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IS NEW TECHNOLOGY ENOUGH? MAKING AND REMAKING u. S. BAS I C I ND U S T RI ES

EDITED BY DONALD A. HICKS

American Enterprise Institute COMPETING IN A for Public Policy Research CHANGING WORLD ECONOMY Washington, D.C. PROIECT The publication of this volume was supported by a grant from the U.S. Department of Commerce.

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Library of Congress Cataloging-in-Publication Data

Is new technology enough? : making and remaking U.S. basic industries / edited by Donald A. Hicks. p. cm. - (AEI studies; 475) Includes bibliographies and index. ISBN 0-8447-3659-7 (alk. paper). ISBN 0-8447-3660-0 (pbk.: alk. paper) 1. United States-Industries. 2. United States-Economic conditions-1981- 3. Technological innovations-Economic aspects­ -United States. 4. Competition-United States. l. Hicks, Donald A. II. Series. HCI06.8.1781988 338.0973-dc19 88-19742 CIP

1 3 5 7 9 10 8 6 4 2

AEI Studies 475

©1988 by the American Enterprise Institute for Public Policy Research, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEl.

"American Enterprise InstituteR and ® are registered service marks of the American Enterprise Institute for Public Policy Research.

Printed in the United States of America Contents

FOREWORD Christopher C. DeMuth ix

CONTRIBUTORS xi

1 INTRODUCTION AND OVERVIEW Donald A. Hicks 1 Organization of This Volume and Overview of Its Major Themes 4 Conclusion 15

2 THE MACHINE TOOL INDUSTRY: THE CRUMBLING FOUNDATION Anderson Ashburn 19 The Large Cyclical Swings in the Machine Tool Industry 20 The Different Needs Filled by Machine Tools 21

Early Machine Tools and the n American System of ManufacturingW 22 The Beginning of the Machine Tool Industry 26 Diffusion of Machine Tool Developments to Other Industries 31 Two New Technologies 35 The Automobile Industry and Its Demands on Machine Tools 37 Carbide's Demands on Machine Tools 40 Automation 42 The Start of Numerical Control 44 The Restructuring of the Machine Tool Industry 49 Japanese Dominance in Small NC Machines 56 Flexible Cells and Systems 58 The Slow Development of Computer-aided Manufacturing 62 Government Policies That Have Influenced the Machine Tool Industry 69 The Present Status of the Industry 77 3 THE U.S. AUTOMOTIVE INDUSTRY: TECHNOLOGY AND COMPETITIVENESS Michael S. Flynn and David E. Cole 86 Historical Background on Automotive Competition 89 Recent Automotive Competition 100 The Current Competitive Task 110 The Role of Technology 118 Just-in-Time Technology 129 Computer-integrated Manufacturing 140 The Future of the Domestic Automotive Industry 153 Summary 158

4 THE U.S. STEEL INDUSTRY: STRATEGIC CHOICES IN A BASIC INDUSTRY Donald F. Barnett 162 Roots: The Era of Scale and Integration 163 Implications and Conclusions 203 Summary 207

5 TEXTILES AND ApPAREL: A BASIC INDUSTRY FOR A BASIC NEED Richard Steele 209 Technology and Change in a Mature Industry 212 Driving Forces for Technological Change 234 Economic Effects of Technological Change 244 What Next? 249

6 ADVANCED CERAMICS: RESTORING U.s. COMPETITIVENESS THROUGH TECHNOLOGY DIFFUSION Candice Stevens 255 Advanced Ceramics Technology 256 Industrial Applications of Advanced Ceramics 262 Advanced Ceramics and Industrial Adjustment 277 Technoeconomic Barriers to Diffusion 284 Promoting Diffusion of Advanced Ceramics: A Comparison of the United States and Japan 288 Conclusion 303

7 FIBER OPTICS: TECHNOLOGY DIFFUSION AND INDUSTRIAL COMPETITIVENESS Harvey Blustain and Paul Polishuk 308 A Fiber-optic System 309 Advantages of Fiber Optics 311 Telecommunications Applications of Fiber Optics 316 Other Applications of Fiber Optics 323 The Role of Government in Technology Diffusion 327 Conclusion 340

INDEX 343

Foreword

One of the most widely accepted ideas in discussions of international trade is that successful development and commercialization of new technologies are the key to maintaining the competitiveness of the U.S. economy. In this view our capacity to nurture technological inno­ vation and to take maximum advantage of the employment, output, and export opportunities of the resulting Uhigh-tech" industries is uniquely important to spurring U.S. productivity growth and avoiding the domestic economic disruptions caused by the growth of foreign competition in the 1980s. Is New Technology Enough? challenges this accepted wisdom. While acknowledging the important role of new technology in indus­ trial renewal and economic progress, the studies in this volume indi­ cate that technology cannot be relied on as a usilver bullet" capable of ensuring America's preeminence in world trade. Four case studies of U.S. basic manufacturing industries (machine tools, steel, automo­ biles, and textiles and apparel) and two studies of families of modern technology (advanced ceramics and fiber optics) show that techno­ logical prowess is only one of many factors determining industrial performance, others being general macroeconomic conditions (tax, trust, fiscal, labor skills). The studies also challenge the prevailing view of industrial change in the American economy that sees older basic industries as dying off while new, technology-based industries rise to take their place. In fact, U.S. basic industries are constantly adapting to changing economic circumstances, making use of both new technologies and nontechnical adjustments. The notion of Usunset" and usunrise" indus­ tries is simplistic and false, failing to appreciate the richness and com­ plexity of economic adjustment over time. Advanced technology is certainly important, but our search for a panacea for our competitive difficulties has led us to distort its true significance in economic and in­ dustrial change. This volume is one of a series of publications and conferences sponsored by the American Enterprise Institute's research project Competing in a Changing World Economy, which is examining

ix FOREWORD changes in the world economy and exploring economic and political strategies for dealing with them.

CHRISTOPHER C. DEMuTH President American Enterprise Institute for Public Policy Research

x Contributors

ANDERSON ASHBURN is an engineer who has been following manufactur­ ing and the machine tool industry for forty-five years as a writer and edi­ tor. His articles on Japanese manufacturing, starting in 1962, were the first to report in the United States on many major manufacturing ad­ vances in Japan, including efforts to minimize work in process and to minimize costs of rework by doing it right the first time. His travels have taken him to most of the world's major machine tool plants. He has been chairman of the manufacturing activity of the Society of Automotive En­ gineers, a member of the Manufacturing Studies Board of the National Research Council, and a recipient of the Distinguished Contributions Award of the Society of Manufacturing Engineers. He is editor emeritus of the magazine American Machinist & Automated Manufacturing.

DONALD F. BARNETT is president of Economic Associates Inc., a McLean, Virginia, firm specializing in strategic planning advice to basic industries. He received his Ph.D. in 1968 from Queen's University in Canada and has since served as university professor, senior industry adviser to the Ca­ nadian government, and chief policy adviser to the Executive Office of the President and the U.s. Treasury, where he was instrumentalin setting up the steel trigger-price mechanism. More recently he was vice­ president and chief economist at the American Iron and Steel Institute, industrial economist at the World Bank, and adviser to numerous govern­ ment agencies and private firms. He has lectured widely and written nu­ merous articles and books, including Steel: Upheaval in a Basic Industry (with Louis Schorsch) and Up from the Ashes: The Rise of the Steel Minimill in the United States (with Robert Crandall).

HARVEY BLUSTAIN is vice president for research at IGI Consulting. Previ­ ously he was senior research associate at the Center for International Studies, Cornell University, and on the faculty of the Department of An­ thropology at the University of Kentucky. He has done research in Nepal, Jamaica, Rome, and Ghana and has been a consultant to the Agency for International Development, the UN Food and Agriculture Organization, and the government of Jamaica. He received a B.A. from New York Uni­ versity and an M. Phil. and a Ph.D. from Yale University. His publications

xi CONTRIBUTORS include Fiber Optic ISDN Broadband Field Trials, The Impact of Fiber Optics on the Copper Wire and Cable Industry, and Fiber Optic Market Opportuni­ ties in Metropolitan Areas.

DAVID E. COLE is director of the Office for the Study of Automotive Trans­ portation at the University of Michigan. His major efforts in automotive engineering are related to both engines and vehicles. Dr. Cole received his B.s.M.E., M.5.E., and Ph.D. degrees in mechanical engineering from the University of Michigan. In addition to his teaching responsibilities in the automotive area, he has worked extensively in the areas of automotive power plants and overall automotive industry trends. His recent research has focused on strategic issues relating to the competitiveness of the U.s. industry in the international environment. He has served two terms on the board of directors of the Society of Automotive Engineers and as past chairman of its Engineering Activity Board. In February 1986 he was named a fellow of the society. Dr. Cole's technical and policy consulting experience includes assignments for both industry and government.

MICHAEL S. FLYNN has a Ph.D. in sociology from the University of North Carolina and describes himself as a bit of a social science Hjob shop." He began to follow the automotive industry seriously in 1982, when he joined the industry-sponsored University of Michigan Joint United States-Japan Automotive Study. His research work has included a large­ scale survey of automotive suppliers, supplier quality jproductivity ef­ forts, engineering outsourcing, and the competitive implications of exchange rates. He consults with automotive manufacturers and suppli­ ers and public sector agencies and has testified before the U.s. Senate and the U.S. International Trade Commission on the competitive status and the internationalization of the automobile industry. Since coming to the Industrial Technology Institute in 1984, he has written on labor and man­ ufacturing costs, manufacturer-supplier relationships, quality, and United States-Japan manufacturing comparisons.

DONALD A. HICKS is professor of political economy and sociology in the School of Social Sciences at the University of Texas at Dallas. He received his B.A. from Indiana University and his Ph.D. from the University of North Carolina. He is currently on leave from his university serving as vice-president, Regional Research and Technology Program, North Texas Commission. He is the author and editor of numerous books and articles on issues related to the industrial evolution of advanced economies, in­ cluding Advanced Industrial Development: Restructuring, Relocation, and Renewal (1985); Automation Technology and Industrial Renewal: Adjust­ ment Dynamics in the U.S. Metalworking Sector (AEI, 1986); and Transition xii CONTRIBUTORS

to the Twenty-first Century: Prospects and Policies for Economic and Urban­ Regional Transformation (coedited with N. J. Glickman, 1983). He recently served as guest editor of a special issue of Urban Studies devoted to U.5. urban policy (December 1987).

PAUL POLISHUK is president and chairman of the board of IGI Consulting and of Information Gatekeepers, which he founded in 1977. Previously he founded Horizon House International after serving as deputy director of the Office of Telecommunications, U.S. Department of Commerce, and as director of planning for the Air Force Flight Dynamics Laboratory. He received a B.S. from the Massachusetts Institute of Technology, an M.S. and a Ph.D. from Ohio State University, and an S.M. in manage­ ment from MIT after spending a year as a Sloan fellow.

RICHARD STEELE was formerly vice-president of the Celanese Corpora­ tion and executive vice-president of its international operations. Since he retired, he has been lecturing and consulting. Dr. Steele holds an S.B. de­ gree in chemistry from the University of North Carolina and a Ph.D. from Princeton University. He is a fellow of the Textile Institute (Great Britain) and its vice-president for North America. He is also a fellow of the Ameri­ can Association for the Advancement of Science. He began his profes­ sional career at the Rohm and Haas Company, where he was head of the textile research and product development laboratory, and joined Celanese in 1965. Dr. Steele has been an active participant in professional associations. He received the Olney Medal of the American Association of Textile Chemists and Colorists in 1964 and the Harold DeWitt Smith Award of the American Association for Testing and Materials in 1978 for his contributions to textile research, particularly in the area of permanent press finishing. He has also served on the board of directors of the Na­ tional Foreign Trade Council and on the International Panel of the Con­ ference Board. He has published more than forty papers on the chemistry of cellulose and wool, the structure and mechanical properties of natural and man-made fibers, and the chemical finishing of textiles.

CANDICE STEVENS is an administrator in the Industry Division of the Or­ ganization for Economic Cooperation and Development (OECD) in Paris, where she is concerned with questions of technology, trade, and indus­ trial structure. She was previously a senior analyst with the Office of Technology Assessment, U.S. Congress. As an economist at the U.s. De­ partment of Commerce, Dr. Stevens was a major contributor to the study A Competitive Assessment of the U.S. Advanced Ceramics Industry. She also worked on minerals and materials issues in the International Division of the U.S. Bureau of Mines.

xiii

1 Introduction and Overview Donald A. Hicks

The commercialization of a wide variety of new technologies and the emergence of new and renewed industries made possible by them have received considerable attention in recent years. As a result, all through this decade technology has been brought progressively closer to center stage in formulations accounting for economic growth and industrial adjustment. Today there is a widely held notion that modern industrial economies are somehow qualitatively distinct from what has gone be­ fore. More than ever before the view that technology now constitutes a prime mover in advanced industrial economies has considerable sup­ port. The chapters that make up this volume offer analyses of the his­ torical and contemporary development of selected U.S. basic indus­ tries and their science and technology bases in attempts to shed light on this assumption.

Technology Moves to Center Stage. For the most part the new visibility of the technology factor may be accounted for by the economic back­ drop against which it has been viewed during the past decade. Stagnant productivity growth in the larger economy, interindustry and intra­ industry adjustments accelerated by intense global competition, and the structural shifts that have been reworking advanced manufacturing have all figured prominently in composing that backdrop. Gradually, in the absence of more promising prospects, the possibilities for harness­ ing the economic potential of new technologies came to be widely re­ garded as the nearest thing to a solution to productivity and competi­ tiveness problems, even though manufacturing productivity generally remained high and rising and the link between productivity and com­ petitiveness is not easily traced. As a result, a broad and deep technol­ ogy base came to be viewed as the dominant feature of advanced manufacturing and the higher-order services whose fortunes became ever more closely intertwined with them. Not surprisingly, then, new technology has come to be viewed by many analysts as the "silver bullet": the key to retaining-or regaining-

1 INTRODUCTION AND OVERVIEW industrial dominance in a crowded international marketplace. And the prospects for competing successfully in a changing world economy have come to be viewed as directly linked to the capacity to nurture technologi­ cal innovation and thereby maximize the employment, output, and trade growth generated by it. As fascination with the role of new technology in driving economic growth has increased, a relatively simple linear model has come to be widely accepted in which new technology is viewed as an early link in a chain of economic activities that leads to a reworked industrial structure. According to this uncomplicated view, technological innovation is pro­ pulsive and can be expected to stimulate the rise of entirely new indus­ tries. The infant semiconductor and microcomputer industries of the early 1980s have served as dramatic illustrations. As the new innovation­ based industries prospered and markets developed for their products, we could anticipate a form of industrial restructuring in which they would gradually be rotated into positions of industrial dominance. As the na­ tional and local-regional economies became dominated by such usunrise" industries, new sources of employment and output growth could be ex­ pected to compensate for the stagnation-even the demise-of older, more mature usunset" industries.

Technology-led Industrial Change Reexamined. This view of innovation­ led industrial growth and adjustment rapidly acquired a broad and influen­ tial following. As the 1980s wore on, however, the background against which the significance of new technology could be assessed began to change, often dramatically. Industrial productivity began to improve where it had been lagging, exports began to grow again, and some of the benefits of the harsh industrial restructuring experienced during the decade began to be appreciated. For the most part these improvements far outpaced any process of technology upgrading. Increasingly, observers acknowledged that global competitive deficiencies have too often prompted U.S. industry to look to new technology alone as a panacea. In the meantime a number of challenges to this simple model of in­ dustrial evolution arose. The first was directed at the presumption of the existence of industry life cycles apart from product life cycles and busi­ ness cycles. By the mid-1980s so-called sunrise industries-ironically including once again semiconductors and microcomputers-were dis­ covered to be in no way immune to severe cyclical downturns. More im­ portant, developments in older mainline industries, notably the geo­ graphically concentrated and therefore politically visible automobile and steel industries, were discovered to be intimately related to the development of new technologies and the sluggish adoption of others that were not so new. The automobile industry, for example, revealed it- 2 DONALD A. HICKS self as the setting of ambitious and explicit corporate strategies involv­ ing long-term investments in new process and materials technologies. By contrast, the steel industry was being reshaped-if largely by default-as start-up firms found success in new, smaller-scale produc­ tion technologies. Clearly, new technology was not the province of new industries alone. Arguably, a more jolting challenge to this new-found faith in new technology came when it was reported that a U.S. trade deficit in manu­ factured goods-first recorded in 1971-had rapidly deteriorated to the point that even technology-intensive goods had slipped from a $26 bil­ lion surplus to a $2 billion deficit from 1981 to 1987. The casual assump­ tion that technological sophistication necessarily implied competitive advantage was shattered. Efforts to assess the role of technology in eco­ nomic and industrial change more realistically began to stir. Increased technological sophistication has not insulated us from what is widely regarded as a deterioration in our ability to remain com­ petitive in a global economy. After the experiences of the past decade, it may well be worth questioning how far technological virtuosity and in­ dustrial competitiveness have been decoupled from each other despite their close association in many minds. It is becoming clear that the tech­ nological intensity of a product or service does not by itself ensure its competitiveness. Although the technology factor may be a necessary in­ gredient of competitiveness, the historical and contemporary evidence for viewing it as a largely sufficient one is slim indeed.

The Technology Factor Recedes. Today the model of innovation-led economic growth and industrial adjustment can be qualified in two im­ portant ways. First, a new role for technology that emphasizes the cen­ trality of application, as distinct from development, is gradually being appreciated. The greatest beneficial effects accrue to the economy that fosters the adoption and successful implementation of new technologies, not just their invention. Second, a realization is growing that the ability to produce can well be viewed as distinct from the ability to compete. Har­ nessing new and not-so-new technologies, as we are seeing today, may well contribute to the capacity for efficient production-even rapidly ris­ ing productivity-but without any guarantee that this will necessarily translate directly into global competitive advantage. The world economy today is a gathering place for an ever wider vari­ ety of models of industrial and political economy, each reflecting the pri­ orities of peoples with differing cultures, world views, histories, and conceptions of a desirable future. Ultimately, it is these contextual, pre­ dominantly nontechnical factors that give direction and momentum to how-whether and with what effect-new technologies are absorbed by

3 INTRODUCTION AND OVERVIEW a nation's industries and economy. These same factors govern the success with which these industries can translate technological superiority into commercial success. Let us take aim carefully. No one today seriously argues that technol­ ogy is the only factor driving advanced economies. Rather, it is the widely held view that technology is the pivotal factor in industrial evolution that this collection addresses. This volume, then, seeks to discover the limits of the role of new technology in the continuing development of the U.S. economy. It does so not by offering aggregate analyses of cross-industry trends but by looking for common patterns in focused examinations of four U.S. basic manufacturing industries and two families of modern technologies. Each chapter offers analyses of the historical, contempo­ rary, and comparative developments that have made and will make and remake our nation's basic industries. Together these chapters provide ev­ idence with which the reader can decide how to evaluate for himself or herself the wisdom of assuming that technology embodies a predomi­ nant dynamic by which an economy's basic industries-and with them a nation's industrial base-evolve. The authors of these analyses were recruited because of theirreputa­ tions as experts in their areas. I am deeply grateful to them for the way they tackled their challenges. I wish to acknowledge my indebtedness to the contributing authors and to many others who have helped shape my views about technology and industrial change. While any listing of them will necessarily be incomplete, I offer special thanks to Hylan Lyon and David Peterman-two alumni of Texas Instruments who are no strangers to the corporate pursuit of technological excellence in a competitive glo­ bal economy. They are also my colleages in the Regional Research and Technology Program of the North Texas Commission, which seeks to un­ derstand the role of technology in the development of the industrial base of the Dallas-Fort Worth metroplex.

Organization of This Volume and Overview of Its Major Themes

This volume explores the process of technology upgrading-the factors that lead to it and the consequences that flow from it-within selected large, visible, and historically important manufacturing industries that are and will continue to be important contributors to our nation's indus­ trial base. Two distinct perspectives are developed. The first assumes that the capacity of key industries to adjust to new economic circumstances is tied closely to the success with which their products and production arrange­ ments embody new technologies. The aim is to view specific industries (machine tools, steel, automobiles, and textiles and apparel) as settings

4 DONALD A. HICKS for the adoption of a variety of new technologies. R&D expenditures, capital investment, shifting patterns of skill requirements and labor use, changing corporate strategies (such as mergers, acquisition, or the use of Chapter 11), and facilitative public policies are cast in supporting roles from this perspective. Their influences are important insofar as they hin­ der or facilitate technology upgrading within an industry. In each analysis of a particular industry, the primary historical and contemporary focus is on the full range of preconditions and effects of adoption, diffusion, and implementation of one or more new or existing technologies. This focus includes an exploration of the process of substi­ tution, as when new materials and materials-handling equipment appear to evolve together. In short, each of the next four chapters adopts a com­ mon perspective: the industry target is fixed, and the technologies (and their combinations) are allowed to vary. A second perspective is intended to supplement the first. Each of the last two chapters likewise has a common research perspective: the family of technologies is fixed, and the industry destinations are allowed to vary. The focus here is on key technologies (advanced ceramics and fiber op­ tics) and the array of product lines and production activities within a wide variety of industries that they may significantly affect. The capacity of a single technology to diffuse throughout vastly different industries and thereby rework the linkages between it and other industries as well is an important focus of this second perspective. What is the capacity of that technology to increase the efficiency of specific activities and thereby transform the industries in which these activities playa central role?

Technology Upgrading and Industrial Adjustment: A Closer Look. The main focus of this collection is on specific industries and specific technologies and what their convergence can tell us about the role of technological innovation in industrial adjustment. In the four chapters in which the adjustment dynamics exhibited by several traditional basic in­ dustries are explored, there is little compelling evidence to suggest that the technology factor supersedes in importance other factors such as macroeconomic conditions, managerial culture, and individual entre­ preneurial idiosyncrasies. In the two chapters that explore families of technologies and the ways in which they are drawn into use across a wide variety of industries and thereby are thought to Hevolve/ a much more propulsive view of technologies in the making and remaking of U. S. basic industries is evident. What is the lesson? Perspective powerfully shapes our understanding. Following a technology as it is pulled into and through the nation's industry base creates a much different impression from following an industry as it evolves and, in so doing, encounters and exploits new technologies.

5 INTRODUCTION AND OVERVIEW

All the succeeding chapters emphasize the role of innovation and diffusion; in doing so, however, they bring other factors to the fore as well. The industries analyzed reveal a wide variety of experiences with new technology- and innovation-driven adjustment. Nonetheless, the conclusion appears inescapable that general macroeconomic conditions and contextual influences facing any given industry at any given time have been and will probably continue to be more consequential than spe­ cific technological innovations or applications in moving industries to embrace higher-order technologies in their products, processes, or mate­ rials. Technology upgrading has typically been a source and substance of response, not a stimulus per se.

Patterns of Technology Transfer. The chapters that follow place heavy emphasis on technology diffusion not because it is new but because some of our global trading partners have exploited its strategic potential more aggressively than we have. The spread of manufacturing technologies from Europe to the United States is clearly revealed across the earliest spans of industrial history. In the machine tool industry, in particular, pe­ culiarly American man-machine combinations, organized to respond to large and growing markets, were already in place by the last quarter of the eighteenth century. From this early phase of mechanization, however, the assumption has often been carried forward that the shift to ever greater technological sophistication is inexorable. The chapters that fol­ low present evidence suggesting that that is not true now and doubtless never has been. Industrial myths such as these serve us especially poorly in the context of a highly competitive global economy. Indeed, it is often assumed that one of the virtues of early mechani­ zation and modern forms of automation is that they have their own in­ ternal source of momentum. But a finer-grained historical analysis reveals something else entirely. The balance between man and machine does not shift in one direction only, as simplified accounts of mechani­ zation and automation often imply. Indeed, Anderson Ashburn, in clar­ ifying the relationship between the quest for interchangeable parts and efficient mass production, indicates that the early notion of precision machining was largely a myth. The close tolerances so vital to precision production were always more likely to come from careful handcrafting than from processes designed to accommodate interchangeable parts. We see in this early example just one of the many complex and subtle factors that make technology diffusion at all times contingent and any­ thing but inevitable. In textiles, steel, and automobiles, as in machine tools, Europeans were frequent originators of new technologies. The existence of large and rapidly expanding markets in the United States effectively reduced

6 DONALD A. HICKS many barriers to the adoption and diffusion of new technologies during most of our industrial past. The effects of those new technologies were consequently expressed earlier and far more dramatically here than elsewhere. 1 Today, ironically, the existence of large U.S. markets has likewise en­ couraged foreign producers-especially the Japanese, heavy borrowers of u.s. technology-to emphasize the adoption of state-of-the-art pro­ duction technologies. As a result of the strategic significance the Japanese have assigned to commercializing and developing borrowed technolo­ gies, they have often quickly amassed much more experience with shap­ ing their uses and remedying their deficiencies than we have (see Anderson Ashburn, chapter 2). This, together with the speed with which new technologies can spread through more concentrated Japanese sup­ plier networks (see Michael S. Flynn and David E. Cole, chapter 3) have made them formidable competitors in a wide range of industries. As nations acquire experience with new technologies-regardless of their source-they become better positioned to contribute to the next generation of innovations. Richard Steele recounts how the u.S. produc­ ers took what they learned about textiles from the Europeans and rapidly became the source, not simply the destination, of new technologies (see chapter 5). Today the implications of that sequence are once again raising concerns, as the nation's industrial base continues to reveal what some observers believe is a virtual uhollowing" -whereby certain industries have either left the United States entirely (for example, some television products) or never fully developed domestically (for example, video­ cassette recorders). There is concern that what this nation chooses not to produce or no longer to produce may define areas in which it may well lose the ability to innovate. The very discipline of production brings with it the ability to innovate. It is largely for this reason that Flynn and Cole caution the U.s. automobile industry to think long and hard about deci­ sions to purchase abroad. The short-term cost advantage may lead to a weakening of domestic supplier networks to the long-term detriment of the capacity for domestic production. And increased dependence on so­ called critical technologies holds special concern for the nation's defense contractors as they and the nation's defense grow increasingly depen­ dent on foreign-source components and systems. A related, if subtle, tyranny of global competition is evident in the view that the relative, not the absolute, pace of technology diffusion is now paramount. uIt is not so much that technology diffuses more slowly in the United States than in the past as that it now diffuses more rapidly in Japan" (see chapter 2). And this dynamic applies to the emergence of new industries as well. As Candice Stevens notes, the Japanese above all have excelled at promoting the diffusion and commercialization of advanced

7 INTRODUCTION AND OVERVIEW ceramics while for the most part its applications in the United States have been limited to the packaging of electronic components (see chapter 6).

