used to enhance the cooperation between foreign and
- 168 -
domestic firms resulting in important subcontracting,
licensing, joint venture, and other relationships that have
facilitated technology transfer and growth for their domestic
companies. This success has made them major competitors at the
low end of the electronics equipment spectrum and has
established them as models for other developing countries.
There are two notable differences, however, between Taiwan and
South Korea. First, because of its smaller domestic market,
Taiwan has had a much stronger export orientation with less
market protection and emphasis on domestic demand than Korea.
Therefore, Taiwan has generally pursued a more market-oriented,
incentive approach to economic policy. Secondly, the
industrial structure in Korea is dominated by large, highly
diversified conglomerates that compare with Japanese firms in
resources and strategic outlook. Taiwanese firms, by contrast,
are smaller, more specialized concerns that do not have the
same financial clout and ability to cross-subsidize
production. As a result of this industrial structure, Korea is
emerging as a world force in semiconductor manufacturing,
particularly of DRAMs.
Singapore. Because of the need to maintain international
competitiveness, government policy formulation and
implementation typically have not interfered with the market,
but have been very responsive to market forces. A fundamental
component of Singapore's strategy, which it pursues
tenaciously, has been to attract foreign investment and
technology in favored areas. The government's guidance of its
electronics industry has generally been very successful, but
mistakes have been made. Most importantly, the sharp increase
in domestic wages to encourage the shift to capital intensive
industries. However, the government has been quick to
recognize mistakes and to adjust.
France. In France, policy concern initially focused on the
creation of a competitive national champion in computers. But
when this effort stalled, attention shifted to promotion of the
larger electronic sector. The interplay of a political desire
for a European leadership role in technology, a complex and
relatively anti-growth policy environment, and the dynamics of
EC integration must be considered in order to explain this
French policy shift.
Japan. As the Japanese electronics industry developed from
infancy to world class status, Japan's development strategy
evolved from extrinsic to technological, and the country is now
engaged in an intense technological race with the United
States. During the sixties and seventies, the Japanese had two
objectives: to create viable manufacturers and to ensure their
survival by protecting the domestic market. By the eighties,
these policies were so successful that Japan had surpassed
Europe as the principal U.S. competitor, had become the world's
preeminent exporter, and was establishing subsidiaries and
- 169 -
challenging U.S. companies in their own market. The Japanese
Government is now directing its efforts toward establishing
global technological superiority through more attention to
basic research.
Before 1970, Japanese firms lagged well behind the United
States in technology and depended heavily on licensing and
joint ventures with foreign suppliers to acquire the critical
manufacturing and product know-how. After it became apparent
that technology transfer from abroad would be insufficient to
reduce the lag with foreign suppliers, the government began
massive funding of national research projects. By 1980, as
Japanese firms became more self-sufficient, the government's
proportion of funding had diminished as the private sector
assumed a greater role in research efforts, especially in the
applied and product development areas.
The government also used a standard array of policies to
reserve its markets and protect its companies during the
formative stages of its industry. These policies included
trade/investment restrictions (high tariffs, import quotas,
and foreign exchange allocations), preferential government
procurement, and indirect financial support for local companies
(tax and credit subsidies). To assure its firms of a
continuing source of demand, the Ministry of International
Trade and Industry (MITI) established the Japan Electronics
Computer Corporation (JECC) that purchased Japanese computers
and leased them to users at subsidized rates. By taking the
financial burden of leasing off the shoulders of Japanese
firms, MITI released additional funds for R&D and capital
expansion. The kinds of financial support instruments used
included general tax benefits for all industries (R&D credits,
accelerated depreciation allowances, and deductions for export
expenses), industry-specific measures (special tax breaks for
computer purchases and repurchase arrangements), and industry
loans at preferential interest rates.
Policy formulation was flexible, and as objectives were
achieved, policies were formally abolished or modified. Import
quotas and limits on foreign participation in the Japanese
market were removed in the seventies, while computer tariffs
were lowered in the mid-1970s and eliminated in 1986. The JECC
continues to operate, but has declined in importance as
Japanese producers handle their own leasing arrangements.
However, Japanese companies still benefit from a strong
preference for local products that exists within government and
the private sector, even though the "Buy Japan" policy was
formally rescinded in 1978.
Competition has been carefully nurtured within the industry to
foster self-reliance and to maintain government influence.
During the early years, the government avoided the national
champion strategies of some European countries, i.e.,
supporting only one firm, and let competitive forces determine
which firms would emerge as leaders. The government has also
- 170 -
shaped the way in which new technologies are developed, often
stretching its leverage over new technology development by
creating rivalries between groups of companies that competed to
be first to commercialize new technologies. These rivalries
were sometimes paralleled by rivalries between government
agencies and their laboratories.
Summary of National Policies
Table 3 lists the principal policy instruments in each country
that affect the electronics industry. These may be targeted
policies aimed only at the electronics industry or general
policies that apply to all industries. The policies are
divided into those that are externally directed at foreign
suppliers and those that are internally directed at indigenous
firms. External policies can be either restrictive or
incentive oriented, but most tend to regulate or prohibit
foreign activity for a variety of national goals. While
internal policies generally provide positive support to local
firms. In theory, preferential treatment provided to national
firms can also be offered to foreign subsidiaries; however,
this is generally not the case.
III. Stages of Industrial Development
Definition of Industrial Activity
The level of sophistication among national electronics
industries ranges from "screwdriver" assembly plants in
low-wage developing countries to state-of-the-art operations of
multinational companies in the developed world. Regardless of
its level, industrial activity can be defined in terms of three
functions that are necessary to any productive enterprise:
research and design, manufacturing, and marketing. In the case
of simple contract assembly, very little research or marketing
is carried out by the company, whereas large conglomerates are
heavily involved in all three activities and in trying to
coordinate them efficiently in the marketplace. Although these
are distinct tasks, they are closely linked. For example,
ideally engineering, production and marketing staffs should
coordinate closely in new product development and design.
Research and Design
Stages in research and design include basic research, applied
research, and product/process development. Basic research is
defined as the investigation of fundamental aspects of
phenomena without assurances that the knowledge gained will
lead to practical or commercial applications. The objective of
applied research is to gain the necessary knowledge to develop
the means to meet specific needs, while development translates
this knowledge into the production of goods and services. As
companies or industries move back along the spectrum from
product development to basic research, the opportunity for
innovation increases, but greater risks and costs are incurred
- 171 -
TABLE 3
Key Government Policy Instruments
Ind Bra Sng Twn Kor Frn Jpn EC US
EXTERNAL POLICIES
TRADE
Tariffs
X
X
Non-tariff barriers
Import licenses
X
X
X
Others
X
FOREIGN INVESTMENT
Incentives
X
Restrictions
X
X
TECHNOLOGY TRANSFER
Regulations
X X
Lack of IPR protection
X X
INTERNAL POLICIES
Financial support
X
X
X
X
X
R&D funding
X
X
X X
Export subsidies
X
X
X
Government procurement
X
X
Market stimulation
X
Physical infrastructure
X
X
X
development
Education
X
X
Pro business climate
X
X
- 172 -
along with longer payback periods. Research carried out by
firms in developing countries tends to be at the
product/process engineering end of the spectrum. These firms
are also heavily dependent upon foreign technology. While
developed countries place significant resources into basic
research and are generally net exporters of technology.
Manufacturing
The manufacturing spectrum includes two separate dimensions:
process and product. High tech products can be produced with
relatively low tech methods, while low tech products can be
produced with highly automated processes. At one end of the
process spectrum are manual operations that require low skilled
workers and employ simple management techniques and input
sourcing methods. At the high end are automated processes,
highly skilled workers, complex management problems, and global
sourcing strategies. Similarly, the product spectrum ranges
from low tech products, which are often dependent on
foreign-sourced inputs to high tech products, mostly based on
domestic inputs. Ideally, the more developed an industry is
the more capable it is of producing all of the necessary
physical and human inputs domestically to manufacture a final
product, including materials, components, subassemblies, and
units. As a company moves along the manufacturing spectrum,
its value added increases, but operational complexities and
capital costs also rise significantly.
Marketing
Marketing activities include product distribution, pricing,
promotion, maintenance, and support. The marketing spectrum
ranges from the simple marketing activities of a small plant
that sells to middlemen or original equipment manufacturers to
the sophisticated techniques of a large integrated company with
an extensive global customer base and broad array of marketing
channels.
Level of Industrial Development
Table 4 classifies the selected countries as imitators (I),
assimilators (A), or innovators (N) according to their overall
level of industrial development. These concepts are not exact,
but are intended only to typify the indigenous industry and
current capabilities of particular countries in a subject area
that is difficult to quantify. It is also difficult to
definitively classify countries in terms of a single concept.
Even the most advanced countries contain examples of
rudimentary manufacturing plants, while relatively poor
countries can point to advanced plants built by multinational
companies. Similarly, high tech companies in advanced
countries may choose more basic manufacturing methods or
marketing channels for a particular product depending on the
commercial situation. Finally, country capabilities vary
- 173 -
across the various sectors in the electronics industry. For
example, India has a much stronger global position in software
than in hardware.
Table 4
Stage of Industrial Development
India
Braz
Sing
Taiwan
S.Korea
France
Japan
E.C.
U.S.
I
I
A
A
A
N
N
N
N
Imitators (I) rely heavily upon foreign technology, know-how,
and capital. Little R&D is done locally except at the
production engineering level. Production is the simple
assembly of foreign components and subassemblies using
equipment purchased from abroad. Production units are usually
loosely organized using inefficient, manual, low skill
processes. Marketing efforts are virtually nonexistent and
undertaken by foreign firms which have contracted for local
assembly.
Assimilators (A) have begun to develop local technical talent
and know-how. Technology is enhanced and often diffused
through the mobility of local technical and entrepreneurial
personnel, which leads to the establishment of new firms.
Production units become more competitive and efficient and the
finished product industry creates a market for and stimulates
growth of a local parts industry. Marketing efforts become
broader to include marketing to original equipment
manufacturers (OEMs).
Innovators (N) rely mostly on domestic technology and
engineering talent. An important percentage of industry
revenue is spent on R&D, including basic research. Foreign
technology is sought where necessary to fill voids through
licensing and joint venture agreements. Production units
stress productivity and economies of scale to meet competition
in local and foreign markets. Most inputs are available
locally. Industrial engineering and production management
techniques are introduced to rationalize production processes.
The industry is engaged in global marketing efforts, including
directly to users or customers.
R. Clay Woods
Office of Computers and
Business Equipment
- 174 -
APPENDIX I
Country Profiles*
Japan
Computer Hardware
I. Historical Development
The Japanese computer industry was established in the late
1950s and carefully nurtured by the Japanese Government, based
on an awareness of its commercial and strategic importance.
Since Japan lagged well behind the United States in computer
development, the Japanese depended heavily at first on licenses
from and joint ventures with several leading U.S. suppliers to
acquire the critical manufacturing and product technologies
needed to compete in this area. Over the next 10 years, the
industry gained self-sufficiency in component and computer
equipment production, and when it had a secure hold on its
domestic market, it began to export. However, the Japanese
faced an enormous competitive threat from U.S. suppliers in the
world computer market and would have probably succumbed to this
pressure had it not been for substantial government support and
protection.
By the 1980s, the industry emerged as the principal competitor
of the United States in a wide range of computer products based
on its strength in high-volume, low-cost manufacturing and
growing prowess in component technology. It has also recently
become more multinational in character in response to fears of
protectionism in key overseas markets and the appreciation of
the yen relative to the U.S. dollar. Japanese suppliers have
now increased their market presence beyond the major OEM
(original equipment manufacturer) agreements they concluded
with U.S. and European companies in the 1970s by opening their
own foreign manufacturing plants and R&D facilities.
II. Stage of Development
In terms of their technological development, the Japanese have
evolved well beyond the imitator stage and are universally
renowned for their ability to assimilate the best research
developed in other countries, to improve significantly on
existing technologies, and to incorporate their research
results into marketable products faster than their foreign
competitors. Their R&D efforts in the past, particularly the
VLSI (very large scale integration) project, have helped them
to become a dominant force in certain key components such as
* Some of the country profiles contained in this appendix were
based on studies prepared for the U.S. Department of Commerce
by the Hudson Institute.
- 175 -
as dynamic random access memory (DRAM), high-speed logic, and
opto-electronics. They are currently working hard to catch up
with the United States in microprocessors and application
specific integrated circuits (ASICS). The scope of and monies
committed to Japanese research on superconductivity have given
U.S. observers great cause for concern. Breakthroughs in this
area would not only help the Japanese to surpass the United
States in computer technology but would also affect the
competitiveness of U.S. firms in several other industries.
At the systems level, the Japanese are reportedly nearly on par
with U.S. firms in hardware design. Their large-scale
mainframes and supercomputers match the best that the United
States has to offer in single processor performance and have
established an impressive reputation for high quality and
reliability. They still lag slightly behind in the development
of parallel, multiprocessor systems. However, Fujitsu and
Nippon Electric Company (NEC) have announced the availability
of their first multiprocessor supercomputers which will compete
with U.S. models on the market. Japanese suppliers have also
gained a strong position in laptop computers and peripheral
equipment and are now attempting to make inroads into the
technical workstation market through licensing agreements,
joint ventures, and investments in promising U.S. start-ups.
The innovativeness of the Japanese has often been overlooked in
assessments of their progress in computer hardware
development. They have cleverly adapted their products to take
advantage of their strength in engineering and manufacturing
and have incorporated many of their key innovations in audio,
video, and optical recording into disk storage devices and
monitors.
III. Industry Structure
The Japanese computer industry is highly concentrated with less
than 2 percent of the more than 1,500 manufacturers controlling
roughly 70 percent of production and almost half of total
employment (see Table 1). Fujitsu, Hitachi, and NEC have
always been the dominant suppliers within this elite group and
the principal participants in and the beneficiaries of Japan's
national computer R&D programs. They are multibillion dollar
conglomerates whose interests in electronics include not only
computer systems, but also advanced components,
telecommunications equipment, and consumer electronics
products. Other highly diversified manufacturers such as
Canon, Matsushita, Mitsubishi, Oki, Seiko, Sony, and Toshiba
are in a second-tier of leading suppliers. These companies
have become world class competitors in certain market sectors
such as laptop computers and low-end disk storage devices and
printers. The remaining firms in the industry are either
subcontractors or subsidiaries and affiliates of the large
Japanese computer producers.
- 176 -
Japanese computer production reached on estimated $27 billion
in 1987, second only to the U.S. industry in output.
Peripheral shipments accounted for nearly half of this value.
Mainframes figured prominently in systems shipments,
representing 42 percent of production, followed by small
systems (24 percent) and personal computers (21 percent).
Table 1
Structure of Japanese Computer Industry
Size of
Percent of
Firm
No. of
No. of
Production
(Employees)
Firms
%
Employees
%
(value)
1-49
1,237
77.4
21,002
17.1
4.1
50-99
185
11.6
12,002
10.6
3.2
100-299
117
7.3
18,828
15.4
7.4
300-999
36
2.3
19,478
15.9
15.4
1000 or more
24
1.5
50,281
41.0
69.9
Total
1,599
100.0
122,526
100.0
100.0
Source: Census of Manufacturers 1986, MITI.
The Japanese industry has been strongly export oriented,
sending nearly a third of its output overseas during the
1980s. More than 50 percent of these exports have gone to the
United States. As a result of the rapid build-up in Japanese
exports entering the U.S. market and relatively lower Japanese
imports from U.S. suppliers in recent years, Japan's computer
trade surplus with the United States soared to around $5
billion in 1987. IBM Japan has traditionally been an important
factor in Japanese computer exports. However, its share
relative to the exports of other leading Japanese suppliers has
fallen sharply since 1980 (see Table 2).
Japan is the second largest computer market in the world with
demand exceeding $18 billion in 1987. Many of the U.S.
computer multinationals have participated in the Japanese
mainframe market since the 1960s either through wholly owned
subsidiaries (IBM and National Cash Register) or joint ventures
with Japanese partners (Burroughs, Control Data, Honeywell
Information Systems, and Sperry Univac). U.S. companies now
sell a broad range of computer systems to Japanese users.
Principal U.S. competitors along with the mainframers include
Cray Research (supercomputers) ; Alliant and Convex
(minisupercomputers) ; Data General, Digital Equipment
Corporation, Hewlett-Packard, and Prime (minicomputers) ; Apollo
and Sun (workstations) ; and Apple (personal computers). U.S.
suppliers generally have had difficulty in penetrating the
Japanese market. Despite their majority shares of key foreign
markets elsewhere in the world, they hold only 22 percent
- 177 -
of Japan's installed base of computers. They have had some
initial success to date in minisupercomputers and workstations
because their Japanese rivals have not yet mounted a
competitive challenge in these market sectors. Apple and other
U.S. personal computer companies originally dominated the
market for these systems in Japan but lost control very quickly
in the early 1980s when the Japanese introduced their own
models.
Table 2
Exports of Leading Computer Firms in Japan
(In Billions of Yen)
Share
Share
of
of
Annual Growth
FY
Total
FY
Total
FY 80-87
Firm
1980
(%)
1987
(%)
(%)
IBM Japan
69
49
317
34
+24
Fujitsu
37
26
209
23
+28
NEC
15
11
180
19
+43
Hitachi
16
11
141
15
+37
Toshiba
4
3
85
9
+54
Total
141
100
932
100
+31
Sources:
Japan Economic Journal and International Data
Corporation.
IV.
Government Objectives
The Japanese Government has actively promoted the Japanese
computer industry since the mid-1950s. It passed laws in 1957,
1971, and 1978 to establish support mechanisms for Japanese
electronics firms and created an infrastructure to guide and
coordinate the industry's activities that brought together the
Machinery and Information Industries Bureau of the Ministry of
International Trade and Industry (MITI), industry councils,
trade associations such as the Japan Electronic Industry
Development Association (JEIDA), and joint research
associations. However, government policy in Japan has been
very flexible and has changed over time to reflect both the
needs and the competitive position of the industry. In
contrast to the policies of European governments, the Japanese
Government did not establish any "national champions" but let
competitive forces determine which companies would emerge as
leaders. Targeting of strategic market sectors and
technologies has been a fundamental element of the Japanese
strategy in computers.
The Japanese Government's role in supporting research and
development was particularly important to the industry. The
government fostered some limited computer R&D in the 1960s
- 178 -
but, when it saw that technology transfer from foreign
companies alone would not be enough to catch up with the United
States and Europe, it began massive funding of national
research projects in the early 1970s. Japanese industry would
probably have had difficulty surviving U.S. competition in the
world market without this support since Japanese firms did not
have enough resources to underwrite these large-scale efforts
on their own. By the end of this decade, the Japanese
Government's involvement in computer R&D diminished when growth
in sales allowed industry to assume more of the research
burden. The national projects remained a significant source of
technology but focused on more speculative, long-term R&D aimed
at helping the industry gain technological leadership.
V. Government Policies, Laws, and Regulations
Research and Development
The principal participants in Japanese computer R&D have been
certain government agencies and their major laboratories,
universities and colleges, joint research associations, and
corporate research laboratories. Their relative contributions
to the performance of this R&D appear in Table 3. Within the
Japanese Government, MITI has played a crucial role in the
development of computer technology not only in providing
research subsidies, but also in identifying priority areas for
R&D, establishing policies and programs, and building a
consensus among Japanese computer firms to work together to
achieve significant R&D objectives in national projects. Its
Electrotechnical Laboratory (ETL) has generally taken the lead
in most of these national efforts. The Ministry of Posts and
Telecommunications (MPT) has also had an indirect influence
through the work of the four Electrical Communications
Laboratories (ECL) of Nippon Telephone and Telegraph (NTT)
NTT has engaged in a wide range of computer-related research
projects internally and jointly with Fujitsu, Hitachi, NEC, and
Oki, its family of suppliers. Its labs have made substantial
contributions to the development of semiconductors, large-scale
computers oriented toward timesharing applications, and high
performance disk storage devices in Japan. From the late 1970s
onwards, NTT has surpassed MITI in spending on computer-related
research.
Japanese universities and colleges have been the weak link in
the research infrastructure, traditionally performing only 4 to
5 percent of computer-related R&D. Inadequate funding from the
Ministry of Education in the past and insufficient numbers of
electrical and electronic engineering graduate students have
limited the amount of basic and applied research conducted in
* NTT became a private corporation in 1985, but the Japanese
Government still has about 60 percent ownership.
- 179 -
academia. Corporate collaborations with universities have also
been minimal until recently, further exacerbating
thesituation. By contrast, U.S. universities have been a
wellspring of basic research in engineering and computer
science, and have greatly benefited from their close ties to
government and industry over several decades.
Table 3
Computer-Related R&D
(Percent of Funding)
Central
Research
Universities/
Year
Industry
NTT
Government
Associations
Colleges
1970
72
28
-
-
N.A.
1971
65
33
1
-
N.A.
1972
33
32
4
31
N.A.
1973
34
21
3
41
N.A.
1974
22
19
3
51
5
1975
31
20
3
40
5
1976
38
18
2
37
4
1977
48
22
2
23
5
1978
46
21
3
25
5
1979
55
19
4
15
7
1980
65
20
2
8
5
1981
61
17
1
16
4
1982
63
16
2
14
4
1983
68
14
2
10
4
1984
73
15
1
7
3
N.A.:
Not available
Source:
Kenneth Flamm, Targeting the Computer, Brookings
Institution, Washington, DC, 1987.
Joint research associations involving government research
institutions and the leading Japanese computer manufacturers were
established during the 1960s to participate in national research
projects and soon became another major force in technology
development. By combining matching funds and resources, they have
provided the industry with an effective vehicle to engage in
critical long-term, competitive R&D and to share results that are
then transferred to corporate laboratories for development into
commercial products. Their significance is underscored by the
fact that the companies in these associations could not have
afforded the expense of the research undertaken jointly in the
national projects on their own and would not have assumed the
great risk entailed. For example, Fujitsu's after-tax profits of
35 billion yen from 1976 to 1979 would not have sustained the
seminal VLSI project, which cost around 72 billion yen. Once a
unique feature of Japan's R&D infrastructure, the joint research
association now has its counterparts in Europe's Alvey, ESPRIT and
EUREKA projects as well as MCC and Sematech in the United States.
- 180 -
Corporations have shouldered more than half of the burden of
funding Japan's computer R&D at least since 1970 (see Table 4)
Their laboratories have also grown in importance in the 1980s,
overtaking joint research associations and even NTT in the
amount of R&D work performed. Most of this corporate activity
is in applied research and development. However, Japan's
progress in computer R&D has been hampered to some extent by
not having the large number of small innovative firms that have
been spawned by venture capital funding in the United States.
Table 4
Japanese Computer-Related R&D Spending
1970 - 1984
(In Millions of Dollars)
Industry
GOJ
Total
Share
Share
Year
Spending
(%)
(%)
1970
83
64
36
1971
118
60
40
1972
168
50
50
1973
301
51
49
1974
314
46
54
1975
348
51
49
1976
398
56
44
1977
438
58
42
1978
626
59
41
1979
725
61
39
1980
726
66
34
1981
978
72
28
1982
1,014
72
28
1983
1,230
75
25
1984
1,645
77
23
Source: Kenneth Flamm, Targeting the Computer,
Brookings Institution, Washington, DC, 1987.
Government support of Japanese computer R&D evolved through
several distinct phases. From the early 1950s to 1961,
development efforts that resulted in Japan's first
commercial computer systems took place mainly within MITI's
Electro-technical Laboratory, NTT, and the University of
Tokyo. The technology incorporated in these systems lagged
well behind U.S. models. Japanese computer firms played only a
subordinate role in these efforts, and government subsidies
provided to industry throughout this period amounted to less
than $1 million.
A MITI-organized research committee in 1955 urged direct
funding for computer R&D and rapid transfer of foreign
technology through patent licensing and technical assistance
to accelerate the growth of the fledgling Japanese computer
- 181 -
industry. These recommendations were formalized in the
Electronics Promotion Law of 1957, which established R&D
support packages and permitted exemptions for the industry from
the Anti-Monopoly Law, allowing MITI to form cartels to control
production, R&D activities, and raw materials purchases. The
Japanese Government later made foreign participation in the
Japanese market contingent on transfer of technology to
Japanese partners. The technical relationships and joint
ventures forged during the 1960s were: Hitachi with RCA
(1961) ; NEC with Honeywell Information Systems (1962) ; Toshiba
with General Electric (1962) ; Oki with Sperry Univac (1963) ;
and Mitsubishi with TRW, Xerox Data Systems, and Westinghouse
(1969) IBM also provided access to its computer patents under
license in 1960 to obtain guarantees for foreign exchange
remittances and the right to manufacture computers in Japan.
However, this arrangement reportedly did not help Japanese
firms in active technology transfer as much as their joint
relationships with U.S. suppliers.