Industrial Linkage and Dependency. The chapters of this volume pro­ vide intriguing historical and comparative accounts of the evolution of specific industries. In doing so, they clearly reveal the boundary­ spanning features of industrial adjustment. Industries are depicted as simultaneously adjusting to countless features of multiple environments -macroeconomic, technical, historical, political, and cultural circum­ stances on local, regional, national, hemispheric, and global scales and within specific periods as well. The steel industry, for example, has been more closely associated with nation building than any other industry, especially as demand grew for an extensive and durable infrastructure above and below ground to support transportation, construction, and utilities. Today the role of fiber optics in establishing a new form of infrastructure to facilitate modern communication illustrates much the same process (see Harvey Blustain and Paul Polishuk, chapter 7). Industries must be viewed as adjusting to one another as well. The interindustry linkage perspective whereby the centrality of a particular industry is established by virtue of its serving as a supplier of inputs to production in other downstream industries is widely appreciated. 2 As several of the follOwing chapters reveal, however, the intricate historical relations between product, process, and materials technologies are inevi­ tably the substance of such linkages, and this implies a constant exposure to their being recast as technology and context interact. The machine tool industry, for example, though accounting for a rel­ atively tiny share of u.s. manufacturing output and employment, has al­ ways exerted an enormous influence on the rest of durable goods manufacturing because of its early position in any production sequence (see Ashburn). Machine tools have long established outer bounds on the production capabilities of the full array of metal-bending and metal­ cutting industries by acting as a conduit for transferring the latest tech­ nologies. This was as true for small arms manufacturers of the late eighteenth century as it is for the aircraft parts industry in the later twen­ tieth century.3 Indeed, while the technological virtuosity of the aircraft industry comes from many sources today, the importance of machine tools in defining those possibilities has hardly diminished. Metal-cutting and metal-shaping activities today account for an estimated 32 percent of the activities in modern aerospace equipment production.4 But because future generations of military aircraft now on the drawing boards are ex­ pected to have most of their weight in nonmetal components, we can ex-

8 DONALD A. HICKS

pect the backward linkage between the aerospace industry and the ma­ chine tool industry to be substantially reworked. There is considerable historical evidence that the influences of shift­ ing technologies flow upstream in other ways as well. Ashburn illustrates this as he recounts the way in which intense competition in the automo­ bile industry in the 1920s stimulated interest in the prospects of new ma­ terials-in this case exploiting the German experience with carbides­ that would permit more durable machine tools capable of achieving higher speeds. Highlighting the importance to technological develop­ ment of backward links between the automobile and machine tool indus­ tries in this way further illustrates the limitations of unidirectional linear models of technology influence. Once the new carbides were pulled into use, they were capable of reordering the landscape of industrial possibili­ ties facing the early U.s. automobile makers. The resulting decline of tool failure rates and increased efficiency lowered production costs at pre­ cisely the time when strategies for creating a mass market for automobiles were being sought. The strategic significance of technology diffusion is revealed in many other complex ways. The automobile industry, for example, is a sprawling complex that includes hundreds of linked industries producing tens of thousands of discrete parts and subassemblies. From this position it has exerted and does exert a tremendous shaping influence on old and new industries in its environment. Its effects on the steel and ceramics in­ dustries illustrate this well. Traditionally a major steel-consuming industry, the automobile in­ dustry has been rapidly substituting new materials for steel. Its doing so is one of the major reasons why the modern steel industry is on the verge of being transformed from a monolithic producer of steel goods to a Balkanized provider of tailored "steel services" (see Donald F. Barnett, chapter 4). By the same token, however, the substitution of ceramics for metal in automobile engines is widely expected to be the major stimulus to the prospects for growth of the advanced ceramics industry. With strategic centrality, however, comes vulnerability. The major consumers of machine tools throughout this century, domestic automo­ bile manufacturers today find themselves in the uncomfortable position of having their fates rest in the hands of their second- and third-tier parts suppliers and the makers of their production equipment. In the past, do­ mestic makers of machine tools were a reliable source of technology transfer to automobile producers as the full array of metalworking capa­ bilities broadened. Today, however, the stimulus must increasingly come from the automobile makers themselves, which in recent years have been responsible for setting implicit and explicit standards (such as General

9 INTRODUCTION AND OVERVIEW

Motors' manufacturing automation protocol) throughout their massive vendor chains. 5 Both the domestic machine tool builders and the domestic automo­ bile parts suppliers have corne to be regarded by domestic automobile makers as weak links in the production chain. Islandlike, domestic auto­ mobile producers are now seeking ways to bring order to the ranks of their parts suppliers while also increasing their capacity to absorb new technologies and once again become a source of low-cost, high-quality, state-of-the-art process and product technologies.

Nontechnical Barriers to Technology Upgrading. There has long been a tendency to believe that the sheer complexity of the technologies being adopted by U.S. manufacturers constitute the chief obstacle to the up­ grading of technology. Gradually, however, as "islands of automation"­ hard wired and inflexible-and early versions of systems integration began to appear, it became apparent that any technical barriers paled in comparison with various nontechnical ones. Slowly, isolated pieces of empirical evidence to support this view have begun to surface. In a study of adaptations made to flexible manufacturing systems (FMS) by manufacturers in England, for example, it was discovered that only one-quarter of the productivity improvements realized could be traced to the FMS technology per se. Three-quarters were due to deliber­ ate rearrangement of key steps in the production process and education of employees-especially managers-about the aims of the technology upgrading. "This has considerable implications for improvement strate­ gies shifting the emphasis away from technology per se, towards the way in which it is used."6 Ramchandran Jaikumar suggests the same thing: U[Using] the new technology of automation for competitive advantage ... does not mean investing in more equipment; ... it is how the equipment is used that is important."7 Time and again the following chapters illus­ trate that however important new technological sophistication may be, domestic and increasingly international market conditions determine the pace and pattern of adoption and diffusion. It is not sufficient to note that the principal barriers to technology up­ grading are nontechnical. It is important to recognize that adoption and diffusion are conditioned simultaneously by microeconomic and macro­ economic factors. The rich historical detail in Ashburn's chapter on the machine tool industry illustrates this well. At one level the larger "win­ dow" of opportunity is generally framed by macroeconomic and broad contextual factors. At another level, however, the critical role of entrepre­ neurs in small companies is likewise evident.

The role of contextual factors. Let us turn first to broader contextual

10 DONALD A. HICKS factors. Of course, new producers in infant industries with undeveloped markets face obvious impediments to the diffusion of new technologies, as is evident in the modern ceramics industry (see Stevens). It is unwise to assume, however, that industries ever outgrow their dependence on fac­ tors that define the multiple environments in which they must function. The evolution of machine tools-always necessarily industry-specific­ toward ever greater technological sophistication has largely depended on the structure of demand faced by particular user industries at a particular time. As the bicycle industry in the 1890s and the automobile industry during the late 1940s illustrate, demand can be a complex precursor to diffusion. During the early stages of rapid increases in demand, the em­ phasis shifts to producing enough to meet that demand. In the absence of an incentive to upgrade production, product, or materials technologies, the levels of technological sophistication are in effect frozen. Later, if de­ mand is expected to remain stable and relatively high, investments in technology upgrading can be considered, much as they were in the auto­ mobile industry during the early 1950s as a way to outmaneuver the com­ petition that began to build. Ironically, shifting markets and expectations of declining demand can also provide a stimulus to technology upgrading as a survival strat­ egy. Such scenarios are revealed in the paradox of the automation proc­ ess. Traditionally viewed as the precursor to employment loss, auto­ mation technology is in fact often adopted by firms in industries vulnerable to declining demand and already experiencing significant em­ ployment losses. Declining demand occasioned by long-term structural shifts, as in the textile industry (see Steele), can set the stage for technol­ ogy upgrading. 8 Of course, severe constraints on the resources available for invest­ ment can place an obvious brake on this activity. But the opening and closing of windows of opportunity are not self-evident. They must be an­ ticipated and recognized. It is here that discussions of context blend into discussions of intuition, insight, and incentive. It is at this level that the role of key individuals and contextual factors specific to individual indus­ tries and firms is encountered. It is also here that illusion is encountered. Investment decisions can be heavily influenced by images of what the industry is deemed destined to become by major producers even though contradictory indicators of shifts in the structures of global and domestic supply and demand abound. The U.S. steel industry in the 1950s offers an excellent example of the way in which a world view tied to technological superiority and market dominance through the first half of the twentieth century devel­ oped a momentum of its own. The industry was by then highly integrated

11 INTRODUCTION AND OVERVIEW and capable of producing on a scale reflecting its leadership during an era that emphasized mass production for mass markets. But integration-a rational response on one scale-reduces flexibility and thereby made it difficult for the steel industry to adjust to another, smaller scale. Barnett notes that scale-induced efficiency peaked in the 1960s and early 1970s. Since then structural changes have been rapidly reworking the industry. Unlike the machine tool industry, steel has been the setting in the past decade for a significant internal restructuring, which has led to the rise of the minimills and microminimills. 9 Moreover, to the extent that the actions of steel producers were easily politicized-as in President John F. Kennedy's MjawboningH strategy in the early 1960s to roll back price increases-investments in new technol­ ogies can be induced to come either too late or too early; but they face the same consequences. The issue becomes, then, not a reluctance to invest so much as premature or poorly timed decisions driven by poor strategic investment planning and perhaps a too high political profile. While there is ample evidence of a predisposition to eager adoption of labor-saving machinery throughout our industrial history, there is also ample evidence of good ideas that failed to diffuse or new technologies that diffused remarkably slowly. 10 At least part of the explanation can be traced to individuals and the mental maps they have of new technologies and their capabilities, the difficulty of identifying the brealH cost struc­ tures of their current production arrangements, and the forces shaping the production environment within departments, firms, and entire in­ dustry sectors. This, then, raises interest in the power of culture and perception-broadly defined-to influence the innovation and diffu­ sion of technology.

Nested cultural contexts. The range of factors that can serve as filters or barriers in the adoption and diffusion of new technologies is very broad. Cultural factors function as limits on this process. MNot nature, but people, acting within social and technical constraints, promote some technologies and bury others.HII Within a specific industry, such as ma­ chine tools, there may be little tradition of R&D investment and limited institutional access to work being done in other settings such as univer­ sity, nonprofit, or federal laboratories. The culture of the small machine shop with a machinist as proprietor certainly reveals little capacity or ap­ preciation for external intelligence gathering and few developed conduits for communication. Indeed, the very notion of collaborative R&D­ cooperation to compete-even on preproprietary questions is only now being developed. The role of occupational culture, evident in the physical and concep­ tual walls separating manufacturing from engineering and marketing 12 DONALD A. HICKS from both, has likewise served to stifle the diffusion of an idea at its earli­ est stages. The reluctance on the part of American consumers to accept apparel made from man-made fibers is yet another example of the com­ plex ways in which broader cultural factors subtly shape notions of fash­ ion and style-and thereby demand-and in so doing substantially alter the prospects of entire industries' embracing new materials and product technologies (see Steele).

Institutional factors. Institutions also have effects on how technol­ ogy is perceived and accommodated by different industries at different times. Consider the role of unions, for example. Although craft and in­ dustrial unions are commonly viewed as responsible for erecting barri­ ers to technology upgrading in the machine tool industry, this charac­ terization has not been universally applicable. Evidence exists of a more supportive and even an advocacy role being played by unions in the tex­ tile and automobile industries as labor has actively sought ways to bal­ ance the human capital aspects of automation with the need for quality, reliability, and efficiency. One of the more pragmatic influences on the way in which technol­ ogy upgrading is employed as a response to changing economic circum­ stances is related to how such upgrading has traditionally been conceptu­ alized. This has its effect on activities as concrete as traditional account­ ing practices. Until recently investment in technology upgrading has tended to be viewed as a cost-reducing strategy. Even from this perspec­ tive the notion of 'cost" is not easily conceptualized. To complicate mat­ ters more, the goal of cutting manufacturing costs has taken on a sequence of cost-control targets in recent years. Initially, in keeping with a traditional view of the role of new technology as labor-saving, the em­ phasis was on getting and keeping labor costs down. This target began to lose its attractiveness as it gradually became apparent that direct labor costs in many industries were already shrinking to less than 10 percent of total production costS. 12 Next the emphasis shifted to getting and keeping overhead costs down. But the difficulties of allocating overhead costs to specific produc­ tion tasks have proved daunting. More recently, as new and expensive materials have been drawn into production plans, new technologies have been explored for their ability to drive down costs related to waste. 13 Apart from the conceptual difficulties encountered in viewing tech­ nology upgrading from the perspective of cost reduction, new conceptual problems have emerged. Today cost reduction is being displaced by new criteria that increasingly determine decisions about technology upgrad­ ing. Flexibility expressed in short start-up and turnaround times to ac­ commodate batch and customized production has emerged as a major

13 INTRODUCTION AND OVERVIEW justification for technology upgrading. In addition, concerns about high quality, meeting delivery schedules, service before and after the sale, and optimal use of physical, financial, and human capital assets have made the task of justifying technology upgrading even more complex. 14 How do these conceptual shifts manifest themselves in practice? As Ashburn suggests, the conceptual paradigms at the base of traditional cost accounting and related standard accounting practices have emerged as formidable, if subtle, barriers to technology upgrading. Their inability to quantify the full range of intangibles that have assumed major impor­ tance today may not only slow the process of new technology investment once the need is recognized but even obscure the option of technology upgrading for a company losing market share and otherwise slipping into an uncompetitive position. IS Traditionally, as expenditures for new technologies were justified by their savings in direct labor costs, the focus could be on tangible factors for which conceptualization and measurement were relatively straight­ forward. Today we know that this approach has caused us to overlook factors that are potentially of far greater importance. Ultimately, this re­ lates directly to newly apparent limitations in the practice of cost account­ ing and the inadequacies of prevailing accounting standards.

The role of government policies. The role of u.s. government pol­ icies-often inadvertent, seldom consistent-has inevitably received much attention as concern has heightened over U.S. industrial competi­ tiveness. The full range of federal policies that shape the macroeconomic and microeconomic environments in which individuals and institutions function is undeniably very important. Policies with domestic aims, such as the temporary extension of R&D tax credits and the renewed debate over the recent elimination of the investment tax credit, are important. More directly relevant to the international context of technology is the issue of export controls, which, because of an inability to define Hcritical" technologies precisely, may since the early 1970s have substantially ham­ pered the development of key industries by restricting world markets for new products and thereby serving as a major disincentive to invest in new technologies. 16 The role of government policy is amply revealed in more sector­ specific examples as well. Certainly, as the initiating roles of the U.S. Air Force in stimulating the family of machine tool control systems in the late 1940s and the Department of Defense in accelerating development in ce­ ramics illustrate, government initiatives are not without influence on technology-based industry development. In other instances, however, it is clear that the role of technology up­ grading can be severely hampered as the strategic significance of an in-

14 DONALD A. HICKS dustry sets it up as a target of government actions that prove counterpro­ ductive. The heavily politicized environment in which the U.S. steel in­ dustry functioned in the 1960s and 1970s illustrates this well. Barnett suggests that the steel industry and the federal government grew increas­ ingly responsive to each other as concern for imports led to efforts to de­ fine unfair trade practices and as concern over contract stalemates brought government pressure on industry to accede to unjustified high wage demands by politically influential labor unions. As the steel indus­ try grew ever more responsive to government pressures, its willingness to make major strategic adjustments to new markets and changing competi­ tive realities was reduced. Investment by the federal government in projects intended primar­ ily to lead to commercia liz able technologies or market-specific outcomes has a remarkable record of failure. Similarly, the limited ability of govern­ ment policies to affect the industrial evolution of selected industries or to remedy competitive disadvantages is seen throughout the following chapters.17 As the chapter on the automobile industry shows, the evolu­ tion of the automobile industry complex in Japan, not preferential gov­ ernment assistance policies, is the key to understanding Japan's competi­ tive success in this industry.

Conclusion

The United States has long been at the leading edge of creating new in­ dustrial technologies and bringing them to full consumer usefulness through vigorous programs of manufacturing adaptation. Over the years, however, this success has probably had far more to do with the changing composition of consumer demand and the fluid economic en­ vironments that shaped it than with the characteristics of any of the tech­ nologies involved. To the extent that this is true, the current preoccupa­ tion with technology- and innovation-led models of economic and industrial change might well be reexamined. In recent years a justified concern has arisen over the inability of u.s. basic industries to sustain competitive advantages in increasingly mature technology and product areas. We have frequently seen our ad­ vantages slip away in one market after another, all of them character­ ized by U.S. leadership in the past. The examples are all too familiar and include the full range of our traditional basic industries-automobiles, textiles, steel, consumer electronics, machine tools-and newer ones such as semiconductors. It is also increasingly apparent, however, that both productivity and competitiveness are better understood as relative than as absolute indus- 15 INTRODUCTION AND OVERVIEW

trial attributes. While technology is one of several influences on both of them, it may be unwise to assign undue importance to it. The U.S. "industrial problem" has come to mean many things to many people over the past decade. Many interpretations have empha­ sized the need to cut costs as a response to concerns about productivity and competitiveness. Direct labor costs and myriad indirect and over­ head costs, including inventory control and asset use, have made com­ pelling targets for cost control in recent years, and technology-based responses have preoccupied U.S. industry through most of the recent past. More recently it has become apparent that fluctuations in the value of the dollar against other key currencies and even brute demo­ graphic pressures on consumer demand may well have greater influ­ ences on the health and competitiveness of our basic industries and the prospects for new ones. Moreover, both conceptual and technical fea­ tures of U.S. tax policy and traditional cost accounting standards and practices also playa role. Today relatively subtle, intangible, difficult-to-quantify, and decid­ edly nontechnical influences on U.S. industry are increasingly moving to center stage and prompting us to reposition the technology factor in the hierarchy of factors governing both industrial productivity and interna­ tional competitiveness. A quality culture and work ethic on the shop floor, more developed information flows and management regimes, closer at­ tention to design for manufacturability, emphasis on preventive mainte­ nance, development of employees' skill, and building rather than inspect­ ing quality into a product, in addition to general macroeconomic condi­ tions, have increasingly come to be regarded as equally, if not more, consequential influences on growth and adjustment. The result has been the discovery-or perhaps rediscovery-of important limits to the tech­ nology dynamic in advanced economies. Ultimately, focusing on the right factors is critical to any undertak­ ing. To the extent that we discover that specific technologies and their ef­ fects on specific industries draw their significance from the larger social, economic, and political contexts of which they are a part, we are closer to reassigning the technology factor properly to its more modest role in eco­ nomic and industrial change.

Notes

1. Nathan Rosenbeig, "Why in America?" in Otto Mayr and Robert C. Post, eds., Yankee Enterprise: The Rise of the American System of Manufactures (Washington, D.C.: Smithsonian Institution Press, 1981), pp. 49-61. 2. A recent discussion of the importance of interindustry linkages and depen­ dencies between and among goods and advanced service industries is found in

16 DONALD A. HICKS

Stephen S. Cohen and John Zysman, Manufacturing Matters: The Myth of the Post-Industrial Economy (New York: Basic Books, 1987). 3. On the importance of the machine tool industry to the full range of dura­ ble goods industries across the history of our industrial era, see David F. Noble, The Forces of Production: A Social History of Industrial Automation (New York: Knopf,1984). 4. Estimates reported in Aerospace Industries Association, "U.S. Aerospace Industry: Production Environment/ staff report, 1984. 5. By contrast, while the Defense Department and the National Aeronautics and Space Administration commonly impose requirements for state-of-the-art manufacturing technology on their prime contractors, there is often a techno­ logical fall-off between them and the second- and third-tier subcontractors whose inputs typically account for the greatest portion of the value added in myriad products. 6. John Bessant and Bill Haywood, "The Introduction of Flexible Manufac­ turing Systems as an Example of Computer-integrated Manufacturing," Inno­ vation Research Group, Brighton Polytechnic, Occasional Paper no. 1, October 1985, p. 49. 7. Ramchandran Jaikumar, "Postindustrial Manufacturing," Harvard Business Review (November-December 1986), pp. 69-76, at p. 70. 8. Elsewhere I have reported that cyclical shifts, such as the recession experi­ enced throughout the metalworking sector during 1980-1982, can likewise pro­ vide the stimulus for the adoption and diffusion of new technologies. See Donald A. Hicks, Automation Technology and Industrial Renewal: Adjustment Dynamics in the U.S. Metalworking Sector (Washington, D.C.: American Enterprise Institute, 1986). For a discussion of the role of external factors in reshaping the fiber, ap­ parel, and textile industries-which together are the nation's largest employer and account for 15 percent of the 1987 trade deficit-see Bruce Stokes, "Getting Competitive," National Journal, June 6, 1986, pp. 1360-65. 9. On this point, see also Gordon L. Clark, "Corporate Restructuring in the Steel Industry: Adjustment Strategies and Local Labor' Relations" (Paper pre­ sented at conference on America's New Economic Geography: Nation, Region, and Central City, Washington, D.C., April 1987). 10. This line of argument is hindered by conceptual problems that influence the measurement of the pace of diffusion. As Ashburn notes, for example, much depends on whether one's indicator of the diffusion of new technologies is the share of annual expenditures allocated to them or their share of the total installed base on which the productivity of the industry rests. 11. Claude S. Fischer, "Understanding Technology: An Agenda," book review in Science, vol. 238 (November 20, 1987), pp. 1152-53. 12. Lawrence T. Michaels, "New Guidelines for Selecting and Justifying Fac­ tory Automation Projects" (Price-Waterhouse, n.d.). 13. Bell-Textron, for example, now uses composite materials that cost $70 per square foot for rotor surfaces in their tilt-rotor helicopters. 14. C. S. Park, "Counting the Costs: New Measures of Manufacturing Perform­ ance," Mechanical Engineering (January 1987), pp. 66-71.

17 INTRODUCTION AND OVERVIEW

15. For further discussion of this point, see Arnoud De Meyer, Jinichiro Nakane, Jeffrey C. Miller, and Kasra Ferdows, "Flexibility: The Next Competitive Battle/ February 1987; and John Holusha, "Cost Accounting's Blind Spot," New York Times, October 14, 1986, pp. 33, 54. 16. Hylan B. Lyon, Jr., and Jack Nunn, "Export Controls: An Inadvertent In­ dustrial Policy," in Michael Buckley, Homer Moyer, and Robert Cassidy, eds., The Law and Policy of Export Controls (Washington, D.C.: American Bar Associa­ tion, forthcoming). 17. For a discussion of the ineffectual role of federal government interventions in the development side of R&D, see Claude E. Barfield, Science Policy from Ford to Reagan: Change and Continuity (Washington, D.C.: American Enterprise Insti­ tute, 1982), pp. 46ff.