The first phase culminated in the FONTAC project, a three-year
effort began in 1962 to develop a computer competitive with the
IBM 7090. It represented the first government-directed joint
computer R&D program and created one of Japan's first private
industrial research associations, involving Fujitsu as the team
leader along with NEC and Oki. Total funding reached about
$1.5 million, with the government providing 50 percent of that
amount. Both Fujitsu and NEC introduced medium-scale
mainframes in 1964 that were based on technology from the
FONTAC project.
A second phase of government support began in the mid-1960s
with the government taking a more active role in the Japanese
computer industry as a nurturer of industrial research. This
was largely in response to the competitive threat posed by
IBM's introduction in 1964 of its System 360, a computer family
based on hybrid integrated circuits. The Japanese Government
recognized at this time that Japanese computer firms would not
be able to catch up with their U.S. rivals if they continued to
depend on licensed technology. A five-year, Super High
Performance Computer System (SHPEC) program was launched in
1966, which brought together the ETL and Japan's five leading
computer manufacturers. Fujitsu, Hitachi, and NEC were given
the responsibility to build a large-scale mainframe, including
operating system and applications software, while Toshiba and
Oki were asked to develop peripherals. Receiving $40 million
in R&D funds, this first national computer research project
succeeded in developing high performance logic circuitry for
use in large-scale computers and Japan's first semiconductor
memories. The same logic and memory technology was also used
in a complementary industry effort led by NTT to design a
computer system for timesharing and data base management (the
Dendenkosha Information Processing System Project). The
software development effort within the SHPEC program failed to
achieve its goals.
- 182 -
By the end of the 1960s, the Japanese Government had three
basic types of institutional mechanisms in place to support
computer R&D programs: MITI's conditional loans (Hojokin) and
consigned payments (Itakuhi), NTT-provided funds, and research
contracts awarded to participants in ETL-managed national R&D
projects. The conditional loans were rarely repaid since the
R&D associations seldom made a profit.
Two major crises within the Japanese computer industry during
the early 1970s brought about a fundamental change in
government R&D strategy and funding. One was the departure of
General Electric, RCA, and eventually Xerox from the mainframe
computer market following the introduction of IBM's System 370,
which severed the critical technical linkages they had with a
number of Japanese computer firms. The other was the Japanese
Government's commitment under pressure from the U.S. Government
to open up the Japanese computer market to foreign trade at a
time when Japanese manufacturers were confronting a new
technological challenge from IBM. MITI's response was to try
to rationalize the industry by forming three research and
production groups (Fujitsu/Hitachi, NEC/Toshiba, and
Mitsubishi/Oki) and by substantially increasing its R&D
funding. In addition, the government's R&D policy placed
greater emphasis on support for large joint research projects
performed by industry associations whose ultimate goal would be
to develop commercial products. This led to internal corporate
R&D activity declining in importance through 1976 and the
transfer of significant resources out of private R&D labs into
these projects. Japanese spending on computer-related R&D
reached $398 million in 1976, nearly three times the 1971 level
when the Japanese Government began its massive infusions of
funding.
The Japanese Government's R&D programs in this phase were
directed toward catching up with the United States in computer
technology. Although focused largely on theoretical and basic
research, the 10-year Pattern Information Processing System
(PIPS) project conducted research into artificial intelligence
modeled after U.S. efforts that would set the stage for the
Fifth Generation Computer and other more advanced R&D projects
in the next decade. The shorter term "3.5 Generation" program
had mixed results. While all six participants succeeded in
developing mainframe products, Mitsubishi, Oki, and Toshiba
decided later to drop out of large-scale computer manufacture
and to concentrate their efforts on smaller computer systems
and peripherals. Fujitsu and Hitachi introduced their own
IBM-compatible machines, with Fujitsu benefiting from technical
assistance from Amdahl Corporation of the United States. NEC
chose to take an independent, non-IBM compatible route by
producing a line of mainframes based on the operating system
technology that it had acquired from General Electric via
Honeywell. The company went on to become a provider of
technology and mainframe hardware to Honeywell Information
Systems (now part of Honeywell Bull), the source of much of its
early computer know-how.
- 183 -
The period beginning in the late 1970s marked another watershed
for Japanese computer R&D. A rapid increase in commercial
sales allowed the industry to assume more of the burden for
computer R&D in terms of funding and performance. By 1984,
Fujitsu, Hitachi, and NEC each were spending over $500 million
on their R&D programs. Although MITI's funding of joint
research associations remained relatively constant, the
government's role in supporting industry research declined
sharply. Efforts in the national research projects focused on
helping Japanese firms to become state of the art and to
maintain their technological advantage. The advanced
semiconductor technology gained in the VLSI project was largely
responsible for Japanese advances in mainframes and eventually
supercomputers in the 1980s. Both the Software Automation and
the Fourth Generation computer projects were five year programs
that attempted to deal with Japan's weaknesses in software
development. They were the forerunners of TRON and SIGMA,
which would focus Japanese R&D activities on software
engineering and on operating system environments and
microprocessors that could lessen Japan's dependence on U.S.
standards, particularly those set by IBM.
The Japanese Government also embarked on 10-year R&D programs
in the early 1980s that set the goal of surpassing the United
States in computer technology. The Fifth Generation Computer
effort, based on research into symbolic computing and
artificial intelligence, set out to create a radically new
computer system capable of imitating the functions of the human
brain. Concern about the advantage the research might provide
the Japanese in the future sparked the formation of similar
efforts in Europe such as the ESPRIT project and the Strategic
Computing Program in the United States. Other Japanese
projects concentrated at the component level on the development
of more sophisticated, high-speed logic and memory circuits
based on gallium arsenide, Josephson Junctions, and High
Electron Mobility Transistors (HEMT), as well as on the
technologies required to automate integrated circuit design and
production further. At the system level, the Japanese are
working on high-speed, parallel multiprocessor computer
architectures. These efforts include the Supercomputer and New
Function Elements programs.
Market Protection/Procurement
When viewed from an historical perspective, Japanese Government
policies initially protected the Japanese market for domestic
suppliers. The Japanese Government effectively limited foreign
competition by instituting high tariffs, import quotas, and
restrictions on foreign investment and foreign exchange
allocated to purchases to computer imports. It also virtually
assured the industry of continuing source of demand for
Japanese products through the creation of the Japan Electronic
Computer Corporation (JECC) by MITI in 1961 and the enactment
two years later of a "Buy Japan" decree covering government
computer procurement.
- 184 -
The JECC, supported by the Japan Development Bank (JDB) and the
leading Japanese manufacturers, is an organization that
purchases Japanese computers and leases them to users on very
favorable terms. It received $2 billion in loans from 1961 to
1979, a third of which came from the JDB at below market
rates. On the demand side, the JECC became such a major
purchaser of computers that it absorbed at least half of the
industry's shipments during the 1960s. Its access to cheap
capital also provided a subsidy to users who were offered
monthly rental fees approximately 40 percent lower than IBM's
and, as a result, found it more attractive to buy Japanese
systems. The JECC was a godsend to the industry for another
reason. By taking the financial burden of leasing off the
shoulders of Japanese suppliers, it freed up more money for
them to pour into R&D and capital expansion.
The major objective of helping the Japanese computer industry
gain strength through capturing the bulk of domestic sales was
largely accomplished by the late 1960s. Japanese tariffs on
computers were lowered in the mid-1970s and eventually
eliminated on U.S. computer imports in 1986. Import quotas and
limits on foreign participation in the Japanese market were
removed by 1975. The JECC continued to operate but declined in
importance during the late 1970s when Japanese producers turned
to their own internal leasing operations. However, although
the "Buy Japan" policy was formally rescinded in 1978, the
Japanese computer industry still benefits from the strong
preference for Japanese systems that exists within Japanese
Government agencies.
Tax and Loan Policies
Indirect financial support has been another policy tool used by
the Japanese Government to foster the growth of the Japanese
computer industry. The Japanese Government has provided some
tax benefits to Japanese industry in general and others
specifically directed toward computer manufacturers and users.
Among the general tax benefits enacted to encourage industrial
research are an R&D tax credit and accelerated depreciation for
R&D capital. Those designed to stimulate exports include
special deductions for expenses related to foreign trade and
investment.
Industry-specific measures were passed from the late 1960s
onwards with two principal objectives in mind. One was to
expand the use of computers in Japan through special
depreciation deductions for on-line and large-scale computers
as well as reductions in local fixed asset taxes on
mainframes. These tax breaks effectively lowered the cost of
these systems to users, thus stimulating demand. The other
objective was to boost return on investment for computer
hardware manufacturers and software developers by providing an
extensive system of income tax deductions. Perhaps the most
important of these is the repurchase reserve allowance. This
tax provision allows Japanese computer suppliers to set aside a
- 185 -
fixed percentage of sales as a reserve against the repurchase
of obsolete computers from leasing companies and to deduct it
from income.
The Japanese Government has also given the industry loans at
preferential interest rates. One of the major sources for
loans has been the Japan Development Bank, mainly through its
support of the JECC. Other significant funding has come
through loan guarantee programs involving Japan's three
quasi-public industrial development banks and the Small
Business Finance Corporation.
VI. Private Sector Initiatives
Japanese computer firms have usually competed fiercely against
one another, but have joined together in various private sector
groups to pursue certain research, production, and marketing
objectives when they felt they had a mutual interest. The JECC
and the Japan Electronics Industry Development Association
(JEIDA) have been the longest lasting marketing and support
organizations. Other efforts have had a much shorter
duration. MITI organized an industry cartel to produce punched
card, paper tape, line printer, and magnetic drum peripheral
equipment that lasted only a few years during the late 1960s.
Another experiment in cartels occurred in 1971 when MITI
attempted to rationalize the industry by forming three research
and production groups. The Fujitsu-Hitachi partnership was the
most successful of these ventures. Both produced and marketed
different models of the "M Series" of IBM-compatible computers
until they decided to go their separate ways in mainframes in
1975. They also participated in a collaborative effort called
Nippon Peripherals to develop and market IBM-compatible
peripherals and terminals. This venture dissolved in 1976.
Joint research associations have generally been successful
endeavors for the Japanese computer industry. They have
engaged in only a few research programs that reportedly failed
to achieve some of their major objectives. All involved
software development. The earliest was the Super High
Performance Computer System (SHPEC) program in the 1960s which
targeted the development of a mainframe computer operating
system and applications software that could compete with IBM's
System 360. A second effort was the 3.5 Computer Project (1972
to 1976), which did not produce an advanced operating system.
A third was the Software Automation Project (1976 to 1981),
which developed only a few computer-generated, applications
software packages for commercial use.
VII. Effects of Government Policies
The Japanese Government's efforts to protect its infant
computer industry during the 1960s and to turn it into a world
class competitor in recent years have been largely successful.
In fact, the Japanese experience has served as a model for a
number of developing nations such as Brazil that view
participation in the world computer market as critical to their
national security and economic interests.
- 186 -
Government policies initially limiting the foreign presence in
the Japanese market and stimulating demand were instrumental in
helping the industry gain competitive strength. Without this
involvement, Japanese manufacturers would have fallen victim to
their U.S. rivals who were marketing products with vastly
superior technology. The advantage provided by a sheltered
market and the persistence of a "Buy Japan" mentality later on
allowed Japanese firms to capture a dominant share of the
installed base of computers in Japan as early as 1966 and,
despite official liberalization 10 years later, to tighten
their grip on this market.
Similarly, Japanese Government support of industrial R&D laid
the foundation for the industry's advances in componentry,
process and production technology, and systems development.
The national research projects in the 1970s, guided by MITI,
played a very significant role in Japan's efforts to catch up
with the United States. They reduced the costs and risks of
research that Japanese firms could not afford to do internally
at that time and provided a particularly effective vehicle for
sharing and transferring technology.
While Japanese companies eventually committed greater resources
to internal corporate R&D and made important contributions to
applied research and product development on their own, they
probably would not have become a competitive force in
large-scale computers and peripherals as quickly as they have
without Japanese Government assistance.
Other policy instruments were helpful in building the
industry's research and manufacturing infrastructure and
promoting exports. These include various tax breaks and
preferential access to cheap capital.
The Japanese computer industry has an impressive array of
quantifiable achievements to its credit:
O
Its computer production has grown at almost twice the
annual rate of the U.S. industry's output over the past 10
years to $27 billion in 1987 (26 percent versus 14
percent).