18 2 The Machine Tool Industry: The Crumbling Foundation Anderson Ashburn

The machine tool industry is the smallest of the industries studied in this book. The total world production of machine tools in 1986 was $29 bil­ lion, but U.S. producers accounted for less than 10 percent of that-only a little over $2.8 billion. 1 Yet every industrial country except the United States pampers and protects its machine tool industry, and almost every developing country places a high priority on developing an indigenous source of machine tools. Why this interest in so small a segment of the economy? It is simply because machine tools are the foundation for almost all manufacturing. Once we leave the work of artisans behind, virtually every man-made de­ vice is produced either by machine tools or by machines and equipment produced by machine tools. Thus an automobile is an assembly of metal parts made by machine tools, plastic parts produced by machines made by machine tools, fabric processed on textile machines made by machine tools, rubber processed and molded by equipment made on machine tools, and glass processed by equipment produced by machine tools. The assembly is achieved with the aid of a variety of devices produced by ma­ chine tools. The assembled automobile is fueled by petroleum that was drilled for, pumped, piped, and refined with equipment produced by ma­ chine tools and is finally driven over highways surveyed, graded, and paved by instruments and machinery built with machine tools. Machine tools have often been called the only machines that can re­ produce themselves. That is true to the extent that machine tools cannot be produced without the use of other machine tools. Because builders of machine tools serve this key role in production, they are also the primary medium of technology transfer in the manufacture of durable goods. This factor was well summarized in a recent study of the world machine tool industry by Britain's Technical Change Centre. Concluding that a withdrawal by the United Kingdom from the manufacture of machine

19 THE MACHINE TOOL INDUSTRY tools would have negative implications that made such a course unaccep­ table, the report explained: Machine tools is a nodal industry. It is the transmission point of new technology to the rest of manufacturing industry. An inno­ vative and competitive machine tool industry contributes sig­ nificantly to the rapid diffusion of new technology and to the realization of the competitive benefits that this makes possible for the rest of manufacturing industry. This is amply illustrated in the case of electronics technology and developments in flex­ ible automation.2

The Large Cyclical Swings in the Machine Tool Industry

Another unique trait of the machine tool industry is the existence of ex­ tremely sharp swings in demand, which carry with them swings in prof­ its and in cash flow. Year-to-year changes in orders of 50 percent or more are not unusual. These fluctuations are due to a relationship between the demand for consumer goods and the demand for capital goods that can be called the accelerator effect. A relatively small change in the demand for an end product can produce a much sharper change in the demand for the equipment used to produce that product. Consider a company that manufactures its product on lathes. As­ sume that it has ten lathes that can just meet production requirements. Assume also that each lathe wears out in ten years and that the company has its investment plans so well organized that one lathe is replaced every year. Now consider what will happen if there is a 10 percent increase in demand for the product. The plant will need eleven lathes to meet pro­ duction requirements. It will have to buy two lathes-one as a replace­ ment for the worn-out lathe and a second to increase capacity. Thus a 10 percent increase in the demand for the product has produced a 100 per­ cent increase in the demand for lathes. Of course, the accelerator effect is also felt in the other direction. If the demand for the product declines 10 percent, the company will need only nine lathes. In view of the reduced sales volume, it will almost certainly not replace the lathe that has worn out. Thus a 10 percent decline in demand for the product has caused a 100 percent decrease in the demand for lathes. 3 In the real world the relationships are not as neat as in this hypotheti­ cal case, but the accelerator effect is a very real factor. Fortunately, the fluctuation in demand for products varies somewhat from industry to in­ dustry, and there have been no 100 percent declines in demand. Few companies, however, have such orderly replacement programs as in the example, and normal replacement of machine tools is often viewed as a postponable expense whenever a drive is undertaken to reduce costs. 20 ANDERSON ASHBURN

Historically most of the companies building machine tools have been small. The need to create reserves for lean periods has made most of them cautious about investing money on research and development without a solid prospect of a customer for the developed machine. In re­ cent decades many of these small, privately owned companies have be­ come divisions of large, diversified firms-usually at the peak of a business cycle. These companies, now divisions, encounter a new prob­ lem arising from the accelerator effect. In good years the parent gladly collects the earnings. In bad years it begins to doubt the wisdom of rein­ vesting some of this money in its machine tool division. If it does continue to support the division through the bottom of the cycle, a critical problem arises on the next upturn. Because of the time lag between order and de­ livery on many machine tools, the working capital needed substantially increases in the early stages of an upturn-a problem that arises at a time when the cash flow from the machine tool division is still small. The par­ ent, faced with many alternative ways of investing its funds, may now feel that investing in the machine tool division is not the most desirable way to use its money and, by restricting working capital, may limit the ability of the division to obtain new orders.

The Different Needs Filled by Machine Tools

Today's machine tools are not a single class of interchangeable machines in the way, for example, that all automobiles perform essentially the same function. All machine tools are power driven, and they change the shape of metal by cutting it, eroding it, or shaping it. 4 Of the estimated 2.8 mil­ lion machine tools in the United States, a little over three-quarters are metal-cutting machines. The cutting machines can be roughly divided into two categories: those in which the cutting is performed by rotating the workpiece against the cutting tool and those that hold the work sta­ tionary while moving (feeding) the tool, usually by rotating it. The metal­ forming machines can be roughly divided into those that work on sheets of metal (often called fabricating equipment) and those that shape heav­ ier sections with presses. Cutting machines include lathes and boring, drilling, milling, and grinding machines; forming machines include presses and punching, shearing, bending, and forging machines. A new class of cutting machines, called erosion machines, cut by an electrical discharge, by an electrochemical action, or by ultrasonic, plasma, elec­ tron beam, or laser beam. Other specialized types complicate this picture; the Bureau of the Census provides shipment data on 126 types of ma­ chine tools. Revolutionary changes in the control of machine tools have become possible in the past thirty years that are dramatically changing the rela-

21 THE MACHINE TOOL INDUSTRY tionship between the traditional classes of machines. These controls have also made possible new, more flexible machines that are beginning to make fundamental changes in manufacturing both for those who make and for those who use machine tools. Technological development in machine tools can occur because of an external demand; that is, a product development in one industry poses a manufacturing problem. When this happens, the technology usually develops quickly and diffuses rapidly through the industry where the need originated. It may then diffuse much more slowly into other industries where the need is not so urgent. This slow diffusion has taken place even when the economic advantages of the new develop­ ment are evident. When new technology develops as a result of basic re­ search or product development not stimulated by a perceived need, the diffusion is usually much slower. That is true whether the technology originates at a machine tool builder, in a using industry, or in an inde­ pendent research laboratory. To understand the recent changes in manufacturing technology and how they affect competitive relationships, it will help to know something about the development of machine tools and the structure of the industry and to review how some past major changes diffused through the industry.

Early Machine Tools and the "American System of Manufacturing"

Tools began as extensions of the hand-knives, hammers, scrapers, drills, and so on. Probably the first hand tool to be mechanized was the drill. The bow drill, in which manually pulling and pushing on a bow caused the cord connecting the ends of the bow to rotate a drill, can be seen in an Egyptian bas-relief dating from about 2500 B.C. Lathes, which produce round parts by rotating the work while a tool is moved along the surface, were certainly in use by 700 B.C. and may have originated several centuries earlier.s Not until the Industrial Revolution, however, did these primitive de­ vices begin to develop into true machine tools: power-driven machines with methods of control permitting some degree of precision. In England in 1774 John Wilkinson devised a boring machine that produced the cyl­ inders that made possible the Watt steam engine. Wilkinson made the boring bar heavier, extended it all the way through the cylinder, and gave it a support on the outboard end. Many consider this the first real ma­ chine tool. In America a quarter-century later it was David Wilkinson (no relation) who obtained the first U.s. patent on a machine tool. His was a screw-cutting lathe with a slide resting on three points. He laterimproved the design by placing the two front bearing points on a prismatic way and

22 ANDERSON ASHBURN the third point on a flat way in the rear. Errors in the prismatic way could be compensated by hand filing the flat way, making it possible to produce reasonably accurate slide-rest lathes cheaply. Hundreds of these lathes were built during the next half-century, some by Wilkinson and many others by imitators.6

Interchangeable Parts. Even when made by machine tools, the parts of an assembly had to be filed and fitted by hand. No two guns, for exam­ ple, had identical parts. If parts could be made interchangeable, guns could be repaired in the field by cannibalizing parts from other damaged guns. Many may have dreamed of doing this, but the earliest effort that has been documented was an attempt by the French in 1717. According to Charles H. Fitch, who for the U.s. 1880 census made an exhaustive search into the origins of what had by that time become known as the "American system of manufacture," the French failed, "presumably through prejudice, improper system, and lack of machinery." Fitch said that the French tried again in 1785 and failed again. That 1785 trial was witnessed by Thomas Jefferson, then minister to France, who wrote several letters home about it. In one to John Jay, he said he had personally fitted together several musket locks from groups of parts, adding that "the government here has examined and approved the method, and is establishing a large manufactury for the purpose of putting it into execution." To James Monroe he wrote that the mechanic's name was Le Blanc, that Jefferson had tried and failed to get the govern­ ment to bring Le Blanc to America, "and I do not know what became of him." Whatever became of Le Blanc, we know that the manufactury ei­ ther was never built or was not successfuV A third attempt was made in France by J. G. Bodmer at a small factory at St. Blaise.s One reason these attempts could not succeed was that machine tools that could provide the necessary precision in a large volume of parts had not yet been devel­ oped. A century later the system was finally introduced into France from America by way of England.

The Need for Guns. How the "American system" developed is the story of the real birth of the machine tool industry. It is also the origin of the concept of "tolerances" and the development of gauges to determine if parts are within those tolerances. Two government arsenals and a small group of private arms makers all contributed to these developments. The first national armory had been established at Springfield, Mas­ sachusetts, and the second was at Harpers Ferry, Virginia. A score of pri­ vate arms makers, most of them in Connecticut, sprang up when Congress appropriated funds to buy arms from private contractors to supplement those from the national arsenals. The War Department gave 23 THE MACHINE TOOL INDUSTRY a contract to Eli Whitney in 1798 for 12,000 muskets to be delivered within two years. There is no evidence to support the often repeated leg­ end that this contract called for the muskets to have interchangeable parts. The contract took eight years, not two, by which time almost all the money due had already been advanced to cover the costs of building ma­ chinery. Whitney introduced the factory system, with its division of labor, that had earlier been devised in the New England textile mills. He devised filing jigs to size the parts when they were hand filed before hardening and, according to Fitch, used a method of case hardening in numbered lots of ten, but the surviving guns provide indisputable evi­ dence that he did not achieve the interchangeability he sought. The year after the first Whitney contract, Simeon North received a contract to make 500 pistols, and the next year another 1,500 were added to the order. Other orders followed, and in 1813 North received an order for 20,000 pistols at $7 each. The contract said, HThe component parts of pistols, are to correspond so exactly that any limb or part of one Pistol, may be fitted to any other Pistol of the Twenty Thousand." This is the ear­ liest evidence that has been found of a contractual requirement of inter­ changeable parts. 9 A system of interchangeability based on hand filing is difficult if not impossible to sustain. It is possible for demonstration lots but not for reg­ ular production day after day. It is certainly not possible to make 20,000 interchangeable parts that way. What was needed was a machine to do the work: a machine we now call the milling machine. The lathe, the bor­ ing machine, and the drilling machine had been around for centuries, but the milling machine did not appear until sometime between 1813 and 1818 in the Simeon North plant in Middletown, Connecticut. North had problems meeting the delivery schedule on his contract, but he achieved sufficient interchangeability to satisfy its terms.

Feud at Harpers Ferry. Even greater contributions were made by John H. Hall, who became a prolific inventor of machines to produce guns with interchangeable parts. A New Englander who started with a woodworking shop in Portland, Maine, he devised a rifle that loaded at the breech instead of from the muzzle. A long, frustrating effort followed to patent and market his invention. At the start the superintendent of pat­ ents claimed to have invented the same thing first but graciously con­ sented to divide the royalties with Hall. It ended with Hall in the unusual position of supervising, for a salary, the production of his rifles at the Harpers Ferry Armory. The rifle works established to build the Hall rifle was an indepen­ dent unit located on an island in the armory. Hall ran it for twenty-one years, from 1819 until his death in 1840, and it became a sort of manu- 24 ANDERSON ASHBURN facturing development laboratory for the Ordnance Department. As much time and money were spent on the design and building of ma­ chine tools as on the production of the breechloaders. Hall apparently had much of his new system in place by 1823. Meantime a classic con­ flict developed between the independent Yankee and James Stubblefield, the superintendent of Harpers Ferry. Stubblefield headed a family clique that ran the arsenal and resented the radical ideas of the interloper. The family succeeded in getting a resolution passed by the House of Representatives to Hexpose the waste & extravagance of the Publick Money on the Patent Rifle."

Investigation by Congress. The outcome of the resulting investigation was an 1826 report Hon Hall's machinery'" by a committee headed by James Carrington, an experienced arms maker who had been a foreman for Whitney: It is well known that arms have never been so exactly similar to each other by any other process, as to require no marking of the several parts & so that those parts on being changed would suit equally well when applied to every other arm ... the machines we have examined, effect this with a certainty and precision, we should not have believed, till we witnessed their operations. Among the various machines Hall built were three types of cutting machines, which the Carrington committee called straight cutting, curved cutting, and lever cutting. These later came to be known as plain milling machines, rise-and-fall milling machines, and hand milling ma­ chines. Hall had also devised a system of hardened gauges; one set of these was used by the workers and a second set by the inspectors, and a third, or master, set was kept in his office to check the working gauges. Two years later, in 1828, the Ordnance Department gave a contract to Simeon North in Middletown to produce 5,000 Hall rifles, the parts to be interchangeable with those produced in Harpers Ferry. Hall was not in favor of the contract and was not very cooperative at first, but ultimately he and North developed an interchangeable system of gauging such that rifles were produced, which can be found in collections today, consisting of a mixture of parts from the two plants. Hall's technology thus diffused through the Connecticut River val­ ley and on through New England. It did not diffuse, however, from Hall's island to the rest of the Harpers Ferry Armory, where muskets were still made by individual craftsmen. In an excellent study of the relationship, Merritt Roe Smith refers to Hthe cool disdain which most people in Harpers Ferry reserved for novelties that threatened to upset their accus­ tomed lifestyles and accelerate the pace of change."lO 25 THE MACHINE TOOL INDUSTRY

The Snail's Pace of Diffusion. From Fitch's exhaustive study of 1880 we can determine the rate of diffusion through the armories. Although Hall had achieved interchangeability sometime before 1826 and North soon after 1828, it was not achieved at the Springfield Armory, less than forty miles beyond Middletown, until after 1840. Finally Thomas Warner, superintendent at the Springfield Armory, introduced the sys­ tem at Whitneyville (where popular legend thinks it started) in 1842. In fact, according to the accoun t books at the Springfield Armory, the prac­ tice of assembling and marking locks Usoft" -that is, before the harden­ ing process-was not entirely discontinued until early in 1849. Fitch sought to explain this apparent contradiction. In the 1880 census he wrote:

It is scarcely a matter of wonder that the systems of interchange­ ability so repeatedly introduced were not well sustained until after the introduction of the practices of close forging with steel dies and metalworking, with efficient machinery for making exact cuts, without dependence on the craft of the operative.

Speaking of the gauge requirements, he said, HOne hundred fifty-four fine gauges are used in testing the accuracy of the parts of the Springfield rifle; that is, 154 pieces, many of them being so contrived as to gauge a great variety of measurements with a single instrument."!! Thus, during the half-century from 1799 to 1849, the combination of the division of labor, efficient machining, and reliable inspection that made possible the system of mass production known as the American system had become a reality.

The Beginning of the Machine Tool Industry

A number of brilliant mechanics were working in the armories, both pub­ lic and private, during this period. Two private firms that started late in the period were Robbins, Kendall, & Lawrence in Windsor, Vermont, in 1845 and Colt's Patent Firearms Company in Hartford, Connecticut, in 1848. The former won a contract to produce 10,000 rifles with a bid of $10.90 each, ten cents below the lowest competing bid. It quickly assem­ bled a staff, hired from the Springfield Armory and the private contrac­ tors. It bought some machinery from Ames Manufacturing Company, a key supplier to the Springfield Armory, but most of the machinery was designed and built by Richard S. Lawrence and the people the firm hired. After the contract was completed eighteen months ahead of schedule, the partnership, now shrunk to Robbins & Lawrence, obtained a new con­ tract for 15,000 guns at the same price.

26 ANDERSON ASHBURN

An American Surprise in London. In 1851 Robbins & Lawrence exhib­ ited a set of rifles produced under this second contract at the World's Fair in the Crystal Palace in London. The guns, with unmarked, interchange­ able parts, excited great interest and were awarded a medal. As a result, a royal commission headed by Sir Joseph Whitworth, then the most re­ spected name in the British machine tool industry, arrived in America in 1853 to investigate those remarkable rifles. When he returned to England, Whitworth had an explanation: The labouring classes are comparatively few in number [in America j, but this is counterbalanced by, and indeed, may be re­ garded as one of the chief causes of, the eagerness with which they call in the aid of machinery in almost every department of industry. Wherever it can be introduced as a substitute for man­ uallabor, it is universally and willingly resorted to. He said it was this Neager resort to machinery wherever it can be applied, to which, under the guidance of superior education and intelligence, the remarkable prosperity of the United States is mainly due.H12 That same year Robbins & Lawrence received a British contract for 25,000 Enfield rifles (plus a verbal promise of 300,000 more) and an order for 157 machine tools to equip a new armory to be built at Enfield. The machines were shipped in 1855. With them went a number of skilled men whom the United States agreed to release from the Springfield Ar­ mory. An English author, L. T. C. Rolt, has commented: Did the parties to this amicable arrangement see its irony? It was only a single lifetime ago that the British Government had fruit­ lessly endeavored to stem the flow of skilled men and new ideas from the old world to the new, yet already the current was be­ ginning to flow in the opposite direction. 13

The next year Robbins & Lawrence, which had expanded too fast with too little capital, failed. Late delivery of the Enfield rifles because of late delivery of lumber for the stocks brought a penalty clause into play; the verbal order for 300 ,000 rifles, for which a new plant had been built in Hartford, did not materialize; and finally the firm made a disas­ trous attempt to produce railroad cars. These events combined to bank­ rupt the firm.

The Peak of Armory Practice. Samuel Colt's new factory in Hartford, which he began to build in 1853, was the culmination of the development of armory practice. On a riverfront property in Hartford, considered worthless because of floods, Colt built seven buildings protected by a dike to keep out the river. Each building had cast-iron columns to support

27 THE MACHINE TOOL INDUSTRY the lineshafting, which was a uniform fifteen inches in diameter so that it served as a continuous pulley (disconnects had to be at the machines rather than at the lineshaft). Under this forest of lineshafting and contin­ uously moving belts were 1,500 machine tools, most of which had been gdesigned and built on the premises."14 When North began to build the Hall rifle in Middletown, he did not import Hall machines but designed and built new ones. That was the customary procedure. Most of the machine tools needed in any plant were built right in the plant that needed them. Although Robbins & Lawrence exported 157 machine tools to England, they did not think of themselves as machine tool builders. Nevertheless, that order seemed to mark a turning point. Lawrence later changed his mind; when he was working as superintendent at the Sharps Company (which had taken over the plant Robbins & Lawrence had built in Hartford during its ex­ pansionist phase), he tried unsuccessfully to get the company to enter the machine tool business. Although Lawrence failed in this effort, other companies did begin to think about making and selling machine tools. Many of the people that started these companies had worked in the armories or for the gun contractors. Colt's was a particular source. Francis Pratt, Amos Whitney, Charles Billings, Christopher Spencer, William Gleason, and E. P. Bullard were among those who started at Colt and went on to found machine tool firms. Other firms did not grow directly from the arms makers but devel­ oped from the unique kind of general machine shop that would develop and build any kind of machine one might wish to order for any purpose. Such shops did not produce standard machines and sell them: they inno­ vated on demand. These shops were a unique element of the New England scene in the early part of the nineteenth century and constituted what has been called a gshop culture.'" It was an elite group in a day when a machinist was gone who invents, or makes, machines." The shops were usually individual or partnership operations, and they rarely grew very large. To sign on as an apprentice in such a shop in those days was the route, and the only route, to becoming a mechanical engineer. IS

An Age of Entrepreneurs. Since a business could be started with rela­ tively little capital, a young man with ideas who had finished his ap­ prenticeship could strike out on his own and start a business at an early age. One major expense would be supplying power to the machines. The source had to be falling water. The power captured by a water wheel was distributed through the shop by one or more lineshafts that were al­ ways turning when the shop was in operation. Individual machines were powered by a wide, flat leather belt that connected the machine to 28 ANDERSON ASHBURN a drive wheel on the lineshaft. Starting or stopping a machine was achieved by sliding the belt from an idler wheel to the drive wheel or back to the idler. When water was the only source of power, a shop had to be located alongside a stream where a dam could be built to create the required fall. The streams of New England provided an ideal site for such shops. The developing textile industry, located alongside streams for the same rea­ son, created a need for machine shops to provide repairs and to design and make new textile machines. With development of the steam engine as a source of power, however, the site limitations were removed, and the capital cost needed for water power was reduced. Power from a steam en­ gine could be distributed by the same system of lineshafts and belts used for water power. In some towns industrial buildings with a steam engine and lineshafts could be rented, with power, by the room. One such build­ ing in Worcester, Massachusetts, was three stories high and 1,100 feet long. It had fifty tenants, the smallest employing two and the largest 800 workers. 16 Steam power became a satisfactory substitute for water because of improvements in valves and the development of methods to govern the speed, but the rapid increase in the use of steam engines brought the haz­ ard of frequent boiler explosions. It was half a century before this prob­ lem was finally brought under control by a combination of independent inspections and the development of the boiler code by the newly organ­ ized American Society of Mechanical Engineers. One of the first machine shops that concentrated exclusively on building machine tools was started in Nashua, New Hampshire, in 1837, but there were few such shops until after 1850. Then their numbers began to increase, and they had an increasing tendency to specialize in one or only a few types of machine tool. By the early 1870s at least seventy-two firms called themselves machine tool builders. Most of these were located in New England (there were nine in Worcester alone), but some had already started in such western outposts as Cincinnati, Cleveland, and Rockford, Illinois.

Diffusion of Milling Machine Design. An example of how technology diffused and developed during this period is the evolution of the milling machine. The early milling machines built by the arms makers shared a serious technical flaw: they had no convenient vertical adjustment. The machine had originated as a power-driven file. The workpiece was clamped on a flat table, which reciprocated to take the work back and forth under a milling cutter rotating in a spindle that resembled the chuck of a lathe. In effect, each designer seems to have approached the problem

29 THE MACHINE TOOL INDUSTRY as though he were thinking of a lathe, and milling machines were often made by starting with castings originally developed for lathes. The first machine known to have a combined vertical adjustment and an adequate support for the spindle was made at Gay, Silver & Company, North Chelmsford, Massachusetts, in 1835, some seventeen years after the early Middletown machines. It is not known which part­ ner or employee devised the system by which the headstock could be moved up and down on the column with a hand crank. An idler pulley permitted slack in the belt to permit this adjustment of the head. Frederick Howe apprenticed at the shop a few years later and worked there until he went to Robbins & Lawrence in 1847. Within a year Howe had designed a plain milling machine that, though a backward step in vertical adjustment, constituted a jump ahead in most other respects for the work required in armories. In 1850 he developed it into an index milling machine; although the machine still resembled a lathe, work could be positioned in rotation in the horizontal position and could be adjusted vertically by a lead screw. The design lacked rigidity, however, something Howe corrected in his design of 1852-the design that was sold to the British for Enfield. Richard Lawrence took this design with him when he went to Hartford to equip the Sharps rifle plant. This design was modified by Francis Pratt (then superintendent of the Phoenix Iron Works in Hartford) into a machine that, though still resembling a lathe, had adjust­ ments in three axes and a power feed. This was named the Lincoln miller (after Levi Lincoln, the owner of Phoenix). When the Pratt & Whitney machine tool firm was started in 1860, it began to produce Lincoln mill­ ers; during the next forty years it produced 7,000 of them with virtually no change in the design. Meantime, Frederick Howe had gone to Providence as superinten­ dent of an armory being started by the Providence Tool Company, which had obtained a contract to produce rifles. Here he met J. R. Brown of Brown & Sharpe, a firm that was producing measuring instruments, and interested him in the making of machine tools. Brown improved on a Howe design for a turret screw machine, which became the first Brown & Sharpe machine tool. Then Howe presented Brown with the problem of filing the grooves in twist drills. Brown solved that problem by designing the universal milling machine: a true toolroom machine with a knee-and­ column arrangement that, forty-four years after the first crude design of Simeon North, produced a machine of universal, industrial caliber. This machine determined the basic form of the milling machine until the ad­ vent of numerical control (a method of providing programmed automatic control) seventy-five years later.I7

30 ANDERSON ASHBURN

Diffusion of Machine Tool Developments to Other Industries

One of the key figures in planning the Centennial Exhibition in Phila­ delphia in 1876 was William Sellers. A product of the shop culture, Sell­ ers had started in the machine tool business in Philadelphia in 1848. Now he was determined to make the exhibition feature the American accomplishments in machinery-locomotives, typewriters, sewing ma­ chines, printing presses, reaping machines, and the machine tools used to build this machinery. The result of Sellers's effort was Machinery Hall, a building 1,402 feet long and 306 feet wide. At the center was a dramatic 1,400- horsepower, slow-speed Corliss engine especially built for the centen­ nial. This drove an underfloor drive shaft 362 feet long. Geared directly to the drive shaft and at right angles to it were four lines of jackshafts, each 108 feet long; these drove the eight overhead shafts that distrib­ uted the power to the machines. These were each 658 feet long and were driven by 30-inch-wide double belts. This immense hall, filled with operating machines of all types, made a profound impression on visi­ tors. Even the people involved in building one kind of machine had no idea of the extent of development in other areas. If theCrystal Palace ex­ hibition in London in 1851 had made a few observant Europeans aware of the development of the American system of manufacturing, it took Machinery Hall in Philadelphia in 1877 to inform the people in the country where it was happening.