Japanese computer exports have risen 36 percent annually
on the average during the same period, again outperforming
the U.S. industry's growth. Japanese firms compete
vigorously against U.S. suppliers in every key foreign
market.
Japan has become the leading foreign supplier in the U.S.
market, accounting now for 42 percent of U.S. computer
imports and 16 percent of domestic consumption. The
Japanese share of the U.S. market would undoubtedly be
much higher if the shipments of Japanese manufacturing
facilities in the United States were included.
- 187 -
The build-up in Japanese-origin imports, together with
offshore U.S. manufacturing, has dramatically altered the
U.S. computer trade picture. A mounting deficit with Japan
has been a principal contributor to a serious erosion in
the traditionally strong U.S. computer trade surplus since
1982.
Fujitsu, NEC, and Hitachi are now among the top 10 computer
manufacturers in the world and are surpassed in total
revenues only by IBM, Digital Electronics Corporation and
Unisys.
Although government support substantially influenced the
development of the Japanese computer industry, other factors
have had some bearing on the success that the Japanese have
enjoyed in the world market. Japan has a culture that promotes
cooperation between government, industry and labor to achieve
national goals once a consensus is reached. This nation also
has a well-educated populace that has provided industry with
the skilled human resources it needs and assisted in the
creation of a strong technical base. For example, the
performance of Japanese high school students on international
tests of mathematics and science skills has consistently
outpaced those of other major industrialized countries for over
a decade.
Japanese corporations have certain characteristics of their own
that have made them formidable competitors. Their managers
generally take a long-term view in developing corporate
strategy. As a result, they place great emphasis on gaining
market share at the expense of short-term profits and price
aggressively (even dump) to attain this goal. They have paid
close attention to process and production technology. This has
allowed the Japanese to become low-cost, high-volume
producers. They also understand the importance of linking R&D
and manufacturing to ensure efficient technology transfer
within the corporation and to build quality and reliability
into their products.
VIII. Future Developments and Trends
Government policy in Japan is currently directed toward helping
the Japanese computer industry gain technological superiority
during the 1990s and ultimately dominate the world market.
However, the Japanese Government's role in charting a course
for the industry has become more complicated, and the problems
Japan faces today are somewhat different than they were a
decade ago. In fostering research, the government continues to
set goals for the national projects and contributes funds for
them, but it has found cooperation from Japanese companies
harder to obtain. It must contend not only with corporations
placing a higher priority on their own internal R&D efforts,
but also with the fact that both government and industry must
compete for a limited number of qualified researchers in Japan
- 188 -
who can work on such exotic technologies as artificial
intelligence and superconductivity. In response to this need,
the Japanese Government has begun to reform its educational
system. It is pouring more funds into basic research within
academia, expanding collaborative efforts between universities
and industry, and revising science and engineering curricula to
improve Japan's capacity to innovate.
The government's involvement in promoting the development of
the industry has lessened to some extent now that Japanese
computer firms have a secure hold on their own domestic market
and have the resources to challenge their major U.S. rivals for
market share overseas. By contrast, its trade and foreign
policy activities on their behalf have increased enormously
over the 1980s. The Japanese Government has had to deal with
mounting criticism from foreign governments, particularly the
U.S. Government, that the Japanese market is closed to outside
suppliers and that Japanese firms routinely engage in unfair
trade practices.
The Japanese Government is also concerned about the effect on
Japan's trade with Western Europe of the European Community's
decision to remove internal trade and economic barriers and to
create a single regional market by 1992. Like the U.S.
Government, it is closely monitoring the implementation of this
decision to see if it will eventually restrict the access of
Japanese firms to this critical market.
Tim Miles,
Office of Computers and
Business Equipment
Computer Software
I. Historical Development
The Japanese computer software industry significantly lags
behind its counterparts in the United States and Europe.
Traditionally, the hardware market in Japan has been dominated
by sales of large systems (mainframes). Most users would
either buy their software bundled with hardware from the
systems suppliers or develop their own custom software
in-house. With the increased proliferation of smaller
computers (primarily personal computers (PC) and office
machines) and the presence in Japan of a number of
world-leading software packages (mainly developed in the United
States), this pattern is slowly changing. Users are buying
more software developed by independent software vendors, both
domestic and foreign. Foreign software suppliers currently
have an advantage, since few domestic software houses have been
able to develop competitive products.
- 189 -
II. Stage of Development
The Japanese domestic software industry is currently an
assimilator of foreign technology. The Japanese (government,
industry, and academia) have recognized that measures must be
taken if the Japanese software industry is to catch up with the
West. Consequently, programs aimed at hastening industry
development have been undertaken under the auspices of all
three. These programs are either based on what appears to be
the direction in which the West is heading (using UNIX as the
basis for the SIGMA project) or are aimed at developing new
systems (TRON) to compete directly with proven products.
III. Industry Structure
Computer software sales in the Japanese market should exceed
$10 billion in 1988. Most custom software continues to be done
in-house and that which is not is developed by Japanese firms.
Packaged software, which holds a smaller share of the market
than custom software but is growing faster, is dominated by
foreign products, mostly from the United States. Most major
U.S. PC software vendors have established a strong presence in
Japan (Ashton-Tate, Lotus, and Microsoft). Many U.S. mainframe
and minicomputer software packages are also available in Japan,
although more of them work directly through systems suppliers.
The market is quite competitive and fair to foreign products if
they have been adapted to fit the demands of the Japanese
market (including Japanese language capability).
IV. Government Objectives
Many believe that the Government of Japan is trying to overcome
what they see as the Japanese's vulnerability in software and
microprocessors. Therefore, the Japanese have launched several
projects aimed at improving their competitiveness in these
areas, and thereby decreasing their dependence on the West,
especially the United States.
V. Government Policies, Laws, and Regulations
The Japanese Government has a number of policies aimed at
promoting the Japanese software industry. For example,
domestic firms may receive tax breaks for software
development. There are a number of government-backed projects,
including SIGMA (aimed at increasing software developers'
productivity) and the Fifth Generation Project (aimed at
parallel processing and artificial intelligence technology).
Current Japanese law generally provides protection similar to
that provided in the United States, but concern has been
expressed that MITI would like to switch from copyright
protection to a sui generis form of protection for software.
This would greatly limit the term of protection and might
include provisions for reverse engineering and compulsory
licensing of software products. Such changes would clearly
- 190 -
benefit domestic software developers. MITI proposed this
approach in 1983, but was rebuffed.
VI. Private Sector Initiatives
Although the relationships between the public and private
sector in Japan are often so intertwined that it is difficult
to determine where one ends and the other begins, the private
sector unquestionably plays a significant role in software
development projects. For example, the TRON project includes
significant cooperation between the private sector and the
academic community. The idea behind TRON originated at the
University of Tokyo and the TRON Association, comprised of
interested companies, oversees much of the development work.
However, it is still not clear that such projects have no ties
at all to the government. In addition, there are other
projects--primarily aimed at making the Japanese software
market more in line with the rest of the world--supported by
various industry segments and in which the government does not
seem to be involved (e.g., AX- a bilingual AT).
VII. Effects of Government Policies
Until there has been further analysis of the effects of
government policies with regard to the development of computer
software, it is difficult to assess the failure or success of
these policies.
VIII. Future Developments and Trends
There is nothing in the immediate foreseeable future that will
improve the competitiveness of the Japanese software industry.
However, given the history of government-industry cooperation
in Japan, the competitiveness of the domestic software industry
may advance. For example, although the technological
advantages of new products such as TRON remain unclear,
Japanese Government support could give them the critical mass
necessary for market acceptance worldwide.
Heidi Hijikata
Office of Computers and
Business Equipment
Telecommunications
This section represents an overview of the Japanese
telecommunications sector, which will be explored in more
detail in the competitiveness study which is due to be published
by the Department of Commerce for Congress.
I. Historical Development
Japan's telecommunications industry has undergone dramatic
change during the postwar period. The Nippon Telephone and
Telegraph Public Corporation (NTT) was created in 1952. After
- 191 -
rebuilding the telecommunications infrastructure destroyed
during the war, NTT engaged in joint R&D programs to develop
new network technologies. (Note: This R&D funding came from
NTT's huge cash flows.) Using its enormous procurement
leverage, NTT perpetuated and strengthened relationships with a
"preferred family of suppliers," that were developed by the
Ministry of Communications during the 1920's. In 1980, a
Policy Bureau was created in the Ministry of Posts and
Telecommunications (MPT) to promote the Japanese
telecommunications industry. In January 1981, NTT procurement
became subject to the U.S.-Japan Agreement, on NTT
Procurement. Until that time, NTT procured products
exclusively from domestic manufacturers. In April 1985, NTT
was privatized and was exposed to competition for the first
time. For suppliers, this process created new sales
opportunities.
II. Stage of Development
For many years, the Japanese telecommunications industry was
regarded as an imitator. Since the early 1980s, however, there
has been an increased emphasis on becoming a world class
competitor. As a result, the industry can now be considered a
commercializer and an innovator.
III. Industry Structure
The Japanese telecommunications industry is highly
concentrated. In 1983, there were 435 manufacturers of
telecommunications equipment with over 83,000 employees.
Although the majority of firms had less than 100 employees
each, the 19 largest companies (with over 1,000 employees
each) produced nearly 70 percent of all telecommunications
production in Japan. Moreover, the industry is dominated by
four firms--NEC, Fujitsu, Oki and Hitachi (the "NTT family").
Although telecommunications accounts for only a portion
(between 16 and 36 percent) of these firms' total production of
all types of equipment, together they account for 60 percent of
total telecommunications production in Japan. When their
medium-sized affiliates are included, they account for about 75
percent of Japan's telecommunications production.
Japan has the second largest telecommunications market in the
world (third if the Soviet Union is included), estimated at
$8.3 billion in 1987. U.S. firms have had considerable
difficulty penetrating the Japanese telecommunications market,
despite some liberalization. Most successful firms (e.g.,
Motorola and AT&T) have committed several years of work to
entering the market. In addition, many have utilized Japanese
distributors to avoid cultural barriers.
IV. Government Objectives
The Japanese Government, through both MPT and the MITI, has
made promotion of the telecommunications industry a high
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priority. MPT is intimately involved in industry planning and
also in R&D funding. Sensing telecommunications as an
important export sector, MITI began to push for a larger role
in the industry and has made various incentives available. In
addition, the NTT family was already export oriented.
V. Government Policies, Laws, and Regulations
Research and Development: Direct Japanese Government funding
for R&D projects in the telecommunications sector totals
billions of dollars per year. In addition, the Japanese
Government used dividends from NTT stock to establish the Basic
Technology Research Promotion Center.
Financial/Fiscal Incentives: Japanese incentives for the
telecommunications industry include investment tax credits, tax
exemptions, and preferential access to low-cost capital.
VI. Private Sector Initiatives
In the early 1980s, many Japanese corporations, unhappy about
the cost of service and delays in introducing new technologies
and services, began to push for a more aggressive
telecommunications policy. Financial service companies, in
particular, were concerned about their ability to compete with
foreign counterparts following liberalization in 1984. As a
result, they exerted pressure to upgrade telecommunications
services in Japan. As a result, there has been tremendous
improvement in the local infrastructure as well as a higher
level of technical capability over the last five years.
Japanese programs to encourage an information society and
regional development in remote areas, coupled with the
transition to a service economy, have resulted in initiatives
such as the Technopolis Program and Integrated Network Services
(INS).
VII. Effects of Government Policies
The telecommunications sector has the highest returns on assets
of any major Japanese industry. Moreover, Japanese firms have
been able to develop and commercialize new technologies with
minimal risk.
Since the early 1980s, Japanese production of telecommunications
equipment has more than doubled, and Japanese exports of
telecommunications products have increased by 60 percent.
VIII. Future Developments and Trends
The U.S.-Japan Agreement on NTT Procurement is scheduled to
expire at the end of 1992. In addition, bilateral
telecommunications agreements will be reviewed annually under
Section 1377 of the Omnibus Trade and Competitiveness Act of
1988.
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MPT has established a study group to make recommendations for
Japanese telecommunications policy for the 1990s. Also, a
subcommittee on administrative reform in the Prime Minister's
office is currently examining NTT's role, with the objective of
increasing competition further.
Linda Gossack
Office of Telecommunications
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BRAZIL
Because Brazil is the eighth largest economy in the West, the
importance it places on developing its own informatics industry
is not surprising. (In Brazil, the term "informatics" covers
all electronic, digitized equipment.) However, what makes
Brazil's experience unique and sets it apart from other
countries with similar goals are the strategies and policies it
has used to accomplish this goal. These policies were
established within the context of a convergence of favorable
conditions, the application of traditional economic policies,
and the hard facts of technological reality.