The Sewing Machine. The sewing machine industry was the first to build on the manufacturing system developed by the arms makers. Be­ cause many different patents were involved, it was difficult to build a ma­ chine that did not infringe the patents of others, and the industry might have strangled in litigation before it was born had not a patent pooling ar­ rangement, the Great Sewing Machine Combination, made it possible for any manufacturer to license all the patents for a fee of $15 a machine. The Wheeler and Wilson machine. David Hounshell has recently made a detailed study of the manufacturing methods of three of the sewing ma­ chine companies. IS The Wheeler and Wilson machine began to be manu­ factured in 1851, at first individually or in small batches, with no attempt at interchangeable parts. In 1857 the company moved into an old clock factory in Bridgeport and hired William C. Perry as superintendent. Perry knew only one method of manufacturing because all his experience had been at Colt. He also brought in others with armory experience, including Joseph Dana Alvord, who had trained at the Springfield Armory and worked at Robbins & Lawrence and Sharps. In 1855, in its previous plant,

31 THE MACHINE TOOL INDUSTRY the company had produced fewer than 1,200 sewing machines. The new plant was calculated to have a capacity of 100,000 machines a year and in its peak year, 1872, actually produced 174,088 machines. One operation eluded mechanization: needle making. Years later needles were still straightened one by one with a hammer on an anvil. The Willcox and Gibbs machine. The Willcox and Gibbs sewing ma­ chine was produced for the company by Brown & Sharpe in Providence and so was produced by armory practice from the beginning in 1858. Brown & Sharpe began by developing the tools, jigs, and fixtures needed to ensure interchangeability of parts. The firm encountered the usual dif­ ficulties that seem to be encountered on every such project. The tools took longer to make and proved more expensive than had been expected. It required eight months to produce 50 of the first 100 machines that had been promised, and the assembly still required considerable hand fitting. Ultimately the system paid off. Demand never exceeded 34,000 ma­ chines a year, but Brown & Sharpe continued to refine the production methods to improve the quality or reduce the cost or both. Henry Leland, eventual creator of the Cadillac Motor Car Company, was hired by Brown & Sharpe in 1872 and headed the sewing machine department from 1878 to 1890. At that time the contractor system was common in armories and in shops that followed armory practice. An inside contractor was some­ thing like a foreman except that he would hire and pay a group of work­ ers, contracting with the armory to produce a certain quantity of work for a fixed price. Leland discontinued the contract system in his department and instituted a piecework system, with the workers paid directly for the amount of their production. A study at the time determined that the change reduced labor costs 47 percent. Leland also introduced the prac­ tice of preparing production orders that enumerated all the tools, jigs, fix­ tures, and gauges needed for the production of each part. Brown & Sharpe continued to make the Willcox and Gibbs sewing machines until the 1950s. The Singer machine. The third firm Hounshell studied, the Singer Sewing Machine Company, did not use armory practice. The first Singer machines were made one at a time in the shop of Orson C. Phelps. Phelps's method was to have the parts made in other shops in the Boston area and then fit them together by hand in his shop. The people who started the company had no background in manufacturing; when they moved the company to New York and began their own manufacturing, they knew no method to use but the one they had seen Phelps use. They soon began to add machine tools and make some of the parts themselves, but they appear not to have been selective in their choice of machines, which were of various makes and were acquired from a commission mer-

32 ANDERSON ASHBURN chant in New York. The sewing machine was essentially "produced by hand at the bench." Singer spent its money not on the expensive accou­ terments of manufacture to have interchangeable parts but on advertis­ ing. Edward Clark, the leader of Singer, contended that the European method of hand craftsmanship being used provided the quality neces­ sary for success. By 1880 production had increased to 500,000 machines a year, according to an estimate by Hounshell. As Singer grew, it emphasized development from within, and all the major positions were held by people who "arose from the bench." This made the company more or less immune to the diffusion of technology taking place in most of industry, and not until sometime between 1880 and 1882 did the company first begin to manufacture machines with in­ terchangeable parts. Until then repair parts had to be filed to fit, and some had to be supplied with special files to fit gears, to file shuttle races, and to adjust some of the dimensions on new shuttles. During the period when the company was still assembling the ma­ chines by hand methods, Singer contracted with the Providence Tool Company to produce 27,000 Domestic brand sewing machines. These were to be lower-priced machines to counter some of the competition Singer was facing. Providence Tool, which has been mentioned in con­ nection with the development of the milling machine, had an excellent reputation for both rifles and other durable goods. It may seem surprising that Singer canceled this contract because of dissatisfaction with the quality of the machines, but this fact points to a paradox not always rec­ ognized: hand fits are generally closer than those that result when parts have the tolerances required to make them interchangeable. The Singer method was producing a high-quality but expensive ma­ chine, one that was not easy to repair. As the quantities grew, however, it became more and more obvious that changes must be made. As early as 1862 the company had begun efforts at mechanizing, but not until 1886, when absolute gauges were abandoned and replaced with limit gauges, was the final step toward armory practice taken. 19 (Absolute gauges have a single dimension, and the operator uses his skill to come as close as pos­ sible to the size of the gauge. A limit gauge-for a hole as an example­ will have two plugs representing the upper and lower limits of the tolerance for the hole size, called the" go" and "not go" gauges. If one plug will go in the hole and one will not, the hole is within tolerance. If both plugs will go in, the hole is too large. If neither will go in, it is too small.)

The Rise and Fall of the Bicycle Industry. Machine tool developments tend to result from stimulation provided by rapid growth in a particular industry. Perhaps no industry has grown faster (or collapsed faster) than the bicycle industry. English bicycles with the pedals directly on a large 33 THE MACHINE TOOL INDUSTRY front wheel began to be imported in 1877. That same year Colonel Albert A. Pope began to produce the Columbia (a bicycle of the high-wheel En­ glish type) in the United States. Because his own plant was inadequate, he contracted the production to the Weed Sewing Machine Company, a firm located in the armory in Hartford that had originally been built by Robbins & Lawrence and was later the Sharps rifle plant. Weed was using armory practice in its production of sewing machines. Later Pope bought the plant and converted it completely to bicycle production. Americans did not take to the high-wheeled cycle, however, and when the MsafetyH bicycle was developed in England in 1890 (two wheels of the same size, pedals driving the rear wheel by a chain, pneumatic tires), Pope quickly switched to the new design. Although he remained the leading producer, new companies sprang up across the country, and by 1895 there were thirteen cycle firms in Toledo alone. That year Pratt & Whitney completed a new forge shop and pressed it into service tempo­ rarily as an assembly floor for 200 "screw machines for bicycle work, all of which are sold." The next year the slump had arrived. There were 4 million bicycles in the country, and the industry's annual capacity was approaching and may have exceeded 2 million. In such a rapid buildup as occurred from 1890 to 1896, there was lit­ tle time for diffusion. Horace Arnold (using the pen name Hugh Dolnar) made an extensive study of the manufacturing methods used. He sum­ marized the variety of methods he encountered as follows:

According to the Monarch and Warwich and Victor ideas, [it is] a shop equipped almost wholly with Pratt & Whitney and Brown & Sharpe tools, and operated on armory and sewing machine plant lines. In the St. Nicholas it would mean a shop full of home constructions; in the Liberty and Waverly, it would mean medium-price tools of regular makes, with as little home-made work as possible; at Pope's it would mean Pratt & Whitney and Brown & Sharpe tools, liberally mixed with home talent effects; in the Western Wheel it would mean put everything on the punching press and run on German locksmithing lines with regular beer at 9:30 A.M. daily.20

Note that there was a major departure in practice at the Western Wheel Works. Where Pope and the other firms made the crank hanger (the part that supports the pedal axle) from a solid forging that required extensive machining, Western Wheel fabricated it from sheet steel in a se­ ries of press operations with intermediate annealing to prevent cracking. Where the ends of the formed sheet steel met, the joint was brazed. Later electric resistance welding was introduced. This method proved so much 34 ANDERSON ASHBURN cheaper than forging that it soon spread to the Pope plant and other east­ ern shops. Other parts Western Wheel made by stamping included the wheel hubs, which were made from flanges produced in a series of seven press operations and brazed to the ends of a section of steel tubing. Again, the cost was considerably less than for the forged hub used on the Columbia, but Pope did not adopt this or other stamped substitutes, apparently be­ cause he felt they looked cheaper and were not as good.21 The rapid rise and fall of the bicycle industry had given Americans a thirst for personal transportation, produced an active and successful movement for better roads and streets, created a short-lived boom for a number of machine tool builders, and produced a number of now empty bicycle factories, most of which were soon converted into shops for build­ ing automobiles.

Two New Technologies

Two new technologies-high-speed steel (so called because of its ability to hold its properties at the higher temperatures caused by faster cutting speeds) and the electric motor-next wholly transformed machine tools.

Cutting Tools. Frederick W. Taylor, better known as a pioneer in time study, spent twenty-six years and $200,000 in studying the metal­ cutting process. He started his tests at Midvale Steel Company (then run by William Sellers), where he had begun as a laborer and become chief engineer. He discovered that a round point was more effective than a di­ amond point on a cutting tool and that a jet of water directed at the point of cut would increase the life of tools made of Mushet steel (an early ver­ sion of high-speed steel) by 30-40 percent. Having discovered that all the machines at Midvale (and elsewhere) had inadequate feed, he re­ built those at Midvale to increase the feed. By 1890 he had begun to ex­ periment with the composition of tool steel but soon clashed with Charles Harrah, Jr., who had replaced Sellers as president of Midvale and did not want Taylor to experiment with tungsten (which Midvale did not produce) as an ingredient. Taylor resigned and spent some years concentrating on time study before getting back to the steel problem. For his research this time he joined Bethlehem Steel, where in 1898 he began working with Maunsel White, a test engineer. Two years later they had developed the Taylor­ White process. By combining an increased tungsten and chrome content with hardening at higher (and critical) temperatures, they produced the first high-speed steel as we know it today. In a last-minute decision, the new tools were demonstrated at the Paris Exposition of 1900. A lathe, an 35 THE MACHINE TOOL INDUSTRY

Uindependent driving system; mild-steel forgings, and the tools were rushed to Paris. The tools were demonstrated making a cut that was 3h6 of an inch deep, with a feed of Ih6 of an inch per revolution, at a cutting speed of 120 feet per minute-a remarkable cut for that day. The point of the tool was cherry red. After the exhibition the Ludwig Loewe Company took some tools to Berlin and tested them on a lathe and a drill press under conditions that gave maximum performance. Both machines were reduced to scrap in less than a month. It gradually became evident that Taylor and White had made every machine tool in the world obsolete. 22

Electric Motors to Replace Steam. The first use of electric motors to drive machine tools occurred about 1892. To conduct his experiments, Taylor had begun to use an electric motor in 1894, and it was surely some such device that constituted the uindependent driving system" used in Paris. As early as 1895 the Baldwin Locomotive Works in Phila­ delphia converted the lathes in the wheel room to individual drives so that the overhead lineshafts could be taken down, providing room to in­ stall an overhead crane to handle the heavy work. A SOO-horsepower steam engine was replaced with several small slide-valve steam en­ gines, providing a total of 250 horsepower. These engines drove dyna­ mos to generate the electricity. An individual motor for each lathe in the wheel room drove a jackshaft above the lathe by belt. A cone pulley (to provide speed variation) on the jackshaft was connected by belt to the machine. In the rest of the plant the lineshafts were left in place, with a motor to drive each. It had been suspected that a great deal of energy was lost in all those lineshafts, countershafts, and jackshafts and perhaps in slippage of the flat leather belts as well. In addition, electric motors certainly seemed a way to supply the greater power that would be needed to use high -speed steel tools; yet industry did not rush to install the new drives. Although some movement to both electric drive and heavier construction took place, the use of individual electric drives did not become general until the 1920s, and the overhead lineshaft was still a fairly common sight more than thirty years after the first introduction of electric drives. 23 Some machines redesigned to accommodate high-speed steel tools began to appear almost immediately (although ten years later a sympo­ sium on the subject concluded that actual practice was lagging far behind the possible increase in speeds). The advantage of higher speed was most evident in roughing cuts, but even for such cuts many shops evidently doubted the value when the number of jobs seemed small and the extra cost of the tools high.24 Even when all machines were driven by belts, it was necessary to 36 ANDERSON ASHBURN

have a fixed relationship, established by gears, between the rotation of the spindle and the feed (in a lathe) or the rotation (in a gear-cutting ma­ chine) of the tool. This relationship could be altered by changing the ra­ tios of the gears connecting the two, a process that was achieved by manually changing the gears in the headstock of the machine. Spindle speed changes were made by shifting the belt connecting a countershaft with the spindle to a different position on a pair of cone pulleys. Electric motors introduced the possibility of variable-speed drives, perhaps infinitely variable, with gear drives replacing belts. Or change gears of some kind (generally called back gears because they were located behind the spindle) could be used to provide a number of speeds. Direct, geared drives had limitations, however, if a fine finish was required. They transmitted vibration to the tool that affected the finish of the surface. Thus grinding machines were among the last changed to direct electric drive and even then were provided with a final belt-driven connection (using multiple V -shaped belts rather than the loose, flat belt of lineshaft days) to insulate the spindle from the power source. 2S

The Automobile Industry and Its Demands on Machine Tools

The automobile industry exploded with a speed that dwarfed what had happened a decade earlier to the bicycle industry. A great many small companies were started, and a few grew with astounding rapidity. Most of these early manufacturers bought components from outside manufac­ turers, often machine shops, and assembled them. Some of the suppliers of specialized components, such as engines, axles, and steering mecha­ nisms, bought parts from still other manufacturers. Heavier parts than had ever been required in such quantities were needed by the automobile industry. This spurred the development of new' production methods at the same time that the intense competition of the large number of manu­ facturers resulted in a rapid diffusion of each new technology. The electric self-starter provides an example. On Christmas Day 1910, Byron Carter, builder of the Cartercar, was driving through Belle Isle Park in Detroit when he stopped to help a woman in a stalled Cadillac. In starting the car, he neglected to retard the spark. As he turned the crank, the motor backfired, and the crank spun around and struck him, breaking his arm and smashing his face. He died two weeks later of complications. Henry Leland, the head of Cadillac and a close friend of Carter, was determined to keep the Cadillac from killing any more people. Within a month his engineers had devised a starter that would operate with a small electric motor and a storage battery. To provide such a motor, they en-

37 THE MACHINE TOOL INDUSTRY listed the aid of a Dayton engineer, Charles Kettering, and by February 27 they had a test model that worked. The self-starter was introduced on the new model Cadillacs in October and on several other cars the following year, and soon any pro­ ducer of medium- or high -priced cars that did not have a self-starter was out of business. In contrast, on the Ford Model T and cars that sought to compete with it in price, the hand crank endured for nearly two decades more.

The Rapid Development of Grinding Processes. The most dramatic changes took place in grinding machines. Before the automobile grinding was a process that made very light, precise finishing cuts only after the work had been brought to the most precise finish possible on a lathe. Charles H. Norton changed that. He learned his trade at the Seth Thomas Clock Company, where he stayed twenty years, becoming master me­ chanic and learning much about the light grinding techniques of the day. Then he went to Brown & Sharpe, with the purpose of studying and im­ proving the universal grinder, a remarkable toolroom machine that had been introduced a t the Cen tennial Exhibition in Philadel p hia in 1876. Be­ cause the machine required great skill and patience on the part of the op­ erator, it had serious limitations as a production machine. Norton studied both the grinder and the wheels. His work involved him with the Norton Company, a nearby producer of grinding wheels founded by Franklin Norton, who was no relation to Charles Norton. Norton developed a wheel-balancing machine. He learned that wheels were often run too fast and that when run at the proper speed they re­ moved metal in the form of minute chips rather than burning it away. He learned that wheels of the proper specification run at the proper speed did not need to be dressed (a barbarous practice involving the removal of the outer layer of abrasive, which had become dulled by use) but only to be trued (a delicate operation to maintain an accurate contour of the sur­ face). He redesigned the machine into a more robust form that long en­ dured. He also wanted to introduce heavier, wider grinding wheels but could arouse no interest in this idea. Norton and Henry Leland moved to Detroit in 1890 to found their own company, and there he became interested in the problems of the early automobile manufacturers. In 1896 he returned to Brown & Sharpe with his ideas on production grinding more fully developed and pro­ ceeded to design such a machine, conceiving the process now known as plunge grinding. But he could not convince Raymond Viall, the superin­ tendent at Brown & Sharpe, who persisted in the conventional view that accurate grinding with a wide wheel was impossible. N orton gave up the fight and left in 1899. With the support of friends

38 ANDERSON ASHBURN at the Norton Company, he formed the Norton Grinding Company. The next year he demonstrated his first production grinding machine, which was sold to a printing press manufacturer.26 In 1903 he introduced a ma­ chine that could grind an automobile crankshaft in fifteen minutes, rather than the five hours it took to turn, file, and polish the part by con­ ventional methods. At that point Norton Grinding became, in effect, a contract shop and held a brief monopoly over crankshaft manufacture. Two years later both Norton and Landis Tool were supplying such ma­ chines to the automobile industry, and by 1911 both had added camshaft grinders that made possible a one-piece camshaft of hardened alloy steel.

Three Other New Grinding Methods. A second type of grinding ma­ chine on which the automobile industry was to be built was developed by James Heald, curiously enough in the same area just outside Worcester, Massachusetts, where Norton Grinding was located. Heald developed an internal grinder in which a small wheel eccentrically mounted on a plan­ etary axis produced unprecedented straightness in the walls of the cylin­ ders. His grinder was introduced in 1905. A totally different type of grinder was needed for piston rings. That turned out to be the disk grinder, which Charles Besly and Frederick Gardner had introduced in 1891. Later these two men split up, as often happened in the development of the machine tool industry, and soon two producers of disk grinders were located a short distance apart in South Beloit, Illinois. A few years later a fourth major development in grinding stemmed from L. R. Heim's 1915 patent on centerless grinding. Although the prin­ ciple was an old one and many people had contributed to its develop­ ment, Heim made crucial improvements. Cincinnati Milling Machine Company acquired the patent and introduced its production centerless grinder in 1922. A wide grinding wheel 20 inches in diameter was op­ posed by a powered regulating wheel rotating at a much slower speed. The work was placed between the two wheels so that the grinding wheel caused it to rotate while the braking action of the regulating wheel intro­ duced a speed differential between the grinding wheel and the work that created the grinding action. A slanted top on the work rest directed forces in such a way as to develop roundness in the workpiece while it was in the grind. The automotive industry took to the centerless grinder immedi­ ately for such parts as pushrods and valve tappets.27 Without these developments in grinding there could have been no automobile industry, because it would have been impossible to manufac­ ture the precision parts required for the internal combustion engine in the volume needed to meet the rapidly growing demand for cars. Production reports at Ford, the leading mass producer of automobiles, indicate that

39 THE MACHINE TOOL INDUSTRY

Model T production was 13,840 in 1909, 189,088 in 1913, and 585,388 in 1916.28

The Growing Demand for Special Machine Tools. In addition to the various general-purpose machine tools, machines have long been built for special purposes. Such machines can produce at a higher rate, often with a high degree of automation. Traditionally such machines were classed as semiautomatic (which usually meant that the cycle was auto­ matic but that an operator was required for loading and unloading) or automatic (which meant that the loading and unloading were also mechanized). The volumes required by the automobile industry stimulated much more specialization in machine tools. According to Charles Sorenson, who had a leading role in the development of Ford production, in the vast expansion of the Ford factory that took place first when it moved to High­ land Park and again when it moved to the Rouge plant in Dearborn, the practice was to design and build an operating prototype at Ford and then contract with the machine tool builders for quantity production.29 Some of this undoubtedly took place, but the implication is probably an exag­ geration. The history of special machines is full of instances in which both customer and builder think they alone are responsible for successful developments while each blames the other for the failures. Many special-purpose machines (not just in the automobile indus­ try) are built by the user, others by machine shops not normally consid­ ered machine tool builders. Specialties develop, however, because companies are able to sell what they have successfully demonstrated they can build. The automobile industry created an unprecedented demand for special machines that stimulated their development. So-called manu­ facturing machines, with a single purpose, grew rapidly in numbers at the expense of universal machines.30

Carbide's Demands on Machine Tools

Users' demands for higher speeds and feeds, resulting from both refine­ ments in high-speed steel and the gradual acceptance of its possibilities, required more power and rigidity. A far greater test of rigidity, however, was just ahead. In 1928 word reached the United States of a new German cutting-tool material, a combination of tungsten carbide and cobalt. Tungsten carbide had long been known as a hard material, but it was weak and porous. A new way to fabricate it had now introduced the pos­ sibility that it could be used for cutting tools, a development that was to have lasting effects on both manufacturing technology and machine tool design. Krupp first produced the material for use in the dies for drawing

40 ANDERSON ASHBURN filaments for electric light bulbs. The possibility that the material would make good cutting tools may have been discovered as early as 1926, but it was not until the Leipzig Fair in March 1928 that a working demonstra­ tion of carbide cutting tools was made by Krupp. The demonstration cre­ ated a sensation comparable to that caused by the Taylor demonstration of high-speed steel in 1900. Predicting what this would do to machine tools, an anonymous editor wrote in the American Machinist: Reports come from Germany of a new material for cutting tools that far surpasses the best high speed steel for many uses. While this material is not yet available in this country, either it or its equivalent is sure to appear and it behooves forward looking de­ signers and managers to consider its effect on machine tools of the future. The advent of high speed steels necessitated many changes in machine tool design. Heavier beds, larger spindles of alloy steel, heat treated gears, heavier feed mechanisms and larger motors were some of the results. Still higher cutting speeds demand harder material in the cut­ ting tool, which in turn implies brittleness and the necessity for more rigid support for the shank, behind or below the cutting edge, but also the elimination of vibration in those parts of the machine that support the tool blocks and the tool slides. 31 Shortly after Krupp had introduced its carbide, called Widia, about half as strong as high-speed steel but far harder, General Electric intro­ duced a version called Carboloy that was produced under license from Krupp. New machines were soon introduced with higher speeds: lathes with spindle speeds of 900 revolutions per minute and boring mills with cutting speeds of 1,000 surface feet per minute. But the Great Depression had started, and investment in new machine tools dropped rapidly. In 1930 fewer than half as many cutting machines were shipped as in 1929, and by 1932 the number dropped to the lowest level since 1908. Initially the carbide material cost $500 per pound, and its use was limited to applications in which the tool cost was inconsequential in com­ parison with other costs. American practice was to exploit carbide's long­ wearing edge by using it on relatively soft materials; Europeans used it to machine materials that were hard to CUt.32 Some experimenting had been done with a technique for fine boring in which a single-point tool made a very light cut at very high speed and very small feed. Some success was achieved with this method when using diamond tools on nonferrous metals; with carbide tools the process could be used on cast-iron cylinders. As a result, cylinder boring began to replace grinding in the automobile industry. For all types of carbide the speeds had to be high to be successful; with slow speeds the tools dulled

41 THE MACHINE TOOL INDUSTRY rapidly. Unless both machine and tool were extremely rigid, the tool would break. Vibration (chatter) of the tools was fatal. Interrupted cuts were difficult, which meant that milling (in which the individual tool points are constantly going in and out of the cut) was more difficult than turning or boring operations. During the 1930s some success was ob­ tained by mounting a heavy flywheel on the spindle of a milling ma­ chine, providing inertia to help keep the cutter moving at a uniform speed. Not until 1939, however, with World War II looming, did a broad variety of machines designed for carbide tools become available. The lack of proper machines had limited the use of carbide for more than a decade after its introduction.

Automation

During World War II all automobile production was suspended, and the plants were converted to the production of war material (in some plants, to the mass production of machine tools). Similar conversions were made in a number of other industries. The production buildup began in earnest in the summer of 1939, and a critical shortage of machine tools soon de­ veloped. A national machine tool show scheduled in Cleveland in Sep­ tember was canceled, and the machine tool industry began a herculean production effort that lasted into 1943. Many plants worked two twelve­ hour shifts six days straight. During the war years the industry produced 800,000 machine tools, of which about 100,000 were exported. Develop­ ment virtually ceased during this period. For the most part the builders produced the designs that had been developed for that never-held show originally scheduled to open two days after Hitler invaded Poland.33 After the war the automobile industry faced a tremendous pent-up demand. Production immediately resumed on the models that had been suspended before the war with whatever equipment could be salvaged from the war years. At the same time the industry began planning new models and a major renewal of production facilities. At this point began a major upsurge in what began to be called 6automation," a word coined by Del Harder of Ford. At that time automation was defined as 6the art of applying mechanical devices to manipulate workpieces into and out of equipment, turn parts between operations, remove scrap and to per­ form these tasks in timed sequence with the production equipment so that the line can be wholly or partially under push-button control at strategic stations. 34 Special-purpose machines had been built for as long as machine tools had been built; with the development of the cam it became possible to build into such machines automatic movements that would repeat with remarkable precision. These can only be changed, of course, by re-

42 ANDERSON ASHBURN

placing the cams. Later methods of control using pneumatic, hydraulic, and electrical devices were developed. One of the most common of these devices is the limit switch-a precision snap-action electric switch that can be adjusted to operate at a precise point of mechanical movement. As automation was applied to tie machines together, limit switches became a critical component, used extensively to control motions, to pre­ vent double feeding or pileups, and to stop the machine when trouble threatened. In the actual assembly of a connected line of machines, er­ rors, miscalculations, and misadjustments are inevitable. These are called bugs, and the process of removing them is called debugging. When a manufacturer puts a consumer product on the market, the product has most often already been through enough development to eliminate the small errors in design and manufacturing that plague a new product. This same procedure can apply to a standard machine tool. But in building a one-of-a-kind, complicated, special production line, some things will have been done wrong, and some things will have been overlooked. The debugging of an automatic production line is an unpredictable process that usually takes weeks, sometimes takes months, and has occasionally taken years. 35 More than one machine tool builder has been put out of business by the inability to debug a complex, connected line of automatic machine tools.