I. Historical Development
The roots of this development effort lay in the 1960s, when
Brazil's "economic miracle" produced the necessary capital for
industrial and technological development, and its government
provided a certain amount of political stability. But the real
impetus came in the early 1970s from several sources. First,
there was the military's perceived need for an independent
Brazilian computer capability, which led to the production of
Brazil's first nationally designed and manufactured computer.
Secondly, a coalition of military and civilian technocrats,
some of which were educated in the United States, began pushing
anti-dependency theories because of their perception that the
"minicomputer revolution" would result in increased demand for
computers, which would make domestic computer production
viable. Finally, the balance-of-payments problem created by
the first oil crisis in 1974 made the general imposition of
import controls necessary, especially on computers, which were
becoming a significant import item. It was not difficult for
the Brazilian Government to implement import substitution
policies in this emerging sector, because such policies had
been the traditional approach to economic development in Brazil.
Like other foreign governments, the Brazilian Government
instituted an activist development model for its computer
industry. In 1972, a government group (CAPRE) was formed and
given significant authority to improve the efficiency of
computer procurement and use. CAPRE's charter and power
expanded quickly so that four years later, it was charged with
formulating a strategy to establish a national computer
industry. In 1974, a "national champion" (Cobra) was
established as a joint venture between the government, a
British computer manufacturer, and a small local firm. This
resulted in the first Brazilian-assembled minicomputer. In
1979, SEI (Special Secretariat for Informatics) was created to
replace CAPRE and was given additional administrative and
regulatory authority over the industry. Reflecting its
military/strategic roots, SEI was originally attached to the
National Security Council. The evolutionary development of the
informatics regime culminated in the passage of the 1984
National Informatics Law. This law created another government
body (CONIN), a cabinet-level council established to oversee
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the informatics policies, and codified most of the restrictions
that the government had decreed over the previous decade. In
1987 Brazil passed a software law that extended the
restrictions to the software industry, while also providing
explicit copyright coverage for software.
II. Industry Structure
Brazil has a bifurcated computer industry. Mainframes and
superminicomputers are either imported, manufactured in country
by foreign companies, or assembled domestically under foreign
license. Microcomputers, the fastest growing segment of the
industry, may be manufactured in Brazil only by domestic
companies. Some minicomputers and peripherals are also
designed and made by national companies. While there are 50 to
60 active Brazilian firms in the industry, fewer than 15 major
foreign computer manufacturers are in Brazil, most of which are
long-established U.S. firms. Most of the largest local firms
are tied to financial or industrial conglomerates. Because of
a recession in the computer industry, however, the Brazilian
industry is consolidating as a result of mergers and
reorganizations.
III. Policy Structure
The Brazilian Government regulates the production, operation,
marketing, and importation of informatics goods and services
guided by the Law of Similars--a long-standing policy that
reserves the market for local products. The controls,
administered by SEI and to a lesser extent other government
bodies, are applied to importers, foreign investors, and
domestic companies alike and are administered in the name of
protecting and expanding the national industry. SEI's
principal control mechanism is its authority to approve or deny
import licenses, investment plans, and marketing requests.
This is basically a negative strategy. Fiscal incentives, R&D
support, and other positive development inducements for local
firms, although provided for in the law, are not aggressively
pursued partly because the Brazilian Government lacks the
requisite funds to implement these policies. Furthermore,
because of strong resistance to foreign involvement in the
industry, there are no foreign investment incentives. For
example, in the computer sector, all microcomputers and most
minicomputers are reserved for national manufacture, and
foreign companies are banned from import or local production.
On the other hand, larger computers not made in Brazil can be
imported. Software is also subject to the law of similars,
although the amount of lost U.S. sales due to restrictions is
much less than that for hardware.
IV. Policy Critique
The success of Brazil's policies to develop an independent
indigenous industry must be evaluated in terms of political and
military objectives, as well as economic goals. The economic
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costs of these policies far outweigh economic gains, and
predictions of long-term commercial benefits are extremely
risky at best in this fast-changing industry. Although
prominent industry sectors within Brazil increasingly voice
their opposition to these policies and to the way they are
implemented, their dissent, which is mainly on economic
grounds, has been overridden by the nationalistic political
arguments of the policies' supporters. These supporters point
to the progress that has been made toward developing the
industry in a relatively short period of time that would not
have happened, they believe, without market reserve. They
argue that economic disadvantages, therefore, must be
overlooked.
Critics of the policies generally focus on the economic impact
of the inefficient allocation of resources as it affects the
total economy, other industrial sectors, and the computer
industry, itself. It has been estimated that the policies cost
Brazil around $500 million a year.
The primary concern is that the nonavailability or delayed
availability of needed technology reduces the productivity and
competitiveness of other industrial and commercial sectors in
Brazil. Lack of availability can be measured in both
quantitative and qualitative terms. Brazil's consumption rate
of computers, 1.3 percent of the U.S. rate, is low relative to
the size of its gross national product, which is roughly 4.6
percent of that of the United States. Brazil's local
microcomputer producers also lag technologically behind U.S.
suppliers by two to four years and face other complaints of
poor quality and user support. One intangible byproduct is the
frustration caused by administrative barriers that discourage
even the authorized purchase of foreign equipment.
Domestic prices are a second concern. The prices of
microcomputers manufactured by Brazilian firms are two to four
times more expensive than comparable models sold in the United
States. High prices impede exports, increase inflationary
pressure, deflate the market, and encourage smuggling.
Finally, critics charge that current policies are essentially
counterproductive. These policies retard the industry's
development by artificially shielding domestic firms from
international competition and by denying them the benefits of
technological collaboration with foreign firms. Brazil is
mortgaging its future by keeping out foreign investment and
technology. It is trapped by restrictive policies and
technological realities, and its internal market is not large
(roughly 3 percent of the U.S. market). Therefore, without
export enhanced markets, Brazilian firms cannot achieve the
necessary economies of scale for efficient production at the
low end of the product spectrum where these firms have a
competitive chance. These firms also cannot compete at the
high end without the aid of foreign technology and significant
amounts of R&D funding.
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V. Future Developments and Trends
Creating a domestic electronics industry is a powerful
attraction for countries with strong nationalistic
aspirations. Achieving success, however, is another matter.
Although Brazil has made tangible strides in production at the
low end, its products are neither competitive nor innovative,
and may lose their dominance over a seemingly secure and stable
domestic market. The industry is also in financial trouble,
with after tax losses in 1987 equaling over 12 percent of net
worth. Problems include capital shortages, predatory pricing,
unrestrained smuggling, insufficient economies of scale, few
exports, and the lack of a semiconductor industry. There are
discussions within the industry and government to increase
company scale and capital concentration through mergers and
consolidations. This, however, may not be enough to make the
industry self-sufficient.
The government has recently moved to ease the implementation of
its informatics policies. It is unclear, however, whether
these acts constitute a trend that will eventually lead to
systemic changes in the laws or are merely another evolutionary
adjustment in the informatics regime. It is certain that the
internal debate in Brazil over the efficacy of the policies
will continue subjecting the government to increasing political
pressure from competing constituencies. Outside pressure will
also continue to be applied on behalf of foreign suppliers.
But if Brazil is to make significant changes in its informatics
regime, it will probably be in response to macro economic
conditions. This is something that cannot be ignored for long
and that may force the country to choose between long-run
economic growth and the short-term viability of its informatics
firms.
R. Clay Woods
Office of Computers and
Business Equipment
- 198 -
INDIA
Introduction
There has been much attention paid to the liberalization of the
Indian electronics market. Extremely onerous controls have
been lifted; many laws on repatriation of profits have been
liberalized; and in some sectors manufacturing has been opened
to both private and public sector firms with no limit.
However, relative to the United States or one of the newly
industrialized economies, the chance that the Indian
electronics industry will become an international competitor in
the near future is virtually nil.
I. Historical Development and Industry Structure
India's Department of Electronics (DOE) was established in 1970
and reports directly to the Prime Minister. Despite the
efforts of the DOE and its various committees, the market
reserve policies, and government-provided R&D support, the
indigenous industry was unable to keep up with worldwide
technological developments. The Indian Government began to
change its approach when the Seventh Five-Year Plan specified
lifting import restrictions on most electronics equipment.
India's electronic equipment production in fiscal year (FY)
1987 was $3.7 billion, 21.7 percent growth over FY 1986.
However, three years after lifting the import restrictions, the
Export/Import Policy for 1988-1991 reinstated restrictions on
all computers except high-end minis and high-end mainframes.
The official government reason for this action was that India
had developed the capability to produce the low-end of the
computer spectrum, and these local manufacturers must be
protected from foreign competition.
The first digital computer was imported and installed in India
in 1956. The first indigenous computer was manufactured
jointly by the Indian Statistical Institute and the Jadavpur
University in 1964. The real thrust in India's computer era
was provided by investment by two foreign computer vendors:
IBM and ICL from the United Kingdom. After entering the
country with manufacturing and design facilities, IBM chose to
leave in 1979 when the Indian Government demanded that IBM
transfer ownership to it. At the same time ICL cooperated with
the Indian Government and transferred 60 percent of its equity.
Today the computer industry in India is made up of 50-60
medium-to-small firms ($30 million or less) that either
assemble imported knocked-down kits, or are involved in
joint-ventures with foreign computer companies and adapt their
firm's technology to the Indian market. Many of the computer
companies are still trying to find a market niche of their own,
in the wake of production decontrols and the resulting market
competition. Among imported computer systems, U.S. products
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dominate the market. Most Indian endusers are familiar with,
and thus prefer, U.S. computers.
The Indian policy for electronic components was introduced in
1981, highlighting the need for economically viable capacity,
internationally competitive prices, and freer import of
technology. Component production grew 9.4 percent to $477
million from FY 1986 to FY 1987. The only manufacturer of
semiconductors in India is Semiconductor Complex Ltd., which
was set up by the Indian Government in 1983, with technical
assistance and semiconductor designs from American Microsystems
Inc. of Santa Clara, CA. Semiconductor Complex Ltd. primarily
produces semiconductors for consumer electronic items and is
functioning at about 50 percent of its capacity.
DOE has had a program for promoting computer software
development since 1972. However, the software sector was not
able to fully develop until both a new software policy was
instituted in December 1986 and the computer policy of 1984 was
adopted, which allowed hardware to be imported. The software
policy has four primary goals: to achieve a greater market
share in the international software market; to develop both the
domestic and export markets simultaneously; to simplify
procedures for starting new software firms; and to promote
domestic computerization. Under this new policy, India
forecasts 60, 80, and 100 percent export growth over prior
years for 1987, 1988, and 1989, respectively.
The Software Development Agency within DOE is the principal
organization responsible for implementing the software policy,
monitoring software export performance and promoting the growth
of the software industry for domestic and overseas markets.
The Indian telecommunications sector is mostly owned and
controlled by the Indian Government, with multiple firms (the
largest had $357 million in revenue in 1986) licensed to
manufacture telecommunications equipment. The government only
recently prioritized the development of an efficient
communications network by allocating funds to that sector in
the Seventh Five Year Plan.
The domestic production of telecommunications equipment in
India grew to an estimated $795 million in 1987, up 16 percent
from 1986. The Indian Government closely controls imports of
telecommunications equipment, and imports for purposes of stock
and sale are not permitted.
II. Government Objectives
The growth of the electronics sector in India has been based on
heavy government support and a hard-line commitment to
self-reliance and an anti-isolationist industry. These themes
have been constantly repeated in the industrial laws enacted
since 1948, which are outlined at the end of this Appendix.
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At one time or another India has used almost all of the
measures known today to restrict competition within the
electronics sector: limits on foreign investment, production
controls, incentives to promote local suppliers, restrictions
on imports, and promotion of exports through subsidies and
import entitlement schemes.
The lack of adequate intellectual property protection in India
has also been a continuing concern. The government amended the
Copyright Act of 1984 to include computer software in response
to both Indian and foreign company concerns. However, many
potential investors do not think that, the current protection
adequately secures their companies interests. India considered
accession to the Paris Convention for the Protection of
Industrial Property in 1986, but there has been no movement in
that direction since.
The government research and development policy is also based on
the belief that indigenous development of technology is one of
the important aspects of self-reliance. Hence, India now has a
substantial infrastructure of research institutions. Among
these are the Central Engineering and Electronics Research
Institute and the Telecommunication Research Center. Emphasis
is placed on the practical use of technological developments
made in these laboratories.