The Origin of Automatic Production Lines. The idea of a continuous automatic production line did not start with the word "'automation.H The first one, in the modern sense, was probably installed at the A. 0. Smith Corporation in Milwaukee in 1920. This plant, built to produce automo­ bile frames, was so soundly designed that it continued to operate for more than forty years, finally being closed because the industry adopted unit bodies that eliminated the kind of frame the plant could build. Another approach to the development of an automatic production line is to combine operations into a single machine instead of linking sep­ arate machines with handling equipment. This was done at the Morris automobile plant in Coventry, England, in 1924, where a collection of standard machines was arranged along a single bed to perform fifty­ three operations on engine blocks. From this beginning Utransfer machinesH began to develop. Some were rotary, with machining stations built around a rotating carrier that transferred the workpiece from machine to machine. Others were built in a straight line, the work being transferred either by a continuous chain or by a lift-and-carry mechanism that lifted the workpieces, advanced them one position, lowered them, and retracted ready for the next transfer when the machining cycle was completed. At Ford in 1948 most of the early applications of automation were on

43 THE MACHINE TOOL INDUSTRY presses-then considered the operations most in need of improvement. The staff of the automation department was able to create automatic press lines by adding sheet feeders; extractors, turnovers, stackers, and loaders for blanks; unloaders, turnovers, and loaders for drawn stamp­ ings; applicators for drawing compounds; scrap removers; and finished part counters and baggers. Next the group turned its attention to the design of a new engine plant. At this point a new element of control was added: the work from two machines might be divided among three machines or combined for one at the next operation, depending on the time required for that next operation. A major problem with all these transfer lines was the cost of obsoles­ cence. Because of their inflexibility the lines could be turned into scrap prematurely if the product designers had misjudged the market and they had been installed to build a product that did not sell. Such lines could, of course, be rebuilt to handle a different part, but only at an expense ap­ proaching that of the original cost. After this had happened a few times, pressure developed to produce transfer lines made of standard building blocks that would permit rearrangement, perhaps even the mixing of units from different lines built by different builders, and the retooling of stations to perform different operations. Although a committee devel­ oped standards for this purpose, individual automobile companies soon began to depart from the standards in their own specifications, and the system never worked as the developers had intended. Another problem arose because of the need to replace worn or bro­ ken tools. The need for a tool change or repair at any point would stop the entire line. This problem could be reduced, it was discovered, by dividing very large lines into individual segments, with a bank of work in process between the segments. Since individual segments could be debugged separately, this development shortened the debugging process. As con­ trol improved, the time spent in shutdowns for tool changes was also re­ duced, in this instance by having the control system keep track of the number of cycles for each tool and signal for a change when a tool was nearing its predicted life. By changing groups of tools that were ap­ proaching their predicted life span rather than just the one tool that had signaled the time for change, it was possible to reduce both the number of stoppages for tool change and the chance that a broken tool would result in a scrapped workpiece or pieces. 36

The Start of Numerical Control

The automobile industry is in the process of making another basic change. This time much of the fixed automation is being replaced by flex- 44 ANDERSON ASHBURN ible equipment using electronic controls. That development, however, is not one in which the industry has been a pioneer. The control revolution started much earlier, largely in the aircraft industry, supported and en­ couraged by a manufacturing development group at Wright-Patterson Air Force Base in Dayton, Ohio.

The Aircraft Industry. The aircraft industry did not initially have much effect on machine tool development. Radial engines stimulated the de­ velopment of more accurate machine tools, but the rest of the early air­ planes were largely spruce and canvas. That began to change after William B. Stout began building planes of aluminum for Ford in 1925. It was well into the 1930s, however, before the Boeing and Douglas passen­ ger planes made of aluminum set off a whole new round of machine tool developments. Parts were larger and, although speeds could be higher when machining aluminum, complex, difficult contoured surfaces were involved. The problem was complicated further as aircraft began to approach supersonic speeds. The original aluminum alloys were replaced by higher-strength aluminum alloys with more difficult machining charac­ teristics. Then skins began to be used as a structural element and had to be sculptured for weight reduction. Further complications came as tita­ nium and composite materials began to supplant aluminum for some applications. While this was going on, a development was taking place outside the machine tool industry that was to change the face of manufacturing throughout the world: the successful development of flexible control by inputting stored digital data-in short, numerical control (NC). Credit for first controlling a machine with punched data (in this case, punched cards to produce different patterns from a weaving machine) goes to three Frenchmen (Falcon, Vaucanson, and Jacquard) who developed the process late in the eighteenth century. Weaving machines that operate in this way, named for Jacquard, are still used to produce woven patterns. Later, with a roll of punched paper to supply the data, the method was applied to control musical instruments, typewriters, monotype machines, and embroidery machines. In 1906 the Sellers company built a special machine to punch rivet holes in sheets and angles of structural steel. A truly mammoth machine, it could handle workpieces up to 10 feet wide and 100 feet long. The hole pattern to be punched was determined by a punched paper tape similar to that used on a player piano. There were thirty-six punches, each acti­ vated when compressed air was blown through the appropriate hole in the paper.37 Fifteen years later Emanuel Scheyer proposed a turning machine

45 THE MACHINE TOOL INDUSTRY that would be controlled entirely by such a perforated tape. He produced designs for the machine and presented a detailed argument that it could be made to work effectively.38 In an era when cam-controlled machinery was coming to the fore, however, only one of the Sellers machines was ever built and, as far as is known, none of the Scheyer design. In the years after World War II, a number of people began experi­ menting with methods of running machines by numerical data. The one that determined the course taken, however, was started by John T. Par­ sons, who ran a company in Traverse City, Michigan, that made helicop­ ter rotor blades. Parsons had developed a more reliable method to produce the templates required for checking helicopter blades. Instead of laying out a few points manually and connecting them with a French curve, he did it by calculating a much larger number of airfoil coordinates on an IBM 602A multiplier. An operator would then drill holes at these data points on a Swiss jig borer. In 1948, when Parsons was working on a method to feed the data points into the machine to eliminate the problem of operator error in set­ ting the hundreds of required drill points, he saw the blueprints of a pro­ posed Lockheed airplane featuring what was then a new structural concept: integrally stiffened skins. Aircraft were then made with individ­ ual ribs and stringers to which a metal skin was riveted. The Lockheed de­ sign proposed to make the skin of thick plate contoured to the airfoil shape on the outside with metal removed from Upockets" on the inside to leave stiffeners equivalent to the normal ribs and stringers except that they were integral with the surface metal. When Parsons inquired how the proposed design was to be made, the answer did not seem practical to him. He reasoned that data could be fed to a milling machine by punched cards just as he was planning to do with a jig borer. He succeeded in interesting the U.s. Air Force in the idea, and on June 15, 1949, he signed a contract with the air force for $200,000 to design and build a machine controlled by cards or tape that would per­ form automatic contour cutting on wing contours. Parsons visualized a machine that would position a ball end mill in two axes and then plunge­ cut with a controlled third axis. IBM was not part of the contract but had agreed to develop the card reader. The machine was to be designed by Parsons and built by the Snyder Tool & Engineering Company, a builder of special and transfer machines located in Detroit. To help with the design work, Parsons hired John Marsh as a project engineer to work on the design. Marsh had attended the Massachusetts Institute of Technology and knew about the work done there on elec­ tronic servo systems. He suggested that MIT might help. Intrigued, Parsons eventually gave a subcontract to MIT to work on the machine control. 39 46 ANDERSON ASHBURN

The people in the Servomechanisms Laboratory at MIT had a differ­ ent agenda. They wanted to produce a continuous-path control system. David Noble has described in detail the battles between Parsons and MIT and the way in which the project was gradually but totally transformed. Parsons was squeezed out, a cost-plus contract was drawn directly be­ tween MIT and the air force, and IBM lost interest and bowed out. The air force installed a Cincinnati Hydratel milling machine and began to talk about five-axis control. Soon MIT was demonstrating its development and claiming it as its own idea, now named numerical control. After demonstrating the technical feasibility of the method, MIT en­ tered into a program with the air force to commercialize it. It put on dem­ onstrations and worked with Bendix, Kearney & Trecker, and Giddings & Lewis (at air force expense) to develop electronic directors along the lines of the MIT machine. The air force also underwrote economic studies of the new process, which were not encouraging, because of the program­ ming costs. This led to a project sponsored by the air force to develop au­ tomatically programmed tools (APT). Nineteen aircraft firms worked jointly to develop the APT system of programming. Noble concludes that APT added to the industry's problems. HFor, like the elegant multi-axis continuous path control system itself­ complex, expensive, and cantankerous-the APT programming system was formidably sophisticated and extremely expensive."40 New impetus was given to the program when the air force, unable to persuade industry to invest in the new machines, placed orders for 100 five-axis continuous­ path profile milling machines. Four companies were to build the ma­ chines: Cincinnati Milling, Giddings & Lewis, Kearney & Trecker, and Morey Machinery. Five companies were to build the controls: Bendix Avi­ ation, Cincinnati Milling, General Electric, Giddings & Lewis, and Elec­ tronic Control Systems. By the end of 1958 only seventy-one continuous­ path machines had been delivered, perhaps including a few that were not part of the air force buy. The machines were placed in plants of air force contractors and subcontractors.

Controversy over the Diffusion of Numerical Control. Common sense would seem to suggest that NC should be at its best when the number of parts to be produced is fairly small yet large enough to justify the cost of programming. About 70 percent of machining is done in such small or medium-sized lots. A small fraction of this work is as complicated as the sculpturing of thick skins for supersonic aircraft, but most work can be done with simpler machines and simpler programming methods. In a sense the work at MIT dealing with the most complicated problems and the initial air force buy of five-axis profile mills combined to create the in- 47 THE MACHINE TOOL INDUSTRY itial impression that NC was something that could be used effectively only by aircraft firms working with a government subsidy. A common expression among people involved in the early years of NC was that it had developed from the roof instead of from the founda­ tion. Yet other people worked on the concept during the same period, and most of them developed simpler approaches. One of the first to produce a working machine was the Arma Corporation, which demonstrated a digitally controlled lathe in 1950. The idea for this lathe originated with Frederick Cunningham, a physicist working on the development of in­ struments for the control of artillery fire. Although he gained some sup­ port within the company, he could not secure funds to build the lathe until the company president bragged to a reporter that the lathe existed. Cunningham was then urged to produce a prototype and managed to do so in six weeks. The project attracted a flurry of publicity but no orders. 41 Arma lost interest in the development, but Cunningham did not. He devised a method of producing the non circular gears required for the in­ struments then being built by Arma; he modified a Fellows no. 72 gear shaper, using servomotors to control the cutter rotation, workpiece rota­ tion, and cutter feed. Information was supplied by a tedious process in­ volving manual calculation (about 100 hours per gear). This coded information was recorded on motion picture film by photographing lights that were turned on and off as the film was exposed one frame at a time. Projecting the film on a bank of photoelectric cells activated the servomotors with a stream of pulses that produced the desired gear. Thus with relatively little capital investment and much skilled labor to calcu­ late the programs, Cunningham became a subcontractor producing noncircular gears.42 Although he later added a second gear shaper to meet the demand, he did not succeed in interesting anyone in following up his simple, accurate control. A number of others began working on still different approaches. At the 1955 machine tool show in Chicago (the first of a series of such shows held at regular five-year intervals) several NC positioning tables were on display that could be used to locate work under the drill of a standard ra­ dial or other kind of vertical drilling machine. One of the first to recognize possible commercial advantages in simple NC machines was Adrian Holmberg, of the Goss Printing Press Company in Chicago. He bought two of the positioning tables at the Chicago show for $10,000 each. The manufacture of printing presses requires small lots of many parts, and Holmberg realized at once that NC would be ideal for such operations. Thus he rushed in at a time when most manufacturers of machinery, including machine tool builders, felt that NC was something that would be used only by aircraft firms working with government subsidies. 48 ANDERSON ASHBURN

Holmberg found NC so effective that he was soon urging machine tool builders to develop NC versions of their standard machines. By the time of the 1960 machine tool show, more than 100 NC ma­ chines were on display. By that time Holmberg was executive vice­ president of the newly formed Miehle-Goss-Dexter and already had twenty-two numerically controlled machines in operation. By that time also the firm had prepared and stored 20,000 tapes, each containing the program for one part. Most of these were used for drilling operations. The tapes replaced the bulky and expensive drill jigs previously used to pro­ duce drilled hole patterns on the parts for printing presses. Holmberg was unusually open in talking about his accomplish­ ments. In one of many articles about his work, he said, HIt's just out of this world what you can save. Why, in the tooling of three new products in our various divisions, we have saved approximately $450,000 just on drill jigs and fixtures. h43 The initial diffusion of NC was difficult. The MIT research had been conducted in a laboratory with the machine tool surrounded on all sides by the cabinets of the control system. In 1958 the first machines procured under the air force purchase of profile milling machines were installed in the plants of prime contractors. Jack Rosenberg has described it as Hthe year of shock for all parties involved, the point at which exposure to real­ ity began.h The factory floor turned out to be a very hostile environment for sensitive electronic equipment. There were vibration, electrical inter­ ference created by other equipment, dirt, and chemical contaminants in the air. Operators who had not been properly trained mishandled tapes. The maintenance men in the plants had no experience with the electronic control systems. When trouble developed, the builder of the machine would blame the control manufacturer, and the builder of the control would blame the builder of the machine.44 Malfunctions, which were fre­ quent, thus became a political as well as a technical problem.

The Restructuring of the Machine Tool Industry

Most of the NC machines shown at the 1960 machine tool show did not work very well. With control systems that depended on vacuum tubes, the combination of a show environment and a heat wave proved inhospi­ table. Most visitors apparently left the show skeptical about the practical­ ity of the new machines. One pair of machines that did work consistently were two examples of the new Kearney & Trecker Milwaukee-Matic Model II. Not only was this a carefully engineered machine, but the engi­ neers had had the foresight to install a room air conditioner in the control cabinet of each machine. The Model II was a horizontal spindle machine with the work

49 THE MACHINE TOOL INDUSTRY mounted on an indexing table so that four sides of a workpiece could be machined in one setup. A rotary drum on the side of the column held thirty tools, coded on the shank so they could be placed at random in the drum. The desired tool was collected from the drum in one end of a unique double-ended arm. At the moment of tool change the other end of the arm would grip the tool in the spindle, remove it, index 180 degrees, and insert the new tool in the spindle. The complete tool change took 8.5 seconds. The NC multifunction machine, soon to be known as a machin­ ing center-the machine that would in time revolutionize manufacturing -was born. It gradually became apparent that a machining center could, in many circumstances, perform work normally requiring a milling ma­ chine. It could also do work done by a drilling machine and by many types of boring machine. Later it was realized that it was possible, if not always economical, to program a machining center to duplicate many of the turning operations normally performed on a lathe. For example, al­ though it would be longer to program and slower to execute, a single turning operation on a prismatic workpiece might better be done on a machining center if all the other operations were to be performed on the center. As the utility of the machining center became evident, all the com­ panies building drilling, milling, and boring machines realized what it might do to their market and began to develop machining centers. Com­ panies that had never been in competition with one another began pro­ ducing machines that looked more and more alike. This happened not only in the United States but in every country with a machine tool indus­ try. At the European machine tool show held in Hanover, West Germany, in the fall of 1981, 200 firms exhibited machining centers. That proved to be the high-water mark. The fallout of producers began the next year, and four years later, at the 1985 Hanover exhibition, only 160 firms exhibited machining centers. As NC developed and other machines were designed to take advan­ tage of it, something similar occurred with the machines that turn round parts. Before NC there had been many specialized lathes. Since lathe builders tended to specialize, it was quite possible for two lathe manufac­ turers to be noncompetitive. Most of the early NC lathes were produced by adding a control to a standard engine lathe, either one that held long work between centers or one that held shorter pieces in a chuck. Soon turrets were added to permit tool change as called for by the program. Turrets began to take more varied shapes and to hold more tools. A type of lathe gradually evolved that was called a turning center. On some turning machines the spindle became a controlled axis, mean­ ing that it could be stopped in a particular position and advanced in pre­ cise increments. Adding powered tool positions to the turret made it

50 ANDERSON ASHBURN possible to perform milling and drilling operations on a turning machine. By 1984 NC horizontal and vertical turning machines and machining centers accounted for 25 percent of the value of machine tools produced in the United States and 42 percent of the value of those imported. By that time all types of NC were accounting for almost half the U.S. consump­ tion of machine tools, and more than 60 percent of the NC machines were being imported.45 From the start of commercial attempts to produce NC machine tools through the end of 1958, a five-year period in which the subject began to attract increasing attention, the apparent consumption (that is, new installations) of NC in the United States was 193 machines. Then the installation rate began to rise rapidly: 203 units in 1959,402 units in 1960 (the year that more than 100 NC machines were exhibited at the Chicago show). From that base there was a steady year-to-year increase until 1967, when 2,957 NC machines were produced, accounting for 21 percent of the value of metal-cutting machine tools shipped that year. Then the in­ dustry suffered one of its down cycles. New orders for cutting machines declined 63 percent from 1966 to 1971, and shipments, reflecting a lag created by the heavy backlog of orders in 1966, declined 48 percent from their 1967 peak by 1971. Interestingly, shipment of NC machines de­ clined a little more steeply than that of standard machines during this re­ cession. Shipments of NC machines had declined 57 percent in value by 1971 while the number of units produced had declined 59 percent.

The Debut of Computer Control Systems. Although the Chicago ma­ chine tool show of 1970 came near the low point of this recession, it marked the introduction of computer control systems on a broad scale. Sixteen such systems were exhibited, most of them based on the use of the minicomputers then coming into widespread use but some using larger computers. Two of the systems were controlling machine tools of different makes located at different booths. The others were running one to five machines in a single booth. Most of them provided a replay with variations of the problems seen a decade earlier in the first large-scale ex­ hibit of NC. On the most complex system the computer replaced the indi­ vidual machine controls and fed data directly to the individual machines on a real-time basis; the demonstrations were constantly interrupted be­ cause of a failure somewhere in the system. In another system, in which the computer developed the programs and fed them to a control system on the machine, the individual machines could continue to operate on a program stored in the control memory when the computer was down. Both these approaches, referred to as direct numerical control (DNC), at­ tracted considerable attention at the time, but neither was considered

51 THE MACHINE TOOL INDUSTRY

successful. Aside from a few test installations, there were no sales of these systems in the United States.

Competition from Abroad. Initially U.s. machine tool builders had been far ahead of their foreign counterparts in both the development and the application of NC, but 1970 provided evidence that this lead was disap­ pearing. In the same month as the Chicago machine tool show, an inter­ national show was held in Hanover with virtually no U.S. builders represented. Hanover had a DNC system introduced by Siemens that was operating thirteen machines in different locations. Altogether more than 250 NC machines were on display (compared with about 200 in Chicago), including 20 that used minicomputers. A few weeks after the Chicago show at a show in Osaka, Japan, four DNC systems involving twenty-eight machines were introduced. The largest of these, shown by Fujitsu Fanuc, was an operating plant to produce parts for pulse motors (the drive motors then used with the Fanuc control system). This system, the Fanuc T, had reportedly been in use in the Hino factory of Fanuc be­ fore the exhibit and was to be returned there after the show closed; it was the type that replaced the individual machine controls and had proved unreliable in Chicago. Either because the system was less complicated or because it had been in operation longer, frequent breakdowns did not ap­ pear to be a problem.46 Within the next few years some fifty Fanuc T sys­ tems were installed in Japanese factories-the only place in the world where DNC systems of this type carne into use. Another approach to using computers was shown at Chicago: a minicomputer incorporated directly into the control cabinet. Although this method did not attract the attention of either visitors or press to the extent that the DNC systems did, it was the approach that ultimately proved successful. Solid-state control systems had begun to appear and were proving far more reliable than those based on vacuum tubes. The minicomputers (all of which were solid state) had further advantages. With most of the wiring in the conventional control systems replaced by software, they were more flexible, more easily adapted to different ma­ chines and tasks, and faster. A major problem in using NC had turned out to be the frequency of errors in reading the tape. Tape readers were mechanical devices that were slow in comparison with the electronic systems to which they were supplying data, and in the shop envi­ ronment errors in reading occurred with enough frequency to be a seri­ ous concern. Because the program was stored in memory, the minicom­ puter was not dependent on the tape speed or subject to errors in reading the tape. Almost as soon as the minicomputer was introduced into control sys-

52 ANDERSON ASHBURN terns, the development of the microprocessor made possible a substitute for the minicomputer that was both more compact and less expensive. Such controls, popularly called computer numerical controls (CNC), began to catch on very rapidly and supplanted the hard-wired controls with a speed that caught many of the manufacturers of the latter off guard. After the 1970 shows diffusion of NC machines continued to decline for another year and then began to rise steadily. In 1980 production reached a peak of 8,889 units and accounted for a third of all the money being invested in cutting machines. By then, however, imports had made actual consumption much higher than these figures indicate. The first year for which imports of NC machines were recorded was 1971, when the Department of Commerce reported a total of twenty-one NC units imported. Of course, NC machines were imported before that without being counted, and the number was undoubtedly somewhat higher than reported for 1971. The first year for which the import figures can be con­ sidered reliable is 1980, the year after a major revision in the classifica­ tions used for imported machine tools. Imports in 1980 were 4,524 units, more than eight times the number (552) reported the previous year under the previous classification system. A comparison of domestic production, exports, imports, and consumption of metal-cutting machine tools for the past eight years shows that the installation rate appears to have leveled off but that imports are accounting for an increasing share of consump­ tion (see table 2-1).

TABLE 2-1 NUMERICALLY CONTROLLED METAL-CUTTING MACHINE TOOLS PRODUCED AND CONSUMED IN THE UNITED STATES, 1980-1987

Domestic Production Exports Imports Consumption

1980 8,889 959 4,524 12,454 1981 7,737 947 7,072 13,862 1982 5,116 659 5,549 10,006 1983 4,224 433 4,712 8,503 1984 5,124 479 7,655 12,300 1985 4,618 564 10,725 14,779 1986 4,633 606 12,146 16,173 1987 4,947 833 9,202 13,316

NOTE: Consumption = domestic production - exports + imports. SOURCE: Department of Commerce MQ35W, EM522, and IM146 reports.

53 THE MACHINE TOOL INDUSTRY

Variation of the Diffusion Rate among Industries. The rate of adoption of NC especially in the early years, was a fraction of what had been fore­ cast by most "experts" on the subject. This led to a general belief that NC has moved into manufacturing plants very slowly. This belief was rein­ forced by data from the American Machinist Inventory, a study made every five years of the type, distribution, and age of machine tools in op­ eration in the United States. The first year in which this study defined equipment in a way that permitted numerically controlled machines to be fully separated from other types was 1968. That year numerically con­ trolled metal-cutting machines amounted to only about half of 1 percent of the total of such machines. (Metal-forming machines did not begin to use NC in significant amounts until a number of years later than metal­ cutting machines.) The NC machines in use accounted for 1.7 percent of the metal-cutting machines that were less than ten years old. Even then they probably accounted for a disproportionate share of production be­ cause by 1968 such machines were generally being run longer hours with higher productivity than conventional machines. Fifteen years later, in the 1983 American Machinist Inventory, the NC metal-cutting machines were still only 5.5 percent of the total cutting machines installed and 16.1 percent of those less than ten years old. A special study was made of the responses to the 1968 inventory from plants that had NC equipment. From this study a calculation has been made of the percentage of responding plants with at least one NC machine a ttha t time. The 1983 in ven tory includes da ta on the percen tage of plants having each major type of equipment. For example, 26 percent of all metalworking plants had NC turning machines, 19 percent had NC machining centers, 16 percent had NC milling machines, and 3 percent had NC grinding machines. Because one plant may have several types, it is not possible to total these to arrive at a figure comparable to the 1968 percentages. NC turning machines are always the most frequently en­ countered of the NC machines and are probably in over half the plants that have some type of NC; therefore, the percentage of plants with NC turning is included in table 2-2 for comparison with the 1968 percentage for all types. Although the studies include plants with more than a quar­ ter of the workers in the industries covered, both inventories are slightly biased toward larger plants. Because of the air force origins of NC and the later subsidies for pur­ chase of machines, NC penetration would be expected to be more rapid in the aircraft industry than in any other-and it is. Because the industry called "metalworking machinery" consists primarily of the machine tool industry producing the machines, this industry might be expected to lead in installing its own products, but it does not. Whether the diffusion rate for NC can be considered adequate de-

54 TABLE 2-2 NUMERICALLY CONTROLLED METAL-CUTTING MACHINES IN SELECTED U.S. INDUSTRIES, 1968-1983

As Percentage Plants with NC (%) of Machines Any Turning Machining Number in Use under 10 Years Old type, machines, centers, 1968 1973 1978a 1983 1968 1983 1968 1983 1983 All metalworking 13,698 26,695 40,019 94,012 1.7 16.1 10 26 19 Aircraft 2,495 4,094 7,300 8,450 5.2 27.4 28 59 50 Automotive 177 699 900 3,708 0.4 12.3 8 27 13 Metalworking machinery 1,778 3,324 6,900 11,713 1.9 16.8 33 32 28 Job shops 1,505 4,289 6,200 15,677 2.1 20.3 14 35 29 Special-industry machinery 1,281 1,757 3,700 3,903 3.7 17.8 20 45 35 Construction, mining, material-handling machinery 719 2,024 5,700 7,420 3.3 27.1 23 44 30 Farm machinery 44 183 500 1,072 0.6 12.7 4 24 12 Engines and turbines 400 833 800 2,689 4.2 31.1 53 47 44 Precision instruments 348 1,248 2,200 4,434 0.8 12.6 n.a. 22 17

n.a. = not available. a. Number of NC machines in plants with fewer than twenty employees estimated; data in other plants collected from 1976 to 1978 for the 12th inventory. SOURCE: 10th, 11th, 12th, 13th American Machinist Inventories.