III. Effects of Government Policies
Overall, the electronics industry has suffered from a
combination of inadequate funding and the lack of an incentive
to expand. However, the effects of the government's electronic
policies have varied between sectors.
Thus far, the government policies aimed at creating an
indigenous computer industry have been unsuccessful. What they
have created are assembly operations and importers who find
creative ways to circumvent the present import ban on computers.
The telecommunications industry is still heavily controlled by
the Indian Government, and the limited imports and foreign
investment requirements make it very difficult for domestic
firms to advance technologically. However, with the recent
funds allocated to this sector, the foreign interest in the
market will increase and likely be followed by the importation
of advanced communications equipment.
The components industry has not had much of an opportunity to
develop. With little manufacturing of computers and production
and investment controls in many end-product manufacturing
sectors, there is little incentive to invest or quickly upgrade
to a higher level of technology. This has created companies
that find little reason to make capital investments and
improvements in their products.
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From all indications, the new government policy promoting
software development both through joint ventures and indigenous
Indian ventures is quite successful. The value of software
developed in India and exported is forecasted to continue to
increase over the next five years.
IV. Future Developments and Trends
The tremendous potential of the Indian market, because of its
size and the enormous number of skilled workers, is highly
touted by the government. This attractive investment picture
is offset by requirements for investment approvals, licensing
considerations, inadequate intellectual property protection,
export quotas, and import restrictions.
The Indian Government may be forced by the increasing number of
skilled Indian workers to liberalize its policy on imports in
order to allow them access to the latest technology. The
Indians have developed a large pool of trained electronics
technicians, engineers, and computer operators, many educated
overseas in environments with the latest technology. Many
Indians consider the country's "brain drain" a serious problem
and believe the government should do something to stop it.
Government Policies
The Industrial Policy Resolution of 1948 - granted the
government authority to control public and private industries.
Industrial Development and Regulation Act of 1951 - granted the
government the authority to enforce production controls on all
industry.
Essential Commodities Act of 1955 - brought both pricing and
distribution under the government's control.
At this point there was a serious confrontation between
business and government, and little investment was made in
India's industrial base.
Industrial Policy Resolution of 1956 - granted the government
control over any industry, with greater emphasis on small-scale
ventures.
The mid-1950's saw a shortage of foreign exchange, and the
government passed the following laws to gain control over
capital flows.
Second Five Year Plan (1955-60) - introduced licensing of some
goods to control foreign exchange requirements.
Also export subsidies were introduced in fiscal measures,
import entitlement schemes, large taxes on some traditional
exports, and foreign trade zones.
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Monopolies and Restrictive Trade Practices Act (MRTP) 1971 -
granted the government the power to nationalize private
enterprise.
Foreign Exchange Regulations Act (FERA) 1974 - prevents
repatriation of profits to foreign investors by limiting
foreign equity to 40 percent.
Open General License 1978 - An effort to relax some harsh
import duties.
Phased Manufacturing Program (PMP) - requires that importing
firms purchase their inputs from local sources for five years
following incorporation.
Heidi Hoffman
Office of Computers and
Business Equipment
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SINGAPORE
I. Historical Development
Singapore's electronics industry began in the late 1960s and
early 1970s, mainly through U.S. investment in the assembly of
TV kits, transistors and simple integrated circuits, and
consumer electronics products. The second phase (1975-85)
witnessed a focus on consumer electronics, passive components
(such as capacitors, connectors, and resistors), printed
circuit boards, and the rapid build-up of industrial
electronics.
II. Stage of Development
The industry has now developed from labor-intensive assembly to
product engineering and automated assembly, integrated circuit
design, wafer fabrication, and product development. The
electronics industry today produces locally developed audio
products and has a highly automated assembly, testing, and
support infrastructure for the production of semiconductors and
communications equipment. Current capabilities in the industry
include the use of surface mount technology, and the
production of high density disk drives, high resolution graphic
controllers, Chinese-language word processors, and electronic
components, such as dynamic random access memory chips and
multilayer printed circuit boards.
III. Industry Structure
Electronics, Singapore's premier industry, accounted for 35
percent of total manufacturing output in 1987. There were 217
companies, dominated by American and Japanese multinationals,
employing 31 percent of the total work force in the
manufacturing sector, or 84,000 workers. Output was $7.5
billion, while domestic exports were $7.4 billion, which
contributed 40 percent of Singapore's total domestic exports of
$18.6 billion in 1987. It is estimated that the electronics
industry accounted for some 40 percent of total investment in
Singapore in 1987. Although the Japanese have overtaken the
United States as the top investor in Singapore for the past two
years, the United States has remained the largest investor in
electronics. U.S. companies present in Singapore include
Apple, AT&T, Unisys, Hewlett-Packard, Seagate Technology, and
Tandon. Many of these companies have expanded beyond
manufacturing and now also use Singapore for marketing,
development. sourcing, servicing and support, and for product design and
Information technology covers computer hardware, software, and
telecommunications services. It is well established in
Singapore, with total sales of $650 million in 1986. The
promotion of Singapore's National Information Technology Plan
led to rapid growth in the usage of computers.
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IV. Government Objectives
In 1986, the government announced its National Information
Technology Plan to develop a strong export-oriented information
technology industry and to use information technology to
improve productivity and competitiveness in all parts of the
economy. Many of the new projects under the plan will be joint
efforts by the National Computer Board (NCB), and the Economic
Development Board.
V. Government Policies, Laws, and Regulations
Through various incentives and training schemes, companies are
encouraged to restructure, rationalize, automate, train, and
improve their productivity. In addition, companies are
encouraged to go beyond manufacturing into other activities
such as marketing, sourcing, servicing and support, and product
design and development. The government provides incentives to
foreign companies setting up overseas headquarters in
Singapore, encouraging the use of Singapore as a distribution
and procurement center.
As a means of financing new ventures, the government offers
pioneer status to firms, which entitles the firms to a tax
holiday of up to 10 years. In 1987, Singapore promulgated a
copyright law that includes the protection of software. An
improved patent system is currently being investigated. The
government also funds R&D programs. Between 1981 and 1983,
three computer training institutions were opened: the
Institute of Systems Science, the Japan-Singapore Institute of
Software Technology, and the Center for Computer Studies. NCB
established an Information Technology Institute in 1986 to work
on software engineering, communications technology, and
knowledge systems. The government also established the Product
Development Assistance Scheme and the Software Development
Assistance Scheme.
VI. Private Sector Initiatives
To create the skilled professionals needed for its software
industry, Singapore has established several institutes with the
aid of multinational firms in the computer industry. In 1981,
the Institute of Systems Science (ISS) was set up as a joint
effort between the National University of Singapore and IBM.
The government also established the Japan-Singapore Institute
of Software Technology. It has also played a role in
accelerating the growth of the local semiconductor technology.
Chartered Semiconductors is a joint venture between state-owned
Singapore Technology Corporation and two U.S. manufacturers.
The Government of Singapore encourages the direct transfer of
technology by foreign firms for use by local companies. For
example, Hewlett-Packard created a training unit for
computer-aided design, manufacturing, and engineering
(CAD/CAM/CAE). Local firms, in turn, are encouraged to form
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business relationships with multinational companies to
penetrate foreign markets. There is some evidence that local
information technology firms are joining together into
consortia to compete in the world market.
VII. Effects of Government Policies
The information technology industry has yet to achieve the main
goals set in the government's plan despite its impressive 15
percent annual growth rate since 1980. Most of the information
technology industry's sales (78 percent in 1986) have been to
the domestic market. The biggest local customers have been
research/education institutions and larger private sector
firms. Information technology exports have risen only slowly
from 18 percent of total sales in 1983 to 22 percent in 1986.
Some constraints affecting the industry are a relatively small
technical base; an educational system that does not emphasize
intellectual creativity; small, undercapitalized and
nonexport-oriented local companies; and the relative lack of
venture capital.
The production of industrial electronics and components fits
well with Singapore's high tech strategy. However, much of the
work in these industries, e.g., the assembly of disk drives, is
often labor intensive and low skilled. Although Singapore is
the world's largest producer of Winchester disk drives, the
Economic Development Board dissuaded at least one manufacturer
from expanding its disk drive assembly operation because of the
tight labor market.
Singapore's efforts in the telecommunications industry have
made it the telecommunications center of South East Asia. It
is the western terminus of the Commonwealth Cable System, which
extends to Singapore from the United Kingdom via Canada and
Australia. Within Singapore the telephone density was slated
to be 40 sets per 100 inhabitants by early 1986.
VIII. Future Developments and Trends
Given the importance of high tech manufacturing, the government
of Singapore is likely to continue to promote actively
electronics investment. Assuming no slowdown in the world
economy, prospects are good for continued growth in the
future. Growth, however, will be at a slower pace due to local
growth. labor constraints and a decline in the rate of productivity
Vivian Spathopoulos
Office of Computers and
Business Equipment
- 206 -
SOUTH KOREA
I. Historical Development
South Korea's electronics industry began in the early 1960s
with the assembly of vacuum tube radios from imported parts.
The industry, dominated by domestic capital up to the middle of
the 1960s, began to attract foreign investment from companies
such as Fairchild, Motorola, and Signetics in the mid-1960s.
In the early 1970s, Korea largely manufactured parts and
components such as transistors, diodes, integrated circuits,
radio receivers, and black and white television parts. By the
end of the 1970s, Korean-made products included electronic
calculators, electronic watches, and videocassette recorders.
Computer and peripheral equipment production and exports began
to grow rapidly in the 1980s.
II. Stage of Development
Korea's electronics industry has moved beyond the simple
assimilation of technology. It is now challenging other major
competitor nations, in a variety of consumer products,
semiconductors, microcomputers, and display terminals.
III. Industry Structure
The electronics industry in South Korea grew from about 1.5
percent of the country's GNP in 1971 to about 8.8 percent in
1985. Over 50 percent of its production is exported. The
electronics share of total exports was about 8.3 percent in
1985, making it, after shipbuilding and textiles, the third
largest export industry. The Korean electronics industry
produced 0.2 percent of total world electronics output in the
early 1970s, a share that increased to 2.8 percent by 1984.
Parts and components have the largest share of the industry's
production followed by consumer products and industrial
equipment. Domestic firms make up the bulk of the industry,
led by companies such as Daewoo, Hyundai, Samsung, and
Goldstar. Foreign firms and joint ventures are heavily
concentrated in the production of parts and components,
producing a small share of consumer products and industrial
equipment.
IV. Government Objectives
In 1969, the Korean Government promulgated its first eight-year
electronics development plan and adopted a national electronics
industry promotion plan. This was the first time the Korean
Government identified electronics as a strategic industry. In
addition, five-year economic development plans were developed
to integrate and define the overall direction of industrial
policy. The policy has shifted away from labor intensive
industries towards promotion of higher value-added, technology
intensive industries.
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In April 1981, the Korean Government revised its electronics
industry promotion law. In addition, the Electronics Industry
Technology Upgrading Plan and the Electronics Industry
Promotion Fund were established.
V. Government Policies, Laws, and Regulations
Support for R&D for both product and process technology is an
important government policy. The Ministry of Trade and
Industry has made funds available to Korean electronics firms
to develop semiconductors and computers. The Korean Institute
of Electronics Technology pursued research in electronics and
also played an active role by building the early production
lines for large scale integrated circuits.
The government also provides investment funds to electronics
firms via established loan mechanisms, such as the Korea
Development Bank. It also acts as a substantial purchaser of
goods, particularly for the telecommunications industry. To
attract foreign companies, the Korean Government gives
companies incentives, including exemption from Korean income,
property, and corporate taxes, usually for a five-year period.
To promote local industry, South Korea protects its local
market through import licensing, strong buy-national policies,
and high tariffs. Policies include restricting the imports of
certain computers, software, semiconductors, and communications
equipment when domestic sources are available. While most
import licensing restrictions were eliminated in the early
1980s and some tariffs have been reduced, buy-national policies
remain.
Korea also has a Software Development Center, which was
established in 1967. The center provides consulting and design
assistance to public and private entities.
VI. Private Sector Initiatives
A number of Korean companies, including Hyundai, Daewoo,
Goldstar, and Samsung, have banded together in a memory chip
consortium. Dataquest-Korea reports that the group has already
developed a manufacturable 4Mb DRAM. In addition, $263 million
has been allocated to develop a 16 Mb DRAM by March 1991, and a
64 Mb DRAM in 1993. Sixty percent of the funding is company
sourced with the remainder financed by the Korean Government.
The Korean Government has provided funds to encourage the
formation of private research institutes. Before 1982, private
sector investment in R&D averaged less than 1 percent of their
turnover. This number jumped to 3 percent before mid-decade.
In 1979, there were only 43 private corporate research
institutes. By the end of 1983, there were 139, and by late
1987, there were over 400. These private research institutes
have been stimulated by a variety of tax incentives, special
privileges, and government funds.
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VII. Effects of Government Policies
South Korea's efforts to promote its electronics industry have
been highly successful. Korea is one of the most successful
nations developing microcomputers. Some of the major players
in the Korean computer industry now are competitive in the
United States. Daewoo produces Leading Edge XT and AT
compatibles, while Hyundai is marketing an XT compatible in the
United States at prices well below many of its competitors.
Korea's growth in this area has been supported by long-term
plans for the electronics industry, including a four-year R&D
program, and funds for firms available from the Technology
Development Fund.
VIII. Future Developments and Trends
The government has played an extensive role in guiding Korea's
industrial development. Heavy intervention in economic
activity has given way to policies of a more general character,
although the government remains highly involved in major
decisions.
Korea has set as a goal to achieve industrial country status by
the year 2000. Current plans aim to have South Korea rank 15th
in terms of gross national product (GNP), 10th in terms of
trade volume, and a comparable ranking in industrial
technology. Policy planners have identified five major areas
for concentration. Two are critical for the future of the
electronics industry. One area is microelectronics,
information and telecommunications
technologies, for an early realization of the information
society. The second is industrial key technologies such as
design, systems engineering, and automation, for increasing
value-added and productivity of industrial production.
In the investment policy area, plans call for R&D investment to
expand from about 2 percent of GNP in 1986, to 3 percent of GNP
in 1991, and 5 percent of GNP in 2001. This investment would
be allocated roughly 40 percent from government and 60 percent
from the private sector, of which some 20 percent of the total
would be for basic research.
Vivian Spathopoulos
Office of Computers and
Business Equipment
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TAIWAN
I. Historical Development
The electronics industry in Taiwan began to take shape in the
1960s with the assembly of transistor radios for local and
export markets. In the mid-1970s, electronics became a
strategic industry in Taiwan. The 1970s were marked by the
local production of terminals and monitors. In the 1980s, the
government specifically sought to develop the informatics
industry. The big breakthrough in Taiwan's development of
informatics came in 1980 when the production of minicomputers
and computer terminals began. Consumer electronics and parts
and components are the largest electronics sectors, but
informatics hardware is the fastest growing. Electronics
passed textiles in 1983 as the leading export industry and the
largest industrial sector in terms of output, employment, and
investment.
II. Stage of Development
Taiwan is strong in the manufacturing of personal computers,
monitors, terminals, and modems. In the early stages of
Taiwan's development, the majority of products were copies of
U.S. designs. In recent years, Taiwan's manufacturing and
design capabilities have risen, although Taiwan's local
producers continue to focus on the low end of the market.
Taiwan's software industry is in its infancy, with imported
software dominating the industry. Software produced locally is
of medium-to-low quality, although prices are lower than
imported software and design may fit local needs better.
Taiwan's telecommunications industry is a telephone
manufacturing industry, with telephone sets and cordless phones
as the two principal items produced. Electronic switching
systems and modems are on the low end of the spectrum.
III. Industry Structure
In 1986, the output of Taiwan's electronic industry was valued
at $8.45 billion, about 10.6 percent of Taiwan's total
production value. This production was distributed among
consumer products (27 percent), commercial and industrial
products (35 percent), and electronic parts and components (38
percent). The major consumer products were color television
sets and audio equipment. The major commercial and industrial
products were equipment related to computers and
telecommunications. The main electronic parts and components
included integrated circuits, cathode-ray tubes (CRTs), motors,
and printed circuit boards. The 10-year electronics industry
development plan (1980-89) projects that by 1989, the product
structure will be 25 percent for consumer products, 38 percent
for commercial and industrial products, and 37 percent for
electronic components and parts, with a total production value
exceeding $12 billion. Way-Lin, Tatung, and Mitac are among
Taiwan's most successful computer equipment manufacturers. In
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1986, it was estimated that U.S. subsidiaries and joint
venturesaccounted for 27 percent of the total sales of Taiwan's
electronics industry. These firms include Texas Instruments,
Motorola, Honeywell, Zenith, Hewlett-Packard, and AT&T.
IV. Government Objectives
The government set up a series of production and marketing
targets over a 10-year period. Under the current 10-year plan
(1980-89) for the electronics industry, the government set out
to increase domestic value added, upgrade product development
capability, reduce dependency on foreign marketing and
distribution organizations, expand the share of domestically
owned firms in the industry, move towards the production of
higher technology products, and increase the localization for
key components and materials. The government specifically
targeted scientific instruments, videocassette recorders,
telecommunications equipment, and computers. In addition, the
government revised its 10-year Telecommunications Plan in 1985,
adopted a Ten Point Plan for high technology development in
1983 and a Communication Industry Plan in 1987. Although the
government continues to play a major leadership and
intervention role, the long-term goal is to promote a private
informatics industry. Even when large capital infusions were
provided to selected key product areas, the private sector
retained management and control.
V. Government Policies, Laws, and Regulations
Market Protection: Import licenses, tariffs, access to foreign
exchange, screening of foreign investment, and preferential
government procurement are the main instruments used to protect
local industries.
Tax Policy: Targeted industries such as the electronics
industry are given tax incentives, including tax holidays,
reduced income tax rates, and exemption or deferment of import
duties.
Financial Market Policy: Taiwan's financial system is tightly
controlled by authorities. Since private industry depends on
debt financing for 70 to 80 percent of its capital, the
government has considerable leverage.
Research and Development: In 1986, 1.02 percent of the value
of the electronics industry production was spent on R&D. The
government contributed 40 percent and the private sector 60
percent of that total. The government's goal is to increase
research and development spending to 3 percent in 1989. It has
set up several government-sponsored research institutions,
including the Electronics Research and Service Organization.
In addition, it has set up several development funds. In 1980,
the Hsinchu Industrial Park was founded with the full financial
backing of the government. This park was designed to integrate
the research efforts of public and private institutes, academic
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institutions, and high technology firms. Firms investing in
the park receive tax benefits, concessionary financing, and
subsidized land costs.
Copyright Protection: Taiwan has enacted a copyright law
protecting software, making software development potentially
more profitable. However, software piracy remains a problem.
VI. Private Sector Initiatives
The government has worked with private industry and academia
through projects such as the Hsinchu Industrial Park. It has
also founded a variety of research institutes that work with
private firms to develop new products, identify and acquire new
technology, and conduct research and development for ultimate
transfer to private enterprise. The premier laboratory is the
Industrial Technology Research Institute (ITRI) founded in 1973.
VII. Effects of Government Policies
Taiwan surpassed the export goals it set for the computer and
peripherals area. Projections made in 1985 for 1990 were
exceeded in 1987 by about 20 percent. Exports of computers and
related equipment in 1986 increased by 67 percent from 1985 to
$2 billion. Exports are slated to grow by 20 percent by 1991
because of the growing number of medium- and small-scale
microcomputer producers. Despite its strategic status, the
domestic software market remains highly fragmented among 150
firms with limited capitalization and employment. Although
preferences have been given to the domestic telecommunications
equipment producers and some telecommunications products are
designated as strategic, most of Taiwan's production remains at
the low and medium technology end of the spectrum.
VIII. Future Developments and Trends
Particular efforts will be made to accelerate the development
of microcomputers, peripherals, and components. Taiwan has
demonstrated its ability to compete in the world market for
microcomputers. It is moving into the production of higher
level microcomputers based on the 80386 chip. The direction of
Taiwan's policy development has not been entirely successful.
The fragmentation of the software industry and the lack of
success in stimulating private sector R&D investment continue
to retard future development.
Vivian Spathopoulos
Office of Computers and
Business Equipment
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FRANCE
I. Historical Development
In 1967, the Government of France launched the First Plan
Calcul to create a viable and independent electronics
industry. The French computer sector attempted to overtake
IBM's strongest product lines: the medium and large computer
markets. By late 1968, the French computer maker, CII,
announced the IRIS 50 medium-scale mainframe. Plan Composant
was launched in an effort to create a French integrated
circuits manufacturing capability and peripherals received $15
million in R&D support. In telecommunications, France
developed expertise in electronic switching technology. The
French Government emphasized creation of "national champion"
firms.
Under Giscard d'Estaing (1975-81), a greater emphasis was
placed on foreign technology acquisition through partnerships
with foreign firms, such as CII's merger with Honeywell Bull in
1976. In 1979, the French Government announced its plan to
expand the use of computers in education, industry, and small
businesses. During this period, a new range of large-scale
mainframes was introduced.
President Francois Mitterand (1981-present) began a program of
nationalization and a restructuring of the electronics industry
occurred. For example, the Filiere Electronique program plans
and coordinates development of computers, telecommunications,
components, and software. In 1982, the French Government
initiated an eight-point program to accelerate the development
of electronics and computers in such areas as very large scale
integration (VLSI) and computer-aided design (CAD) tools,
software engineering, computer-aided design and computer-aided
manufacturing (CAD/CAM), computer-aided instruction, automatic
translation, display hardware, basic components, and subsystems
for microcomputers and minicomputers and supercomputers. The
software industry gained government support as part of this
program.
After decades of steady growth in a very controlled
environment, deregulation and international standardization of
telecommunications are taking place. In semiconductors, the
recent focus has been on VLSI circuitry.
II. Stage of Development
In spite of the French Government's long-term investment in the
electronic sector, few notable developments have resulted. In
the computer and semiconductor subsectors, France is an
assimilator. Growth in computer market share is largely a
result of government procurement policies rather than computer
innovations. Outdated plants and equipment constrain the
semiconductor sector's ability to assimilate the latest
technology.
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Of all the electronic subsectors, telecommunications and
software have achieved the greatest successes. France has the
world's most digitalized network. Minitel, the French videotex
system, exemplifies a successfully created and commercialized
telecommunications service. As one of the largest producers of
software in the world, French software suppliers control
three-fourths of the domestic market with high quality
products. Recent focus has been on the creation of new
languages, advanced software engineering, and speech synthesis.
III. Industry Structure
Computers and Peripherals: The French computer market is the
fourth largest in the world. IBM France remains the market
leader by value, though the French nationalized company, Groupe
Bull, now the largest French manufacturer, is catching up
rapidly. In 1987, imports accounted for 44 percent of domestic
consumption with U.S. manufacturers accounting for 50 percent
of imports. Because many U.S. firms supply a portion of the
French computer market through manufacturing operations located
in France, the declining U.S. import share understates the U.S.
presence. Selective government procurement policies protect
domestic producers like Groupe Bull and Alcatel from U.S.
competition.
Telecommunications: In 1987, imports of telecommunications
equipment accounted for 11.7 percent of total demand. U.S
manufacturers supplied 32.5 percent of imports, while West
Germany, Japan, and Italy supplied 16.7, 6.0, and 3.5 percent
respectively. France Telecom, France's national telecom
authority, has developed the most advanced and sophisticated
telecommunications systems in Europe. Recent liberalization
encourages competition in value-added services such as data
base information and electronic mail. Because of
privatization, government control over some major firms like
CGE (Compagnie Generale d'Electricite), Thomson, and Alcatel
has been eliminated. Selective procurement procedures of core
network equipment restrict foreign manufacturers from competing
for most equipment contracts. While the market for network
equipment remains relatively closed, terminal equipment can now
be supplied competitively if the foreign products meet strict
testing and certification requirements.
Software: In 1987, software imports accounted for 15.8 percent
of domestic demand, which totaled $7,061 million. Domestic
suppliers control 74 percent of the market. U.S. suppliers
provided almost 20 percent of software sales. Other supplier
nations were West Germany with 3.8 percent of the market
followed by the Netherlands, the United Kingdom, and Italy.
Semiconductors: In 1987 imports of electronic components
accounted for 90 percent of domestic demand, which totaled
$3,794 million. The French semiconductor market relies heavily
on foreign manufacturers, most of which are American such
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as Motorola, ITT-Intermetall, Texas Instruments, Harris
Semiconductor, Honeywell, and Westinghouse. Many foreign
manufacturers of electronic products manufacture componentry
for in-house consumption. Major French producers include
Alcatel-CIT, Fribourg Condensateurs Intermetall, RTC-Compelec,
and Thomson-CSF.