(J1 (J1 THE MACHINE TOOL INDUSTRY pends on the point of view. Compared with the forecasts of the early en­ thusiastic supporters, it is disappointing. Compared with the diffusion rate of earlier developments, however, it seems rapid, particularly if we measure NC by the annual consumption of new machine tools rather than as a fraction of the total installed base of manufacturing equipment. In terms of the value of new machine tools installed and with the cost of imports to the user estimated as 30 percent higher than the reported value at the port of embarkation (to allow for transportation, duty, and distribu­ tion costs), NC machines constituted 41 percent of the apparent con­ sumption of new metal-cutting machines in 1983.

Japanese Dominance in Small NC Machines

The diffusion rate of NC may be disputed, but there can be no dispute that imports have steadily gained in the U.s. market and in 1985 ac­ counted for more than two-thirds of the NC units and more than half the value of NC equipment bought in the United States. This happened pri­ marily because a few Japanese companies came to dominate the market for the two fastest-growing sectors-the smaller turning centers and ma­ chining centers. Many U.S. manufacturers believe that the Japanese in­ roads were the result of price, variously attributed to an unreasonably low value of the yen or to the dumping of Japanese equipment on the American market. When selling a new product below cost to enter a mar­ ket (a practice followed by many U.s. companies) is a legitimate practice and when it becomes illegal dumping is highly controversial. It is clear, however, that, as in the automobile industry, U.S. manufacturers under­ estimated the growing efficiency of Japanese manufacturing plants and the increasing reliability of their products. To a considerable extent both these gains were due to faster diffusion of new technology into the Japa­ nese factories. The Japanese NC machines that made the first inroads were gener­ ally smaller, lighter, and less expensive than the American machines. They also proved more reliable-at least in their early years. Because of their lighter construction, there have been suggestions that, like some cars, they require more maintenance after a few years than the heavier U.S. machines. In effect, the Japanese did the same thing in machine tools that they were doing in automobiles. It is often said today that they turned the machine tool from a customized product to a commodity. By 1974 Fanuc had become the largest control builder in the world, measured by the number of controls produced, producing about 3,000 NC units a year with only 700 workers. This was at a time when the com­ bined production of all the producers in the United States was about 4,000 units a year. Dr. Seiuemon Inaba, who had developed Fanuc from a

56 ANDERSON ASHBURN department within the Japanese electronic company Fuji Tsushinki, claimed that it would take any other NC producer with comparable sales about 3,000 workers to match Fanuc's volume. The entire production process at the Fanuc Hino factory was already under computer control, including order tracking, parts inventory, parts purchases, production schedules, parts testing, and testing printed circuit boards. At that time the pulse motor was the heart of the Fanuc open-loop control system. Parts for pulse motors were produced in a production line of thirteen ma­ chines operated by seven workers that produced 151 parts. This was the line (augmented by a few other machines for show purposes) that had been displayed in operation at the 1970 machine tool show in Osaka.47 As this plant continued to develop in the following years, the origi­ nal DNC pulse-motor line was dismantled. The pulse motor was aban­ doned when Inaba suddenly switched to a closed-loop system using servomotors instead of pulse motors. This change to the method that had been adopted in the United States and Europe was made at almost the precise point that the declining cost of electronic components made the dosed-loop system less expensive to manufacture than the open-loop system. After that change Fanuc began to group machine tools in cells with a single robot (also designed and built by Fanuc) to load and unload two or three machines. The machines needed to assemble the various electronic components onto strips of tape to feed the automatic assembly machines and the automatic assembly machines themselves were ac­ quired in the United States. As the business continued to grow, Fanuc moved into a series of plants at the base of Mount Fuji, each a little more automatic than the last. In these plants most of the machining operations and some of the assem­ bly operations could be performed without operators.48 About 1974 Fanuc established a service network in the United States, after which Jap­ anese machines with Fanuc controls began to be sold. Almost all the U.5. machine tool builders continued to use U.5. controls, however, until Fanuc began to produce controls in the United States and sell them under the General Numeric name in a partnership established with Siemens, the major control builder in Europe.

The Role of U.S. Microprocessors in the Japanese Capture of the U.S. Market. Although manufacturing economies were a factor in the growth of Japanese imports, an equal or larger factor was the more rapid diffu­ sion of solid-state technology in Japan than in either the United States or Europe. The microprocessor was developed and became available in the United States in 1972 but was not applied by the major independent con­ trol builders until about 1980. Even then considerable difficulties were experienced with many of the early models. In Japan control systems

57 THE MACHINE TOOL INDUSTRY based on the microprocessor were introduced in 1976 and were soon available in volume. They proved more reliable and, combined with sim­ plified programming, were sold to independent contract machine shops (called job shops) first in Japan and later in the United States. After the in­ troduction of microprocessor-based controls, the share of NC in total Japanese metal-cutting machine production rose from 25.7 percent in 1977 to 51 percent in 1981. In exports the success was even more dra­ matic, NC machines accounting for 70 percent of Japan's machine tool exports by 1981.49 Many machine tool builders in the United States have stated privately that they see the four-year lead in the adoption of the microprocessor-based controls as the major reason for the surge in the sale of Japanese machines in the United States. At the start of 1987 General Electric, once the dominant commer­ cial producer of NC systems in both the United States and Europe, formed a joint venture company with Fanuc to market automation products worldwide (except for NC systems in Japan). Shortly after­ ward the new company decided to discontinue the manufacture of Gen­ era1 Electric NC systems.

Flexible Cells and Systems

The technological development-really a collection of related develop­ ments -that currently dominates the manufacturing scene is the develop­ ment of flexible manufacturing cells and systems and the true computer integration of manufacturing operations. The machine tools used in manu­ facturing can be general-purpose machines that, within their size con­ straints, can be extremely flexible in what they produce, or they can be virtually automatic but extremely inflexible. Each type has had its purpose, and the manufacturer who chose the inappropriate type was at a severe disadvantage against a competitor whose balance of flexibility and auto­ mation more nearly matched his requirements. The development of NC brought some of the advantages of the special-purpose machine to manu­ facturers making small quantities of many parts. The addition of automatic tool changers brought more. The possibility of an Mautomatic factoryH began to be taken seriously. What is believed to be the first flexible manufacturing system was planned in the mid-1960s and announced in 1967 by a team headed by D. T. N. Williamson, the chief of research and development for the Molins Machine Company in London. Williamson had designed a ciga­ rette machine made primarily of aluminum for Molins, a maker of to­ bacco machinery. Now he proposed a special factory, called System 24 because it would operate twenty-four hours a day, to produce the parts for this machine. The system included several machine tools designed to

58 ANDERSON ASHBURN machine aluminum parts at high speed. All featured automatic loading and unloading and automatic tool change. Workers would load blanks onto pallets and unload the finished workpieces. A computerized han­ dling and transport system moved the work from the loading area to in­ process storage and then to and from the machines. Operators working one shift would load the system with workpieces for the next twenty-four hours while unloading work from the previous day. A number of approaches had previously been tried for converting discrete parts manufacturing into a system. One of these was a machine built by Ingersoll Milling for John Deere in which a single casting was presented by NC to a number of work stations in any desired sequence. Any work within the capability of the preset tools at that station could be performed. System 24, however, was closer to a manufacturing system than anything yet conceived. As one commentator said, "The various special machines, transfer mechanisms, and controls now being built comprise a staggering number of innovations in one system. They could readily be adapted in subsequent models to work larger part sizes and, though not so easily, on other materials.u50 Supported by a grant from the British government and with software development by Ferranti, Molins produced a number of the machines (some of which are still in use) but never completed the originally con­ ceived plant. The problem of developing the software to manage what would have been the first completely computer-integrated plant proved to be beyond the state of the art at the time, and the British government eventually discontinued its support. When, in 1969, it announced the cancellation of the project, the firm had reportedly spent $4.8 million on the software, and a Molins spokesman said that another $2.5 million would be needed to complete the project. Molins did produce and sell about fifteen of the special twin-spindle, three-axis, turbine-driven NC milling machines that were one of the basic units of the original system. 51 One commentator wrote at the time:

"The wolves are all waiting for me to fail," Williamson said some time ago. His repeated promise to drag the machine-tool indus­ try into the 20th Century by its heels was hardly calculated to make him part of the establishment, and traditional members of the industry are bound to feel a little relieved that this brash outsider didn't succeed in pulling off the first truly automatic batch system for discrete parts. One legacy of Williamson's work on System 24 is the new group of machines that Molins is now manufacturing. These machines will continue to be produced, Molins says, and will probably be developed by easier stages into something ap­ proaching the original systems concept.

59 THE MACHINE TOOL INDUSTRY

But an even greater legacy is the stimulus that the fresh ideas of a brilliant outsider have been to the thinking of other design­ ers. We'll never know for sure how many development pro­ grams have been initiated or accelerated because of System 24, but the number has been substantial. 52

As early as 1962 a flexible line had been installed at Westinghouse Electric to machine a family of forged blanks for steam turbine blades. The Sundstrand machines were not NC and required some readjustment for each new batch in the family as well as manual change of the tools, but parts moved automatically on powered roller conveyors to sixteen machining and five gauging stations and were automatically loaded and unloaded at each machine.53 Later Sundstrand Machine Tool built on this experience to produce a somewhat similar line for a sister division-Sundstrand Aviation. This line included eight machining centers and two automatic drilling and tap­ ping machines. The latter were not NC but were multispindle machines capable of drilling and tapping bolt circles on many of the parts processed on the line. All machines were equipped with automatic loaders and aligned along a powered roller conveyor. All the machining centers were five-axis and operated independently with their own NC programs. The line processed seventy magnesium cases and their covers. When a workpiece was loaded manually on a pallet, tabs on the pallet were posi­ tioned to indicate the first machine to which the work would go. A photo­ electric cell at each machine checked the tab positions to determine whether the pallet should be removed from the conveyor and held for that machine. When a machine had completed its operations on a workpiece, a tape-actuated tab setter would reposition the tabs to indi­ cate the machine to which the work was being dispatched. No overall computer control was attempted. This system was placed in operation in 1966 and operated twenty-four hours a day by the aviation division; yet despite this success it was several years before the machine tool division was able to sell such a line to any other company.54 Cincinnati Milling Machine announced its Variable Mission system before Molins abandoned System 24. Waist-high roller conveyors carried work on pallets to the various machines in the system. Plans were made to include powered conveyors, controlled by a central computer. The company later stated that Heven though the Mill gave hundreds of dem­ onstrations of the FMS to a wide range of visitors from both the United States and abroad, no sales were made.Hs5 All these and many other developments took place before the term "flexible manufacturing systemHand its acronym FMS came into popular use. Today there is not much agreement on where to draw the line be-

60 ANDERSON ASHBURN tween a "true" FMS and lesser forms of automation. Certain elements seem to be required, however: • potentially independent NC machine tools • a transport mechanism • an overall method of control that coordinates the functions of both machine tool and conveyance systems so as to achieve flexibilityS6 Some systems that are called flexible are capable of high output but have very little flexibility; others are extremely flexible and have low out- put for their size and cost. Some may have only one or two NC machines yet be capable of loading, unloading, inspecting, adjusting, and changing tools, all with little or no attention from an operator. Others may contain enough machines to fill a factory. The smaller systems are usually called flexible cells, or merely cells. They have the advantage that the software needed is less complex than for large systems. Although the large-scale systems have attracted the major share of world attention, cells are currently being adopted at a greater rate. A recent assessment concluded that in 1985 there were about 200 full FMSs in the world, including about 47 systems in the United States and 50 in Japan. There are no reliable estimates of the number of cells, but there are certainly hundreds in the United States and Japan and a growing number in Europe. 57 Although most systems are unique, a full-scale system would use the computer to plan the processing of a piece, develop the sequence of pro­ duction steps, perhaps develop the NC programs for the individual ma­ chines, certainly produce the schedule of parts to be produced on a given day, bring the tools and material from storage (either automatically or manually), and enter them into the system. Workpieces are delivered to the appropriate machines in the appropriate order, dull or broken tools are replaced, and the schedule is adjusted if one machine develops a problem. Parts are inspected either in process or between operations, and adjustments to tools are made as required. Material may be handled by robots, conveyors, or vehicles that operate on rails or by magnetically fol­ lowing a wire embedded in the shop floor. The last are called automatic guided vehicles (AGVs). The FMS is considered the most effective manufacturing method for a group of parts that have similarities (constitute a "family") and are pro­ duced in fairly small batches. Systems can be designed to be effective over a particular number of parts combined with a particular range of quantities. It is probably not economical to design a system so flexible that it could handle unlimited ranges of all these factors. The advantage of flexibility is that it permits a manufacturer to pro­ vide greater variety and to adjust more quickly to changes in customer 61 THE MACHINE TOOL INDUSTRY demand. A dramatic demonstration of the dangers of inflexibility was provided when the U.s. automobile industry found itself concentrating on producing large cars at a time when the customers wanted small ones and on producing small cars when the customers had decided they pre­ ferred large ones. Flexibility may make possible a reduced amount of work in process and by shortening the lead time for production may also reduce the quan­ tity of finished goods that must be held in inventory. Other possible sav­ ings are in reduced numbers of machines, less floor space, reduced setup time and costs, and a more consistent product quality. 58 In Japan many cells are equipped so that they can function without an operator. Such untended machines are equipped with storage mecha­ nisms to hold a supply of work and sensors to determine when tools need changing and to stop the machine in case of malfunction. The first machines-two standard chucking lathes adapted for untended operation-were displayed in Japan in 1978, and the concept spread rap­ idly in that country. 59 Two years later, in 1980, machining centers were being shown that were equipped for such untended operation. Although machining centers with the ability to operate untended have been offered in the United States, only in the past year or two have manufacturers begun to think seriously about installing them. One rea­ son given for the delay is that union contracts specifying job classifica­ tions or the number of machines per worker may restrict the use of untended machines.

The Slow Development of Computer-aided Manufacturing

Computers have done far more in manufacturing than first act as a pro­ gramming tool and later become an internal element in the control sys­ tems of machine tools. First introduced into most companies for accounting and into design departments to assist in performing engineer­ ing calculations, their ability to help bring order out of the chaos that is the typical factory floor was soon evident to a few people. As early as 1970 Black & Decker was implementing a complete, companywide sys­ tem encompassing everything from sales forecasts and order entry through inventory control and production scheduling to product distri­ bution;6o but most companies that tried to apply computers to manufac­ turing control tried to do it with systems and software developed for accounting and payroll purposes. These proved ill adapted to the task. Later graphics terminals made possible the use of computers as a drafting tool and then as an aid for two-dimensional design work. This latter development made these computer-aided drafting (CAD) systems extremely useful for the design of circuit boards and other electrical and

62 ANDERSON ASHBURN electronic applications. Many companies first used CAD for such appli­ cations and then went on to mechanical design. The move to mechanical design was aided by the development of three-dimensional CAD systems and by software for the graphic representation of solid forms on the screen. Although the term "CAD /CAM/ implying an integrated design and manufacturing system, soon came into popular use, no company ac­ tually achieved such integration for many years. There was, and in most companies still is, literally a wall separating design engineering from manufacturing. The computer systems used by the two departments are usually incompatible and the efforts to design for ease or economy of manufacturing minimal. A separate set of computer programs was developed for the record­ ing and control of inventories of purchased parts and materials. Such programs, which became known as material requirements planning (MRP), were later broadened to include production scheduling and other aspects of manufacturing. The later version was referred to as ma­ terial resource planning (MRP II). Various other kinds of software for such applications as establishing part families, capacity planning, man­ agement of tools and gauges, and control of warehousing and handling have added to the hundreds of systems, most of them incompatible, that are available. Efforts to introduce standards that would make it possible to com­ municate between competing brands of hardware have been made and are beginning to show results. A standard for the exchange of graphic data, though still being developed, is already in use. A system for creating a communications network that can connect all the work stations in a fac­ tory (called manufacturing automation protocol-MAP) that has been supported and stimulated by General Motors is gaining adherents.61 All these computer-related developments, combined as appropriate with traditional or newly developed mechanical methods of handling and control, are, in the view of some observers, creating a new kind of manufacturing base. The Japanese have coined an English language word-Hmechatronics h -to describe the combination of mechanical and electronic elements involved. This word has become common in Japanese manufacturing circles in recent years. In both the United States and Japan, the whole control system required for the "factory of the future" is now generally described as computer-integrated manufacturing (CIM).

The Seventy-five-Year Diffusion Cycle. A recent example of the con­ sistently turgid progress of technology diffusion is the rate of progress in extremely precise machining. Professor Norio Taniguchi of Tokyo Uni­ versity has made a study of the diffusion of new technology in which he traced the progress of what he calls uItraprecision machining. He defines

63 THE MACHINE TOOL INDUSTRY this as the highest possible dimensional accuracy that has been achieved at any time. At the time of writing his paper, Taniguchi defined this as a tolerance of one half-millionth of an inch with a surface roughness of one nanometer (0.001 micron). He also defined two lesser classes of accuracy: normal or commercial machining and precision machining. In tracing the progress of these three classes of machining since 1900, Taniguchi found a consistent lag of fifty years between precision machining and normal machining and a consistent lag of twenty-five years between ultra­ precision machining and precision machining. 62 One contributor to current developments in precision machining is the diamond turning process, in which a surface superior to a ground sur­ face can be produced by turning with a single-point diamond tool in an extremely rigid machine with carefully controlled temperature. Work on this process began at the Lawrence Livermore National Laboratory under James Bryan. E. Raymond McClure, who heads the Livermore Precision Engineering Program, has said that when a technology exchange was at­ tempted with the machining community, it was greeted with a response that amounted to, Who needs it? Who could have predicted at the time that, a little more than a dec­ ade later, the laser would lead to such products as bar-code scanning readers at supermarkets, creating a demand for laser scanning mirrors­ mirrors that can most economically be produced by diamond turning? This and other uses have created a hotly competitive international busi­ ness in diamond turning machines that McClure believes now amounts to about $200 million a year. In 1985 McClure told a conference on machine tool research (the first ever sponsored by the National Machine Tool Builders Association) that his group now has diamond turning machines that are ten times as precise as those of 1970 and again he is asked, Who needs it? HAll I really ca::l do at this point/ McClure told the machine tool builders, His advise you as I and others did 15 or more years ago that it would be wise to keep abreast of the present ultraprecision-machining technology.H63

Changes in the Rate of Diffusion. Taniguchi suggested that for the past century the time required for ultra precision machining to diffuse through the manufacturing plants and become normal machining has remained constant at about seventy-five years. The review just made of the diffu­ sion of other kinds of new technology in machine tools suggests that the rate is not quite that sluggish but that it has neither accelerated nor slowed much in the past two centuries. Perhaps the difficulties of travel may have slowed communications early in the nineteenth century, but Hall was developing improved mill­ ing machines within a few years after North built the first one. The rate at

64 ANDERSON ASHBURN which high-speed steel tools were applied starting in 1900 is about the same as that by which carbide tools came into general use after 1928 or NC after 1964. Yet the U.S. machine tool industry, which established world leader­ ship at about the time it was formed in the last half of the nineteenth cen­ tury and held that leadership against all comers until a decade or so ago, has evidently lost its competitive edge. In a 1983 study of the competitive status of the industry, the National Research Council concluded:

Regarding the technology of machine tools themselves, there is an emerging consensus that there will be an intense demand in the future for flexible manufacturing systems and untended machines. The American industry does not seem to have widely perceived and accepted this trend. It appears to be in danger of slipping behind some of its international competitors in advan­ cing toward these technological objectives. While many in the industry are convinced that u.s. machine tool technology is presently equal to the most advanced level at­ tained by any overseas competitor, the panel believes that the United States may now have slipped behind the Japanese on control technology and on the software to support such control systems. Additionally, the panel expressed concern that the Jap­ anese are also more advanced in the general development of machining systems that allow round-the-clock operation with minimum human attention.64

The Ingredients That Produce an Innovative Company. The National Research Council panel studying this question sought to establish a pro­ file of innovative machine tool companies and concluded that people were crucial. The longer-range review of the diffusion of technology pro­ vided here seems to make the same point: innovative, entrepreneurial people are almost always behind each innovation. Such a person is more likely to exist in a small company. Many, though not all, of the innova­ tions in machine tools have come from small companies, but a small com­ pany may not have the facilities or the resources required for some of the current developments. A company large enough to undertake the combi­ nation of mechanical, electronic, and software development involved in a system may have so many management layers that innovation is stifled. According to the NRC panel, too much standardization of products may discourage innovation. The problems of small production lots or even of custom-made products may stimulate innovation. Close relations between a machine tool builder and its customers may also be a factor. If the users are not involved in the design of new products, they may exhibit a passivity that works against the interest of the machine tool builders. In

65 THE MACHINE TOOL INDUSTRY other words, if users were better informed and more involved in the new technologies of manufacturing, they might be more willing to try the new ideas. They might also be more demanding and thus encourage the build­ ers to be more responsive to their demands. 65

Barriers to the Adoption of New Technology. The barriers most fre­ quently mentioned in considering the adoption of new technology are financial, although they may not always be the most critical ones. Under­ lying all financial questions is the matter of depreciation-a matter little understood by too many people. When a business buys a piece of equip­ ment, say a truck or a machine tool, it must be capitalized. That is, the full cost is not charged as an expense against income; a portion is charged each year, and the capitalized value is reduced by this amount, which is the depreciation. In theory, this money is put into a reserve to pay for a re­ placement truck or machine when the present one is worn out. In practice depreciation becomes part of the cash flow of the busi­ ness and, because it is expensed, is not subject to tax, because income is reduced by the amount of depreciation. Many individuals, not realizing that the money now being charged as an expense was really spent when the equipment was purchased, seem to feel there is something a little sharp or unfair about depreciation. In reality, when the equipment must eventually be replaced, the chances are that, because of inflation, the re­ placement cost will be higher than the original cost. During periods of high inflation the replacement cost will be far greater than the deprecia­ tion that has been taken. The understanding of this is further confused by the fact that depreciation is also used to describe the deductions made to write off the purchase of land and buildings. In contrast with equipment, land is likely to be worth more on resale than it was when purchased. Rates of depreciation are governed by tax codes and have frequently been changed over the years. In recent years accelerated forms of depre­ ciation have been permitted that more nearly matched the effects of in­ flation, although the tax law adopted in 1986 reduced these again. One of the many anomalies of depreciation is that, with most justification meth­ ods, the faster the depreciation, the harder it is to justify the purchase of a machine tool, because in most methods the first-year depreciation is a key expense in the purchase of the machine. Justification is the financial process by which most companies de­ cide on a capital investment. There are a number of methods, but most depend essentially on calculating the revenue and expenses under the present method of operation and comparing them with estimates of the same items under the proposed method. A typical procedure is to calcu­ late the amount of additional profit the investment will bring as a per­ centage of the investment. Some companies establish a "hurdle rate" that