IV. Government Objectives
Since World War II, the Government of France has remained
committed to making France an independent, world leader in
electronics. It has followed a system of indicative planning
with substantial government involvement. The major electronic
sectors targeted have been telecommunications and computers.
In recent years, components have received special attention
through the Plan Composant programs. Ironically, software has
received the least attention yet has succeeded in capturing 74
percent of the French market. The French electronic sector is
guided through five year, nonbinding plans prepared by the
government after consulting with representatives of industry,
unions, and other government bodies.
V. Government Policies
The French Government has expanded its role in industrial
planning through the nationalized companies of the electronic
sector. The current government hopes to use the large
nationalized companies as engines to encourage growth and
modernization and to gain control over the national market.
Restrictions on Imports: Most restrictions on imports take the
form of non-tariff barriers (NTBs). The most popular NTBs
employed are strict testing and certification requirements.
Requirements on Foreign Investments: Because foreign
investments in some high tech sectors require prior government
approval, the government is equipped to channel investment
flows to the electronic sectors. Joint ventures most often
require foreign minority ownership. Investment requirements
are used to protect domestic industries and to obtain foreign
technology.
Government R&D Subsidies: Large government expenditures for
R&D and guidance over nationalized banks' resources assist the
electronics industry. Investment incentives such as capital
grants and R&D funding are provided for domestic and foreign
investors. In the past, most R&D support was provided to the
computer and telecommunications sector. Today, component
makers, foreign and domestic, receive government R&D support.
Procurement Policy: Because of preferential treatment given to
domestic producers and the nonavailability of bid information,
foreign manufacturers have great difficulties bidding on French
Government contracts as in the case with the "Computers for
All" program. Much of the state-of-the-art technology in the
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telecommunications sector and the ability to produce on a mass
scale have been the result of government procurement policies.
Tax Policy: French tax policy is designed to promote
investments in targeted industries. Some tax benefits include
accelerated depreciation allowances for certain expenses,
special tax regimes for mergers, tax exemptions for new
companies, consolidation privileges, and tax credits equal to
25 percent of the increase in a company's R&D expenditures.
Intellectual Property Rights: The new Copyright Act of 1986
provides copyright benefits to computer software for 25 years
and poses no barriers to trade.
Government Sector Initiatives: European efforts to make the
European electronics industry internationally competitive
include the EUREKA and ESPRIT programs. France participates in
both programs. Several government-owned R&D institutes
participate in programs for telecommications. CNET, the PTT
research center, emphasizes basic research and applied research
and development. INRIA, the computer sector's information
systems research agency, brings industrial firms, universities,
and CNRS teams together to work on pilot projects. CNET and
CNRS are the electronic sector's public research centers.
Post and Telecommunications Law: All equipment must be
type-approved by the PTT Secretary of State prior to
connection. French equipment is given top priority followed by
EC equipment. Foreign equipment is considered when no similar
equipment is available or when the foreign manufacturer agrees
to manufacture the equipment in France. Other barriers like
length of time for approvals also exist.
Restricted Sector: PTT procurement of many telecommunications
products, such as network equipment, is restricted. France
Telecom uses a closed bidding process and only accepts bids
from French manufacturers unless the equipment is not available
in France or if it is clearly of inferior quality.
VI. Private Sector Initiatives
Private sector initiatives in France are predominately between
domestic and foreign companies in the form of joint ventures.
The French firm joins with the foreign firm for access to
foreign technology, while the foreign firm joins for market
access and to benefit from government subsidies, tax benefits,
etc. A lack of coordination exists between the government R&D
centers and industry. Industry complains of difficulties in
identifying R&D centers working in their field.
VII. Effects of Government Policies
While France's electronic policies appear to have helped its
industry survive, the Government's ambitious goals of achieving
independence and international competitiveness for the industry
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have not been attained. For example, the goal of
self-sufficiency in semiconductors by 1983 was not reached due
to insufficient funding and outdated plant and equipment.
The French electronics sector has often tried to match
developments in the United States rather than develop unique
technology niches. An example of this was the unsuccessful
attempt to overtake IBM's lead in the medium and large
computer market. In the case of Minitel, in contrast, the
telecommunications sector succeeded, through creative
marketing, to exploit the untapped videotex market.
Selective public procurement and closed bidding serve to
protect the domestic electronic industry from foreign
competition while inhibiting the industry's international
competitiveness.
Frequent restructuring of the industry inhibits long-term
planning. Company mergers and breakups stifle product
development and company commitment.
Most often the large nationalized or state-favored companies
receive the majority of the venture capital from the
government, making it difficult for the smaller companies to
obtain the needed capital for development and growth. Because
software requires little capital, government funding has been
minimal. In spite of foreign competition, the French software
industry controls 75 percent of the domestic market.
Overall growth of the sector is inhibited because of the lack
of coordination between government research institutes and
private industry. Instead of urging commercialization and
creative marketing, basic research has been emphasized.
VIII. The Future
As Europe implements the integration of its markets under EC
92, the French electronics sector will face increased
challenges within a larger, more competitive arena. French
electronic companies are already acting to adjust to this
imminent change by joining with other European electronics
suppliers in joint ventures, mergers and other collaborative
efforts.
Maria de la Guardia
Office of Computers and
Business Equipment
- 217 -
EUROPEAN COMMUNITY
I. Historical Development
Only in recent years has the European Community (EC)
established a series of initiatives to promote the development
of telecommunications equipment and systems (RACE), industrial
technology (BRITE), electronics (ESPRIT), and information
technologies (EUREKA). The first three of these are funded
through the Community. But the EUREKA program exists outside
the Community framework, with funding developed by national
corporate, university, and government participants.
These four programs have achieved a means of promoting large
projects with several important features. They link together
the key national firms in Europe that are working along similar
lines in joint research efforts or joint ventures, with some of
Europe's leading universities and research centers. In
addition, the opportunity for smaller firms to participate in
these initiatives exists allowing them to gain valuable
knowledge and expertise. This is the first time such extensive
cross-border research has been undertaken. EC programs place a
community-wide emphasis on precompetitive research. Previous
national programs emphasized basic research while governments
used national procurement and incentives to create strong
national firms in specific parts of the sector. These European
collaborative efforts have a 10-year life span during which
time certain results must be attained in the first 4 to 5 years
or otherwise they lose EC funding.
II. EC Programs
The ESPRIT project is a 10-year effort to create a strong
information technology and telecommunications sector in the
EC. ESPRIT began in February 1984 by funding a series of
precompetitive efforts in microelectronics, software
technology, advanced information processing, office systems,
and computer integrated manufacturing. The first five-year
phase of ESPRIT cost ECU 1.5 billion ($1.3 billion), with ECU
650 million coming directly from the EC, and the remainder from
companies and other national contributions to research
support. In ESPRIT's second phase, which began in 1989,
greater efforts will be made to stimulate market-oriented
investment and production, especially in high-density
integrated circuits (ICs), high-speed ICs, and multifunctional
ICs. Most evaluations of ESPRIT's work are positive.
The RACE program for telecommunications was begun in 1986 to
promote the introduction of integrated broadband communications
(IBC) in Europe, using integrated services digital network
(ISDN) standards and other technologies. The focus is on
pre-competitive research on the technologies needed to
establish integrated broadband networks in Europe in the 1990s,
especially broadband switching equipment, broadband coding,
microelectronics and opto-electronics, and communications
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software. The program emphasizes development of optical signal
processing, switching, and transmission, which are needed for
the transmission of large volumes of information at high speed,
particularly to aid the transition to high definition
television (HDTV). Total investment in the RACE program will
be about ECU 1 billion, with 70 percent going to R&D. The
first 46 contracts, funded in 1988 for three years, will
receive ECU 186 million in support.
The BRITE program encourages the creation of a broad advanced
technology base on which traditional Community industrial firms
can draw so as to remain competitive on the international
market over the next decade. BRITE was established by the EC
Commission in close cooperation with industry. of the nine key
sectors identified as needing research support, laser
technology and computer-aided design and computer-aided
manufacturing were included. It was launched in March 1985,
and its first four-year research program (1985-88) includes
pre-competitive efforts that will receive ECU 125 million in
support. BRITE's purpose is to improve industrial
productivity, product reliability, and overall product quality
in addition to encouraging more originality in design.
EUREKA was originally proposed by the French as a response to
the U.S. Strategic Defense Initiative (SDI). EUREKA is to
promote the joint development of commercial products in high
technology industries throughout Europe, thus improving the
competitiveness of these industries. EUREKA has become a
vehicle for European R&D in computers, telecommunications,
microelectronics, robotics, materials, and biotechnologies. It
differs from the other programs in the Community since it is
not directly funded through the EC. EUREKA programs originate
with companies and are not part of any strategic program, as
are projects in BRITE or RACE. Funding varies greatly from
project to project, with some national government and private
funding becoming common. Microelectronics has received a great
deal of attention since the first of EUREKA's projects in 1985.
The EC Commission has recently agreed to major funding of the
JESSI (Joint European Submicron Silicon) program in the
microelectronics/semiconductor field. Funding for the initial
group of 72 projects was set at ECU 3.2 billion over a 10-year
period.
III. Successes and Failures
As part of the ESPRIT program, 201 projects are under way in
the areas of microelectronics, information processing systems,
and information technology applications. The first phase of
ESPRIT rapidly yielded significant results: one example from
the field of microelectronics is the design of a bipolar gate
array circuit of 10,000 gates with an access time of 200
picoseconds, for which a production line has just been set up.
In advanced information processing, several ESPRIT projects
have led to developments in Prolog, a logical programming
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language. Under a project headed by the creator of the
language, a more efficient version of Prolog (Prolog III) has
been developed. Prolog III was used to produce an expert
system for detecting engine defects. In the field of software
engineering, advances have been made on the Portable Common
Tool Environment system designed to standardize interfaces
between components of software environments. A consortium of
the major semiconductor manufacturers LEP (France), Plessey
(UK), Siemens (West Germany), and Thomson-CSF (France) has
produced a fully operational gallium arsenide chip using new
technologies to rival the performance of the traditional
silicon chip. The EC succeeded in developing a new
international standard on Office Document Architecture (ISO
8613) within ESPRIT projects which was adopted by the
International Standards Organization (ISO).
The BRITE program has mainly increased the mobility,
cooperation, and vocational training of research workers within
the EC and increased communication between scientists. The
second phase of the program should produce more results in the
areas of new materials and new production methods.
The main goal of the RACE program as stated by its creators is
to prepare for the "introduction of Integrated Broadband
Communication (IBC), taking into account the evolving ISDN and
national introduction strategies, progressing to Community-wide
services by 1995." However, because work on the RACE program
only began in January 1988, it is not possible to evaluate the
program. Nonetheless, one result of the RACE program should be
early standardization in EC telecommunications.
Because a substantial amount of risk is borne by each European
firm, the EUREKA program has attracted selective
participation. The French have proposed the creation of a
venture capital fund with state-backed guarantees. At present,
EC member state officials, with the support of the EC
Commission, are actively examining how to encourage the flow of
capital from the banking system and venture capital companies.
Due to overlap between EUREKA projects and EC programs, the EC
Commission has organized joint workshops with partners from the
Community and EUREKA projects, including BRITE and ESPRIT.
Aside from involvement in specific EUREKA projects on a
case-by-case basis, the EC Commission is playing a key role in
developing mechanisms to encourage a flow of private sector
finance to high technology projects, including risk insurance.
Projects with EC Commission assistance include COSINE
(Cooperation on Open Systems Network in Europe), EAST (EUREKA
Advanced Software Technology), JESSI, and HDTV.
IV. R&D Budget
Community R&D spending only represents about 2 percent of
national R&D expenditures in the 12 member states.
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V. Future Developments and Trends
Aside from the new fiscal policies being adopted by the EC that
will affect all industries doing business in the EC, directives
targeting the electronics sectors have been proposed or
adopted. In essence, by 1992 these directives become Community
law. Some of these directives include: 1) the minimum safety
and health requirements for work with visual display units;
2) standardization in the field of information technology
and telecommunications; 3) pan-European mobile telephones;
4) dissemination of information procedures on standards and
technical rules; 5) mutual recognition of type approval for the
telecommunications terminal equipment; 6) competition in the
supply of telecommunications terminal equipment; 7) Green Paper
on copyright and the challenge of technology; 8) competition in
the markets for telecommunications services; 9) opening up of
public procurement in the telecommunications sector; and
10) a proposal for a directive to protect computer programs.
Maria de la Guardia
Office of Computers and
Business Equipment
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U.S. GOVERNMENT PRINTING OFFICE: 1990-249-280 20347