66 ANDERSON ASHBURN the proposed investment must exceed to be approved. Others line up all the investments in descending order and approve them from the highest rate of return downward until the amount available for investment has been exhausted. In practice, many machine tool builders do not use these rather sophisticated methods they urge on their customers. They buy a piece of equipment when they must because they need the additional capacity. A few plants are tributes to a long-range investment policy carefully adhered to, but many bring to mind the adage about the shoemaker's children. Justification procedures proved to be a major barrier to the diffusion of NC technology, and they are proving an equal or larger barrier for flex­ ible cells and systems. This is because most justifications depend heavily on savings in direct labor. Contrary to popular opinion, direct labor is no longer a major part of the cost of most manufacturing operations, and the savings in this category are often minimal for much high-tech equip­ ment. For most manufacturing operations there was once a typical break­ down in which a third or more of costs were in direct labor, a third in materials, and a third in burden-that is, all the indirect costs normally allocated to products on the basis of direct labor. Today it is more common for direct labor to be only 10-15 percent of the cost of production. The savings that count are likely to come in items like reduced inven­ tory charges, reduced warranty costs, and additional sales because of the ability to respond faster to customer demands. All these tend to be indi­ rect, difficult to estimate with precision, and subject to stiff challenge from financial officers. Assigning these indirect costs on the basis of di­ rect labor (the usual method) will make no allowance for any specific ef­ fect on indirect costs. It has been said of accountants that they would rather be absolutely wrong than partly right-in other words, if they can­ not include a precise, measurable figure for a factor, they would rather leave it out altogether. A few accountants have begun to call attention to the errors implicit in the present methods of allocating costs and calculating returns, but their ideas are not yet generally accepted by management. Robert S. Kaplan has stated that the basic accounting principles are correct but common errors in their application are the source of the problem. He argues that any invest­ ment that has a discounted cash flow above the current opportunity cost of capital is justified and that the real cost of capital in historical experience is far less than the rates that managements often use in their calculations. Another common error is to use a discount rate that allows for the effects of inflation but not to allow for the effect of inflation on prices-an inconsis­ tency that encourages rejection of new investments. 66 When a factory is operating on a computer-integrated basis, a cost

67 THE MACHINE TOOL INDUSTRY allocation system based on direct labor has become obsolete. Direct labor may account for less than 5 percent of costs. In such a system most manu­ facturing costs will become fixed costs that will not vary with the volume of production. Variable costs will be small in relation to selling prices, and errors in writing off sunk costs on a short-term basis are essentially mean­ ingless in providing an indication of the long-term value to the business of the investment. A variety of nonfinancial measures may become better indicators of performance than the short-term financial statement. These might include failure rates, inventory levels, percentage of on-time ship­ ment, and average setup time. 67 Financial considerations on the part of security analysts and inves­ tors have become an increasing barrier to investments based on long­ term rewards. The problem is summed up by the report of a chief executive who, at the end of a security analysts' meeting, asked the ana­ lysts a question: "Suppose I were to tell you that we have a new product under development which will result in a substantial increase in both sales and profits starting five years from now, but that the expense of test­ ing and building the production facilities for this product will have a neg­ ative effect on profits for the next two years, what would you advise your clients?" Without exception the analysts said they would advise their cli­ ents to sell. 68 Another financial barrier to making a major investment in ad­ vanced manufacturing technology can be the existence of approval lev­ els. A division executive may be able to approve a capital investment for $100,000 while an appropriation of $1 million requires the approval of the chief executive officer or even of the board of directors. In such a sit­ uation the tendency is to make many small, incremental investments rather than a single larger investment that would provide a more ad­ vanced technology. Machine tool firms that have been acquired by conglomerates also pay a high price for the cyclicality of the industry. They are usually pur­ chased at or near the peak of the business cycle. As orders and shipments decline during the down cycle, it soon becomes evident that the acquisi­ tion cost too much and will not provide the return on investment that the financial targets of the parent require. As a result the machine tool divi­ sion will be starved of the new investment required to keep its manufac­ turing operations competitive, will be restructured in a smaller size, and on the next up cycle will be unable to make the expansion in output needed to maintain or increase its market share. People, particularly those in middle management, may be a greater barrier to technology diffusion than the financial barriers. A manager within a company may readily learn of a new development from a peer in a research laboratory, another company, or a specialized journal directed

68 ANDERSON ASHBURN at his peer group. He may be totally frustrated, however, in trying to con­ vey word of this development to upper levels in his own company. Resis­ tance to change is built into the bureaucracy in any large organization. In current organizations a principal function of middle management is to serve as a conduit of information from the top management of the firm to the floor operators (and sometimes in the other direction) so that operators understand the goals and priorities of the business and the managers know that correct decisions are made on the shop floor. When a true computer-integrated manufacturing system is installed, much of the information flow is taken over by the system. When the goal becomes one of pushing decision making to the lowest possible leveL the multiple lay­ ers of middle management become a problem rather than a solution. A current study by General Motors of its machine tool buying prac­ tices provides an example of another form of the problem. The study points out that the company has traditionally rewarded high volumes at low piece costs and has punished failed innovations. A production man­ ager whose future depends on meeting production goals will select a proven technology over a promising new technology with no track rec­ ord. Under these conditions successful machine tool companies offer what they know will selL rather than risk an order by pushing for a risky innovation, no matter how promising.69

Government Policies That Have Influenced the Machine Tool Industry

Some government policies directly affect technology in the machine tool industry, and others affect it indirectly by their influence on marketing or other operations of the builders or their customers. For the most part, nei­ ther the legislative nor the executive branch has taken much notice of the industry except when, usually in the early stages of a war, there has been a critical shortage of machine tools.

Depreciation Policies. When investments are made in capital equip­ ment, such as machine tools, the cost cannot be considered an expense charged against revenue in determining profit. Cost must be capitalized and gradually recovered in the form of depreciation charges. Originally a U.S. company could set any time period it chose for this recovery so long as it was reasonable and was consistently followed. That freedom was lost in 1934 when the Treasury issued a regulation, Bulletin F, speci­ fying the life of various classes of capital equipment. The purpose was to reduce depreciation allowances so as to increase revenue without rais­ ing taxes. Faced with an obsolete industrial plant at the beginning of World 69 THE MACHINE TOOL INDUSTRY

War II, partly because of the depression and partly because of Bulletin F, the government permitted a sixty-month amortization for modernization or expansion of facilities for war production. The same temporary relief was provided during the Korean War. A period followed in which the rate of depreciation was accelerated but with regulations that made it difficult or impractical for many companies to take advantage of it. In 1962 President John F. Kennedy proposed and Congress enacted an investment tax credit (ITC). Proposed at 10 percent and enacted at 7 percent, the ITC was a direct deduction from income tax of a percentage of the purchase price of machine tools and other productive capital equipment. Kennedy also caused the Treasury to replace its 1934 regula­ tions, although it retained a complex reserve ratio test. At first the ITC was a controversial political device. The 7 percent credit did not affect the gradual recovery through depreciation of the full original cost and for most companies had the effect of a 14 percent price reduction in the pur­ chased equipment. In the view of its supporters the ITC was a powerful incentive to invest; in the view of its opponents it was an unjustified subsidy. The ITC also became a pawn in repeated attempts to fine-tune eco­ nomic activity. In 1966 President Lyndon B. Johnson asked Congress to suspend the lTC, and in 1967 he asked Congress to reinstate it. In 1969 President Richard M. Nixon asked that it be repealed, and in 1971 he asked that it be reinstated. President Gerald R. Ford had the ITC rate in­ creased Mtemporarily" from 7 percent to 10 percent. Each of these re­ quested changes was enacted by Congress but only after months of debate and indecision, including doubt about the date on which the change would be effective. But when President Jimmy Carter asked that the Mtemporary" increase to 10 percent be made Mpermanent," the re­ sponse made it appear that the ITC had ceased to be politically controver­ sial. in 1981 President Ronald Reagan had the ITC modified to permit companies operating at a loss to sell ITC credits to companies that were profitable. A few large companies purchased enough credits to eliminate their income taxes. This aroused such protest that the ITC again became controversial, and in late 1984 the Treasury included repeal of the ITC in its tax reform proposal. The credit was eventually repealed effective Janu­ ary 1, 1987. At the same time a further liberalization of depreciation rates that had been enacted in 1981 was also turned back. 70 Figure 2-1 charts quarterly domestic machine tool orders as reported by the National Machine Tool Builders Association from 1956 to 1986 and indicates the point at which each of these changes in the ITC took place. The effective date of the changes was usually preceded by a period of uncertainty about the effective date. For this reason any influence of a

70 FIGURE 2-1

NET NEW ORDERS FOR METAL-CUTTING MACHINE TOOLS AND CHANGES IN INVESTMENT TAX CREDIT, 1956-1987 (millions of dollars) 1,200 10% permanent

1,000 10% temporary Oil embargo Sale of credits Reinstated 800 permitted Repealed 7% reinstated Repealed 600

Liberalized 400 7% ,,,dit I

200

1960 1965 1970 1975 1980 19851987

SOURCE: Adapted from American Machinist & Automated Manufacturing; based on data from National Machine Tool Builders Association.

change may show up a few months before the change is effective. Al­ though business leaders have often denied that the ITe has had any ef­ fect on investment decisions, every major change in direction of orders seems to be associated with a change in the ITe except for the major de­ clines starting in 1974 and 1980, both of which took place when the ITe was in effect and not under challenge. The first of these two changes co­ incides with the original sharp rise in energy costs, the second with the major turn to imported machine tools.

Stockpiling Policies. Before World War II the army and navy placed "trigger" orders with machine tool companies that could be initiated by a single command in the event of an emergency. After the war the govern­ ment owned large quantities of machine tools, most of which had been operated almost continuously for several years. Some were scrapped,

71 THE MACHINE TOOL INDUSTRY some were sold as surplus (depressing the market for new machine tools for several years), and some were placed in a strategic stockpile. The current stockpile is maintained under the Defense Industrial Re­ serve Act, partly by the Department of Defense in a general reserve and partly in mobilization packages maintained by the individual services. In July 1983 the general reserve had 12,286 machine tools valued at $334 million. The packages in the individual services consisted of 13,489 ma­ chine tools valued at $382 million. The average age of the machines held by the Defense Department was twenty-nine years and of those in each of the individual services twenty-eight or twenty-nine years. The goal of replacing 5 percent of the stockpile each year has not been met because of a lack of funds. A recommendation by the Defense Science Board in 1981 for a one-time 25 percent replacement was never implemented. In fact, because of a lack of funds for maintenance of the reserves, the number of machines has gradually been reduced over the years. 71 At present there is no effective trigger order program, nor is stock­ piling viewed as a practical approach by the Defense Department. This contributes to concern about the ability of the domestic industry to meet the needs of defense production under either peacetime or wartime conditions.72

Research Support. A contract from the air force financed the research that led to numerically controlled machine tools. Military programs have also aided in the development of the APT programming language and of demonstrations in computer-aided manufacturing. Following up its work with NC, the air force began a program in the late 1950s to improve manufacturing techniques in the aerospace indus­ try. In 1964 the army started a similar program whose major emphasis was on ammunition production. Later the navy began to fund some proj­ ects without establishing a formal program. In 1969 the Defense Depart­ ment made these separate efforts into a formal set of programs called manufacturing technology (ManTech). Although the programs are administered separately by the services, an advisory group provides some coordination and technology transfer. The ManTech programs grew from a total annual investment of less than $50 million in the early 1970s to more than $200 million in 1982.73 Man Tech programs have generally concentrated on cost reduction in the plants of prime contractors. Relatively little ManTech money has gone to support research in machine tools or other basic manufacturing technologies. An important exception was the air force sponsorship with ManTech funds of the Machine Tool Task Force, a three-year study pro­ gram, completed in 1980, that assessed the technology of machine tools

72 ANDERSON ASHBURN and established an agenda for proposed research. McClure, who super­ vised the task force from the Lawrence Livermore National Laboratory, has since complained to the U.S. machine tool industry that the Japanese industry made much more use of the resulting unclassified five-volume study than the U.S. builders.74 In recent years, as concern for the future of U.S. manufacturing has increased, the National Research Council and the National Science Foun­ dation have begun to pay more attention to manufacturing technology. The former has established a Manufacturing Studies Board, and the latter has established regional university research centers. One project of the Manufacturing Studies Board, sponsored by the army, led to the organization of the National Center for Manufacturing Sciences in November 1986. This organization, still in the formative stages, has both machine tool builders and users as members and is in­ tended to finance potentially valuable long-range research projects that could not be justified 'by an individual firm. The National Bureau of Standards has moved actively into manufac­ turing technology by creating a Center for Manufacturing Engineering, one of whose major projects is the Automated Manufacturing Research Facility (AMRF), a test bed for developing software and technology for flexible manufacturing systems and cells. Although the facility has had a number of corporate sponsors, the largest supporter has been the U.S. navy, using ManTech funds.

Export Policies. Government policies have a substantial influence on machine tool exports. Unfortunately, in the view of the industry, the in­ fluence is usually bad. It starts with export controls on products consid­ ered critical to national defense. These restrictions, which apply to exports to the Soviet Union and Eastern Europe, are coordinated with other NATO nations through coordinating committee (COCOM) regula­ tions that are supposed to maintain uniform policies in the cooperating countries. There is a list of equipment, the A list, whose export is forbid­ den, and another list, the B list, for which export licenses are required. li­ censes are issued or refused on the basis of the use to which the buyer intends to put the equipment. Machine tool builders charge that the regulations are inconsistently applied, both in the United States and between the United States and the industrial countries of Western Europe. They also claim that the licensing process is so time consuming that buyers will not wait and turn to coun­ tries that issue licenses more rapidly. The Department of Defense, which has veto power over the licenses, is concerned about losing its technologi­ cal edge. For whatever reason, U.S. exports to the Soviet Union and coun­ tries of Eastern Europe are negligible in most years although those 73 THE MACHINE TOOL INDUSTRY countries constitute a major market for West Germany, Switzerland, France, Italy, and other European countries. The other export policy that has most affected machine tools has concerned the loan regulations (and the cutbacks in recent years) of the Export-Import Bank of the United States, an organization that can guar­ antee loans made to support export sales. In general, machine tool sales are too small to qualify for such guarantees, and u.s. machine tool build­ ers have often lost sales because loans were available on more favorable terms from other governments, which have given higher priority to aid­ ing their machine tool industries.

Government Response to Increased Imports. The value of imported machine tools always equaled less than 10 percent of the value of U.S. production until 1973. Since then the volume of imports has grown rap­ idly, and in 1986 it exceeded 75 percent of the value of domestic produc­ tion. This rapid increase has brought a rising demand from the industry for protection from imports. A number of unsuccessful efforts have been made to get Congress to increase tariffs or establish quotas. There have been repeated charges that Japanese companies were dumping machines (selling below cost) in the United States. In 1978, in an attempt to defuse protectionist efforts, the Japanese Ministry of International Trade and Industry (MIT!) established an export cartel to control the export of machine tools to the United States. The cartel established floor prices based on production costs and, in effect, certified that the machines were not being sold below cost. The cartel, established for one year, has been renewed annually, usually with some changes in the price structure. Imports of machine tools from Japan continued to increase after the cartel was established and were 48 percent higher in the first half of 1980 than they were the year before.

Houdaille Petition. In May 1982 Houdaille Industries, a diversified manufacturer with a machine tool division made up of several firms, filed a petition with the U.S. trade representative asking that the president deny the investment tax credit to purchasers of machining centers and NC punching machines (two types of machine produced by Houdaille imports of which were growing rapidly). The petition was based on a pro­ vision in the 1971 tax bill that gave the president power to exclude prod­ ucts from the ITC when a foreign country Hengages in discriminatory or other acts [including tolerance of international cartels] or policies unjusti­ fiably restricting U.S. commerce." The petition, which resulted from ex­ tensive research in Japan and the translation of many Japanese docu­ ments, charged Japan with government support of research and develop­ ment (R&D) for the machine tool industry and with targeting particular 74 ANDERSON ASHBURN products and industries for attack and charged that the "export cartel" formed by MITI was an illegal cartel. The Japanese industry claimed that the support for research was less than that provided in the United States and was not illegal under in­ ternational trade regulations and that the export cartel was not a cartel in the sense meant by the U.S. law. Although the petition covered only two types of equipment, Houdaille sold copies of its research to other companies and to trade organizations (presumably to recover part of the cost). There were widespread reports that, if the petition were granted, there would be numerous petitions asking the same relief for NC lathes, for other types of machine tools, and for various electronic products. The petition was the subject of heated debate within the government and of extensive discussions between the United States and Japan. A de­ cision drafted by a subcabinet group agreed that Houdaille had demon­ strated injury, but there was continuing disagreement over the remedy. Excluding Japanese machines from the ITC was ruled out on the grounds that it would set an awkward precedent and expose the United States to retaliation. In April 1983 President Reagan denied the petition. After it was denied, Houdaille attempted unsuccessfully to develop a joint venture with a Japanese company. In 1985 it closed or offered to sell its machine tool divisions.75

NMTBA's Section 232 Petition. A month before the denial of the Houdaille petition, the National Machine Tool Builders Association pre­ sented a petition asking that quotas be established, restricting imports to 17.5 percent (by value), on each of the two basic groups of machine tools (metal-cutting and metal-forming), with a limit of 20 percent on each of eighteen classes of machines within the two types. During the year pre­ ceding the filing of the petition, imported machine tools had amounted to 27 percent of consumption by value. The basis for the petition was Section 232 of the Trade Expansion Act of 1962, which authorized the establishment of quotas on imports when necessary for national security.76 Although several previous attempts had been made to use Section 232 for other products, it had been invoked only once (to restrict petroleum imports). To justify basing the petition on national defense, the petitioners used quotations from the debate at the time of adoption indicating that Congress had had machine tools in mind when adding the section to the original law. The law requires the secretary of commerce to determine whether theFe is a threatened shortage in an emergency situation and, if so, whether imports are a factor. He must report his recommendation to the president within one year. In this case the secretary found an import threat to national security in seven of the eighteen product categories.

75 THE MACHINE TOOL INDUSTRY

The petition stirred controversy beside which the intramural arguments over the Houdaille petition paled. There were widely different views in Congress and the White House and a barrage of concerned comments from other nations. The president kept sending the report back to the sec­ retary for more information. After more than three years, during which there was an appreciable rise in protectionist sentiment in Congress, the president announced on May 20, 1986, that he would seek voluntary re­ straint agreements (VRAs) on the chosen categories from the four coun­ tries with the highest imports into the United States: Japan, the Federal Republic of Germany, Switzerland, and Taiwan. A six-month deadline was set; if agreements were not reached by then, quotas would be im­ posed under Section 232. The categories affected were machining centers, horizontal and ver­ tical NC lathes, non-NC lathes, and NC and non-NC punching and shearing machines. Agreements were negotiated with Japan and Taiwan at about the time of the deadline but not with the other two countries. During the six-month period of negotiation Italy advanced into the third position in imports, moving Switzerland and Taiwan to fourth and fifth, but this change did not affect the negotiations. In effect, the VRA with Japan rolls the most critical categories back to about 1981 levels for five years, putting quotas on the number of ma­ chines to be imported rather than on the value. Imports of the two types of NC lathes will be 6 percent less than estimated levels in 1986, of ma­ chining centers 28 percent less, and of NC punching and shearing ma­ chines 65 percent less. Taiwan was not exporting these types to the United States in 1981 but agreed to roll them back to 1985 levels, that is, 40 percent fewer NC lathes and 37 percent fewer machining centers than in 1986. The biggest loser in these VRAs appears to be Amada, a manu­ facturer of NC punching and shearing machines and the largest distribu­ tor of machine tools in the world. Ironically, Amada is not considered a machine tool builder in Japan and is not a member of the Japanese trade association because metal-forming machines are not classed as machine tools in Japan. In theory these two VRAs will reduce imports by 3,300 units valued at $155 million a year. When these restraints went into effect on January I, 1987, there had been no indication that either West Germany or Swit­ zerland would agree to such quotas voluntarily, but the tables released by the United States indicated that there would be almost no "rollbackn en­ forced on these countries since the number of units exported to the United States had changed little since 1981. The principal reduction would be of fifty-two machining centers from West Germany, but any in­ crease in the units imported from either country would presumably result in quotas under Section 232.

76 ANDERSON ASHBURN

For 1986 it is estimated that imports constituted 49 percent of u.s. machine tool consumption (compared with the 27 percent that the asso­ ciation asked be rolled back to 17.5 percent). At this stage there is no way of determining what assistance the VRAs will provide to the domestic machine tool industry or what effect they will have on prices or on the availability of small NC lathes and small machining centers-the catego­ ries that Japan has dominated in recent years. It should be noted, how­ ever, that the history of restraint agreements, voluntary or other, for several other industries-most obviously automobiles and steel-has not been encouraging. Perhaps as significant in their effects on the industry as the VRAs will be some other initiatives announced at the same time. These included making the machine tool industry a major focus of the ManTech pro­ grams and providing federal support for the newly formed National Cen­ ter for Manufacturing Sciences in the form of $15 million in challenge grants over a three-year period (to be matched by equal contributions from industry).

Uncertainty Caused by New Tax Laws. Perhaps one of the strongest in­ fluences on the machine tool industry in the past five years has been that one tax bill or another has been continuously under consideration in Congress. The response of private industry to pending changes in taxes is always uncertainty about the future, tending to cause the postponement of plans for investment. In no previous period has there been such pro­ longed uncertainty over the future tax structure.

The Present Status of the Industry

In 1987 the U.s. machine tool industry, which dominated the world in­ dustry from its beginnings until the late 1960s, was in almost total disar­ ray. The leading world producer through 1969, the industry had an output valued at less than 40 percent of that of the Japanese industry in 1986. A net exporter of machine tools through 1977, the United States has been a net importer ever since, and domestic producers account for about half of U.S. consumption.?7 Although the deterioration in the industry's competitive position was evident to many in the industry and to close observers throughout the 1970s, it was in the early 1980s that the industry as a whole began to restructure itself in an effort to regain profitability. Many firms reduced their size, increasingly acquired components from outside suppliers in the United States and abroad, or began to serve as distributors of im­ ported machines. At the same time several foreign machine tool builders began some

77 THE MACHINE TOOL INDUSTRY production in the United States, either by building a plant or by buying an interest in a U.s. firm. These developments cloud the statistics and make it difficult to determine precisely how much of current U.S. needs is being met by domestic machines and how much by imports, either as complete machines or as elements of machines assembled in the United States. The Commerce Department estimates that U.s. domestic machine tool capacity has declined by at least 25 percent since 1982 and that the industry is operating at 60 percent of its reduced capacity.78 The extent of the decline, which continues at a rate that continually overruns past estimates of performance, raises serious questions about the ability of u.s. industry to regain its international competitiveness. From the point of view of the present study, the question is to what extent this condition is affected by the diffusion of technology and, if it is af­ fected, how such diffusion can be accelerated. The history of the diffusion of new technology suggests that it has al­ ways been sluggish in the United States and was equally or even more sluggish abroad until the late 1960s. At about that time the Japanese in­ dustry began to be a factor, and, for whatever reason, technology dif­ fused much more rapidly in Japan than in either the United States or Europe. Although the trend had started several years earlier, it became most evident in the spread of solid-state NC and the microprocessor. This diffusion took place in several ways. The Japanese machine tool builders put the new technology into their products, which they used in their own plants. They successfully introduced the products into the large-volume markets of job shops, first in the Japanese domestic market, then in the United States, and later in Europe. Part of the strategy that made this possible was a shift to high­ volume production of a limited number of standard models, which per­ mitted substantial economies of scale in manufacturing. This strategy was not invented by the Japanese. It has been at the heart of success of many consumer products from toasters to automobiles. It had been tried a number of times before in the machine tool industry, most often with lathes and milling machines. A conspicuous success in the United States was the Bridgeport Model I milling machine, production of which was highly mechanized and included the use of assembly lines. A competitive effort by another firm to go even further and use transfer machines to produce the components failed because the firm was unable to capture enough of the market to make such high-volume manufacturing tech­ niques economical. In the end most efforts at mass production of machine tools fail ei­ ther because the builder is not able to develop a market that will sustain an economic level of production or because a later technology that makes the machine obsolete begins to diffuse. (The former caused the failure of

78 ANDERSON ASHBURN the effort to outproduce Bridgeport; the latter eventually brought down the highly efficient Bridgeport Model I production lines as demand shifted to newer model Bridgeports that could not be produced in the same way.) Might it be possible with flexible manufacturing systems to gain some of the advantages of automation and still retain flexibility in pro­ ducing machine tools? The Japanese apparently think so. They have begun to install FMS as eagerly as they have embraced other recent tech­ nologies. By the fall of 1984 there were at least twenty-seven FMS sys­ tems in the plants of fifteen Japanese machine tool builders, described at the time as Na sampling of the industry." Some of these systems were clearly uneconomic and some were evidently installed to gain operating experience to aid in the design and sale of such systems to others, but some are clearly intended as production tools. 79 It is not so much that technology diffuses more slowly in the United States than in the past as that it now diffuses more rapidly in Japan. As the chief executive of one Japanese firm said several years ago, NIf you have no FMS, you lose face; so everyone is installing." Throughout the period of decline the prevailing opinion in the U.S. industry has been that price was the principal factor in the growth of im­ ports. This was blamed in part on the overvalued dollar and in part on charges of dumping or HpredatoryH marketing practices, including the charge that MITI targeted the U.S. machine tool market and subsidized a concerted attack on the market. The efforts by individual U.S. builders and by the trade association to obtain protection from imports have been reviewed earlier in this chapter. The principal results of these efforts have been the Japanese export cartel and the VRAs. The floor price system es­ tablished in Japan in 1978 by MITI, which it called an export cartel, re­ quired machine tool builders to obtain an export license that, in effect, certified that the machines were not being dumped. Anecdotal evidence from time to time has suggested that this licensing process was sometimes used as an informal quota system by delaying the issuance of export li­ censes, but such reports have never been confirmed. The VRA with Japan that went into effect in 1987 will substantially reduce imports of the most-wanted types of machines. Opponents of a quota system have said that it would reduce the chances of keeping U.s. manufacturing industries internationally competitive (or making them so again). Certainly any quota system would tend to slow the diffusion of new technology into U.S. industry. Although the Japanese machine tool industry looks so strong, it now faces serious problems. The rising value of the yen has begun to slow ex­ ports of Japanese products and in 1986 caused an almost unprecedented reduction in machine tool investment in Japan. The Japanese domestic

79 THE MACHINE TOOL INDUSTRY market has been far stronger in the past quarter-century than most Amer­ icans realize and has provided the base for the rapid expansion of the Jap­ anese industry. In addition, the VRA will curb exports to the United States, at least for several years. These two events may combine to pro­ duce serious overcapacity in what has become the most highly auto­ mated machine tool industry in the world. Although the rate of technology diffusion has generally been slower in Europe than in the United States, there is some evidence of change there. A notable demonstration was provided by the comparison be­ tween the machine tool shows held in Hanover in 1981 and 1985. To the shock of the German machine tool industry, it was evident in 1981 that the Japanese exhibitors had developed a technological edge. To the sur­ prise of most visitors in 1985, it appeared that the German builders had reseized the initiative in technology from the Japanese. The interim had been a period of recession for the German industry, and many of the firms were operating at a loss, but a number of them had poured money and effort into research and development. One observer spoke of u a na­ tional effort of the machine-tool industry in the FRG to gain a technologi­ cal edge over the Japanese .... Although business has been unprofitable for many German machine-tool builders in recent years, this has seemed to stimulate rather than restrain investment in new technology.uso The U.S. position did not come into that comparison because the U.S. industry did not constitute a major presence at the Hanover show in 1985, presumably because the high value of the dollar caused most U.S. builders to curtail drastically whatever export efforts they might normally have made. Another factor in the deterioration of the U.S. in­ dustry may be that in the past twenty years the management of most machine tool companies in the United States has moved into the hands of people with financial rather than technical backgrounds. This is true almost universally of companies that have merged into larger organiza­ tions but also of many of the smaller companies that are still privately held, perhaps because in the present economic climate it seemed the only way to survive. In 1983 a survey was made of forty-three of the principal machine tool builders in the United States by a committee studying the industry as part of the defense industrial base. The firms were generally found to be more concerned with economic trends than with technological ones. Concerns about economic health overshadowed concerns about the role of technological leadership in remaining competitive. The committee found this attitude worrisome and suggested Uthat extraordinary efforts might be required among American machine-tool builders in order to maintain their reputation for technological excellence.uS ! Because it was at the mercy of the sharp swings in the business cycle, 80 ANDERSON ASHBURN the U.s. machine tool industry has always been cautious about making capital investments. The natural conservatism born of this problem has been accentuated by the shift in values of American industry that has brought short-run performance to the forefront of the considerations of both investors and managers. This process has brought about a kind of firm in the manufacturing industries that is primarily engaged in putting its label on and distributing products manufactured by others, which Business Week has characterized as the "hollow corporation.H82 The U.S. machine tool industry has shown an increasing reluctance to invest in advanced manufacturing processes. In its comparative study of the industries in several countries, the Technical Change Centre of London found that both European and U.S. firms seemed to view invest­ ment in improving productivity as an exercise in short-run cost reduction for new products. In contrast, the Japanese firms viewed manufacturing engineering in a much more fundamental way, considering such invest­ ments an important element in product design and development and a major long-run source of international competitiveness.83 As the U.s. machine tool industry has restructured itself in the past five years, a critical point may have been reached in which most of the companies with the financial resources to invest in developing machine tools or expanding facilities to meet new demands as they arise have ei­ ther disposed of their machine tool divisions or no longer have the will to invest in them. Many of the companies that have the will and the ability are so loaded with debt that they lack the needed capital and, in view of the recent wretched financial history of the industry, will have great diffi­ culty in obtaining funds either from banks or in the capital markets. There are encouraging elements beyond this dreary outlook. One is the growing importance of manufacturing technology in the curriculums of some colleges and universities. Another is the recognition by some people of the long-range harm being done to the economy by the concen­ tration on short-term financial results. An important third is that a few machine tool builders have been defying what had become the conven­ tional wisdom of the business schools and concentrating on the develop­ ment of technology and on the adoption of the most advanced technology possible for their own operations. During the past few years these have generally suffered severe financial difficulties, just as those who concentrated on the economic problems have, but some of them are doing well at a time when much of the industry is being crippled by im­ port competition. They seem poised for better days if they can only suc­ ceed in diffusing more of their own developments to the manufacturing industries that could use them.

81 THE MACHINE TOOL INDUSTRY

Notes

1. "World Machine-Tool Production and Trade," American Machinist & Auto­ mated Manufacturing (February 1987), p. 64. 2. E. Sciberras and B. Payne, The UK Machine Tool Industry: Recommendations for Industry Policy (London: Technical Change Centre, 1985), p. 63. 3. Anderson Ashburn, "The Millennium Has Not Arrived," American Ma­ chinist, November 22,1965, p. 85. 4. The 13th American Machinist Inventory of Metalworking Equipment, 1983. 5. Robert S. Woodbury, History of the Lathe to 1850 (Cleveland: Society for the History of Technology, 1961), pp. 18-21; reprinted in Woodbury, Studies in the History of Machine Tools (Cambridge, Mass.: Technology Press, 1972). 6. "Metalworking: Yesterday and Tomorrow," American Machinist, lOath an­ niversary issue (November 1977), pp. B2-B3. 7. American Machinist, lOath anniversary issue, pp. B5-B7. 8. L. T. C. Rolt, Tools for the Job: A Short History of Machine Tools (London: B. T. Batsford, 1965). 9. Simeon N. D. North, Simeon North: A Memoir (Washington, D.C., 1913). 10. Merritt Roe Smith, Harpers Ferry Armory and the New Technology: The Chal­ lenge of Change (Ithaca, N.Y.: Cornell University Press, 1977), pp. 219-51. 11. Charles H. Fitch, "Interchangeable Mechanism," in The 10th U.S. Census (Washington, D.C., 1880), pp. 617-48. 12. American Machinist, lOath anniversary issue, p. B17. 13. Rolt, Tools for the Job, p. 146. 14. American Machinist, lOOth anniversary issue, p. B12. 15. Monte A. Calvert, The Mechanical Engineer in America: Professional Cul­ tures in Conflict (Baltimore: Johns Hopkins University Press, 1967), pp. 3-40. 16. Joseph Wickham Roe, English and American Tool Builders (New York: McGraw-Hill,1916). 17. American Machinist, lOath anniversary issue, pp. C3, C6, C7. 18. David A. Hounshell, From the American System to Mass Production, 1800- 1932: The Development of Manufacturing Technology in the United States (Balti­ more: Johns Hopkins University Press, 1984). 19. Ibid., pp. 67-124. 20. American Machinist, lOath anniversary issue, pp. D5-D8. 21. Horace Arnold (Hugh Dolnar), "Bicycle Tools," American Machinist, Octo­ ber 3, 1895, to September 24, 1896. 22. American Machinist, lOath anniversary issue, p. D9. 23. Harless D. Wagoner, The U.S. Machine Tool Industry from 1900 to 1950 (Cambridge, Mass.: MIT Press, 1968), pp. 8-34. 24. H. 1. Brackenbury, "Symposium on High-Speed Steel Tools," ASME Trans- actions (1910), pp. 729-32. 25. Wagoner, Machine Tool Industry, pp. 11-14. 26. Rolt, Tools for the Job, pp. 209-13. 27. American Machinist, lOath anniversary issue, p. EIO. 28. Hounshell, From The American System, p. 224. 82 ANDERSON ASHBURN

29. Ibid., pp. 231-32. 30. American Machinist, 100th anniversary issue, p. F7. 31. American Machinist, May 10, 1928, p. 788. 32. American Machinist, 100th anniversary issue, p. F8. 33. Wayne G. Broehl, Jr., Precision Valley: The Machine Tool Companies of Springfield, Vermont (Englewood Cliffs, N.J.: Prentice-Hall, 1959), pp. 176-207; and American Machinist, 100th anniversary issue, pp. G3-G5. 34. Rupert LeGrand, "Ford Handles by Automation," American Machinist, Oc­ tober 21, 1948, pp. 107-22. 35. Anderson Ashburn, "Detroit Automation," Annals of the American Acad­ emy of Political and Social Science, Special Issue on Automation (March 1962), pp. 21-28. An excellent discussion of the debugging problem will be found in Powell Niland, Management Problems in the Acquisition of Special Automatic Equipment (Cambridge, Mass.: MIT Press, 1961). 36. Ashburn, "Detroit Automation"; and Niland, Management Problems. 37. Frederick A. Halsey, "Sellers Automatic Multiple Punching Machine," American Machinist, vol. 29 (1906), p. 469. 38. Emanuel Scheyer, "The Control of Machines by Perforated Records," American Machinist, November 10,1921, pp. 743-47. 39. David F. Noble, Forces of Production: A Social History of Industrial Automa- tion (New York: Alfred A. Knopf, 1984), pp. 79-105. 40. Ibid., pp. 106-43. 41. Ibid., p. 88. 42. Anderson Ashburn, "Film Runs Non-circular Gear Shaper," American Ma­ chinist, February 2, 1953, p. 149. 43. American Machinist, 100th anniversary issue, p. FlO. 44. Jack Rosenberg, "A History of Numerical Control, 1949-73: The Technical Development Transfer to Industry, and Assimilation," Information Sciences In­ stitute Research Report ISIjRR-73-3, 1973. 45. Based on an analysis by the author of domestic production data in the MQ35W reports of the Bureau of the Census and export and import data in­ cluded in the compilations made by the National Machine Tool Builders Associa­ tion from the Commerce Department EM522 (export) and IM146 (import) reports. 46. Peter Hoffman, "Computer Control Hits Europe," American Machinist, Oc­ tober 5, 1970; Chicago Show Issue, American Machinist, September 7, 1970; "The Chicago Shows," American Machinist, October 19,1970; and Anderson Ashburn, "Japan Puts DNC to Work," American Machinist, November 16,1970. 47. Michael Mealey, "NC and Computers Build NC," World Manufacturing (in­ ternational edition of American Machinist, published quarterly 1973 to 1975) (November 1974), pp. 31-34. 48. These and other descriptions of the Fanuc operations are based on personal observation by the author during more than a dozen plant visits that took place at approximately two-year intervals. 49. E. Sciberras and B. D. Payne, Technical Change and International Competi-

83 THE MACHINE TOOL INDUSTRY tiveness, vol. 1, Machine Tool Industry (London: Technical Change Centre, 1985), pp.39-41. 50. D. T. N. Williamson, '''New Wave' in Manufacturing," American Machinist, September 11, 1967, p. 143. The quotation is from Anderson Ashburn, HCatching the Next Wave," ibid., p. 123. 51. "Molins Shelves 'System 24,'" American Machinist, September 8, 1969, p.107. 52. Anderson Ashburn, HThe Next Wave: Still Coming," ibid., p. 41. 53. Ben C. Brosheer, HAutomation Comes to Turbine Blade Machining," Ameri­ can Machinist, December 9, 1963, p. 97. 54. Ben C. Brosheer, HThe NC Plant Goes to Work," American Machinist, Octo­ ber 23,1967, p. 138. 55. Ben C. Brosheer and James c. DeSollar, HVariable Mission Machining," American Machinist, September 9,1968, p. 137; and 1884-1984, Finding Better Ways (Cincinnati: Cincinnati Milacron, 1984), p. 139. 56. Joseph Jablonowski, HAiming for Flexibility in Manufacturing Systems," American Machinist (March 1980), p. 167. 57. U.S. Department of Commerce, International Trade Administration, A Competitive Assessment of the U.S. Flexible Manufacturing Systems Industry (Wash­ ington, D.C., July 1985). 58. Ibid. 59. Anderson Ashburn, HAiming for Unmanned Operation," American Ma­ chinist (December 1978), p. 107. 60. -The Computer Is a Manufacturing Tool," American Machinist, June 29, 1970, pp. 68-84. 61. George H. Schaffer and Joseph Jablonowski, HPutting MAP to Work," American Machinist & Automated Manufacturing Oanuary 1986), pp. 75-79. 62. Norio Taniguchi, HCurrent Status in, and Future Trends of, Ultra precision Machining and Ultra fine Materials Processing," Annals of CIRP, vol. 32, no. 2 (1983), pp. 573-82. The illustration of the Taniguchi curves is from a simplified version appearing in American Machinist (October 1985), p. 101. 63. E. Raymond McClure, HResearch and Development Trends in Ultra­ precision Machining," Proceedings of the 1985 International Machine Tool Re­ search Forum (McLean, Va.: National Machine Tool Builders Association), pp.8-1-8-26. 64. Machine Tool Panel, Committee on Technology and International Eco­ nomic and Trade Issues, National Research Council, The Competitive Status of the U.S. Machine Tool Industry: A Study of the Influences of Technology in Determining International Industrial Competitive Advantage (Washington, D.C.: National Academy Press, 1983), p. 51. 65. Ibid., p. 53. 66. Robert S. Kaplan, HMust ClM Be Justified by Faith Alone?" Harvard Busi­ ness Review (March-April 1986), pp. 87-95. 67. Manufacturing Studies Board, National Research Council, Toward a New Era in U.S. Manufacturing: The Need for a National Vision (Washington, D.C.: Na­ tional Academy Press, 1986).

84 ANDERSON ASHBURN

68. Bela Gold, "Justifying CNC and Computer-integrated Manufacturing," IMTS-82 Technical Seminar, National Machine Tool Builders Association, McLean, Va. 69. "GM Studies US Machine-Tool Firms: One Problem: The Way Automakers Buy," American Machinist Oanuary 1986), p. 45. 70. Joel Barlow, address to the National Tax Association-Tax Institute of Amer­ ica Symposium on Federal Tax Reform, 1973, plus reports inAmerican Machinist. 71. Manufacturing Studies Board, National Research Council, The U.S. Ma­ chine Tool Industry and the Defense Industrial Base (Washington, D.C., 1983), pp.77-78. 72. Ibid., p. 1. 73. National Research Council, The Role of the Department of Defense in Supporting Manufacturing Technology Development (Washington, D.C., 1986), pp. 38-53, summarizes the history of ManTech programs. 74. McClure made this statement on many occasions, one of them in a de­ parture from his prepared text in an address to the 1985 International Machine Tool Research Forum sponsored by the National Machine Tool Builders Association. 75. This brief summary of the history is based on the author's knowledge of the contents of the petition and the various responses to it and discussions with people involved on both sides of the issue. 76. The discussion of the Section 232 petition is based on the petition, fact sheets issued by the International Trade Administration, and interviews with people involved for the purpose of producing news articles that appeared over al­ most four years in the American Machinist. 77. These comparisons and most other statements comparing machine tools among countries are based on the annual studies of world machine tool produc­ tion and trade made each year by American Machinist (now American Machinist & Automated Manufacturing) since 1962. The studies appear originally in Janu­ ary or February issues starting with January 18, 1965. Summaries of these sur­ veys can also be found in the Economic Handbook of the Machine Tool Industry, published annually by the National Machine Tool Builders Association, and in studies of machine tools prepared by U.S. government agencies and by re­ search organizations. 78.1986 U.S. Industrial Outlook (U.S. Department of Commerce), 1986, pp.21-22. 79. Anderson Ashburn and Joseph Jablonowski, "Japan's Builders Embrace FMSs," American Machinist (February 1985), pp. 83-88. 80. Anderson Ashburn, "A Country with Too Few Chad Frosts," American Ma­ chinist (November 1985), p. 5. 81. Manufacturing Studies Board, National Research Council, U.S. Machine Tool Industry, p. 41. 82. "The Hollow Corporation," Business Week, March 3,1986. 83. Sciberras and Payne, Technical Change and International Competitiveness, p.93.

85 3 The U.S. Automotive Industry: Technology and Competitiveness Michael S. Flynn and David E. Cole

Major shifts in the patterns of U.S. industrial production have occurred over the past two decades. Manufacturing has declined as a percentage of gross national product, and the specific mix of production has changed markedly in relation to product markets. Whether the United States will continue to decrease its manufacturing role-perhaps reaching a truly "hollow" economy-or will enjoy a resurgence of manufacturing is un­ certain. Those who believe that a resurgence of manufacturing is in the economic interest of our society often see the introduction of new tech­ nologies as the occasion of this resurgence, through the introduction of new products, or as the means that make such a resurgence possible, through the introduction of more competitive manufacturing techniques. This chapter examines the role of new technologies and the possible ad­ justments facing the domestic automotive industry. The domestic automotive industry constitutes a major segment of the U.S. manufacturing economy. Since 1978, this industry has under­ gone a series of shocks that have permanently changed its structure and shape. The industry is at a crossroads: the traditional industry could eas­ ily continue to shrink drastically in market share, supporting its reduced activity through a variety of strategies relying on nondomestic manufac­ turing; or it could stabilize, though at a smaller market share than pre- 1978, supporting its reduced activity through domestic manufacturing. The stakes are enormous, as the automotive industry is a major source of wealth creation for our society. Production for the U.s. automotive market now is multinational, and this internationalization of production has profoundly affected the traditional domestic industry. Increased import penetration, domestic production of foreign nameplate vehicles, nondomestic sourcing options for traditional U.s. manufacturers, and emphasis on quality and cost as bases of competition are all facets of the growing internationalization. Heightened international competition in and for the domestic market is 86 FLYNN AND COLE the major external influence on the structure of the domestic industry, se­ lecting which companies will play what roles in the future production of vehicles for that market. The viability of automotive manufacturing in the United States and the future role of the traditional U.S. manufactur­ ers and their suppliers of raw materials, parts, components, and produc­ tion equipment in domestic manufacturing will be determined by international competition and played out under much more complex "rules" than in the past. The major international competitors of the U.s. automotive indus­ try, at least for the next fifteen years, will be the Japanese. 1 As has been the case in other manufacturing areas-radios, televisions, and audio components, for example-the Japanese have proved themselves to be formidable competitors. It is not clear, however, that Japanese competi­ tion must ultimately cause the traditional u.s. automotive industry to disappear or to shift most of its economic activity outside the country. Automobile production will not necessarily follow the pattern that oc­ curred for these other consumer durables: the demise of traditional do­ mestic manufacture in the face of imports. The critical questions facing the United States are how much of that economic activity and wealth cre­ ation can, and how much of it will, be kept here. Because of its centrality to the U.S. manufacturing economy, the automotive industry can lead the entire manufacturing sector in the re­ surgence of international competitiveness. The industry will be able to regain its competitiveness, however, only if the supplier industries rees­ tablish their own competitiveness. The manufacturers can, of course, increase the offshore sourcing of parts and components or, for that mat­ ter, import entire vehicles and become more distributors than manufac­ turers. If this happens, however, the structure of the industry will be so altered and its size so constricted that the industry, by any meaningful measure, will be judged as having failed to meet the competitive chal­ lenge. If the suppliers do meet the challenge, their dispersed presence in so many manufacturing sectors immediately affects the competitive­ ness of the entire U.S. manufacturing base. The automotive industry has been a central consumer of the output of the durable goods manu­ facturing portion of the economy; it can now serve as a central source for the diffusion of the techniques and technologies for restored manufac­ turing competitiveness. The manufacturing and marketing of automobiles involves a mas­ sive complex of activities and processes that convert raw materials into finished goods of differing degrees of complexity and sophistication, all of which are assembled to yield vehicles of varying designs. These activi­ ties require enormous coordination of capital and human resource invest­ ments, tying together thousands of parts from hundreds of locations, so

87 THE U.S. AUTOMOTIVE INDUSTRY

that a dependable and affordable vehicle rolls off the assembly line. Such a complex process is subject to both external and internal forces, and our ability to understand and control these forces is severely limited. Numer­ ous circumstances can affect different aspects of manufacturing and mar­ keting in ways that cannot be predicted or, even when predictable in isolation, in ways that produce effects in combination that cannot be an­ ticipated. In competition the actions of anyone player influence the ac­ tions of the others, and that is certainly the case in the automotive industry, perhaps especially when we consider the effects that a manu­ facturer's sourcing decisions can have on its suppliers. The external circumstances include the health of the general econ­ omy; government policy in the areas of taxation, interest rates, monetary growth, deficit reduction, consumer credit, trade, and research and de­ velopment; consumer tastes, preferences, and uses for vehicles; and tech­ nological developments outside the industry. Any number of external events can dramatically affect the auto industry in either the near or the long term: witness the effects of the two oil shocks of the 1970s on con­ sumer vehicle preferences and the possible effects of the sudden collapse of oil prices early in 1986. Influential developments within the industry include the corporate strategies of major companies, with regard to both their competitive plans and their own structure; development and de­ ployment of human resources; and technological innovation, both in product and in manufacturing processes. This chapter focuses on the role that the development and diffusion of new technologies might play in the competitive success of the tradi­ tional U.s. automotive industry. The role of the other factors, from gov­ ernment policies to corporate strategies, is addressed only to the extent that they are important conditioners of the processes of technological de­ velopment and diffusion. Space simply does not permit even a superficial treatment of all of the factors that may be of critical importance in shap­ ing the domestic auto industry of the next ten to fifteen years. Limiting the discussion to new technologies is defensible, though, because tech­ nology adoption and deployment by the domestic industry are likely to have the greatest influence on its own future structure and success. Because internationalization of the competition for the automotive market is the critical change of the past decade, and because the Japanese are the most immediate and direct competitive threat to the traditional in­ dustry, this chapter first reviews the historical development of the two national industries and evaluates their current competitive status. Two of the fundamental areas of comparison are (1) the division of production activity between the manufacturer and its suppliers and how that division is negotiated, and (2) the use of human resources. These two areas are both conditioners and arenas of technological change. They are

88 FLYNN AND COLE so important in themselves, and so intimately tied to technological changes, that they are major themes throughout the discussion of the role of technology. The discussion of technology respects the traditional distinction among product, process, and materials technologies. Product technology refers to technological developments that produce a new product or alter an old product. The technological development is itself embodied in the product. Process technology refers to technological developments that are embodied in the ways that the product is manufactured or produced and only indirectly, if at all, embodied in the product. Materials technol­ ogy covers developments in the basic materials available for production, whether new or improved materials, or important changes in the ways the materials are processed. It will become clear that these distinctions are often more convenient for discussion than they are real in the manufac­ turing world. The three types of technological innovation so often occur simultaneously, and so often are necessary conditions for each other, that the distinction can be difficult to maintain. Further, since the artificial separation of the three technologies can create very real problems in a manufacturing environment, the distinction does not need to be rein­ forced. Nevertheless, for ease of discussion, the distinction is observed. Process technology is the arena in which the U.S. automotive indus­ try faces the most immediate and clear competitive threat from Japan, particularly if the definition of process technology is expanded to include the routine activities that support a machine. To highlight Japan's supe­ rior ability to link the complex operations involved in the production of a motor vehicle, the discussion of process technology distinguishes be­ tween hard and soft technologies and emphasizes whether these tech­ nologies perform focused or linking functions. Finally, a summary discusses the promise and potential pitfalls in technological innovation and diffusion as a strategic mechanism for maintaining the competitive strengths of the U.s. automotive industry and for restoring its competitive capabilities where necessary.

Historical Background on Automotive Competition

The automotive industry plays a central role in the economies of both the United States and Japan. Statistics on industry share of GNP, share of consumption of the output of materials and industrial products, share of total domestic capital investment, and, in the case of Japan, share of total exports all support the conclusion that the automotive industry is a cen­ tral, highly important sector in each national economy. The industry share of jobs is a case in point. For each economy, about 10 percent of all jobs are automotive related; it appears that in the United States about 1.7 89 THE U.S. AUTOMOTIVE INDUSTRY percent of all jobs are directly tied to the production of vehicles, whereas in Japan it is somewhat higher-about 2.0 percent.2 Although Japan and the United States are the world's leading pro­ ducers and consumers of motor vehicles, they pursued very different routes in reaching this position. These differences are important to con­ sider when assessing their current and future competitive relationships. It is perhaps especially critical in the case of automotive competition to de­ velop some understanding of the national experience of the two indus­ tries. Concern over the competitive success of the Japanese has waxed and waned since 1978, and this concern has become both a source of de­ bate itself and a backdrop for other debates. These debates have attracted numerous participants representing varied interests, and some complex issues have been oversimplified. This chapter is not designed to correct all misinformation or to expose all myths; but some basic understanding of how the two industries developed is essential if the reader is to form an independent judgment about the problems and prospects of the tradi­ tional industry. This section provides an overview of the two industries at the opening of the 1970s and some basis for understanding the rapid changes in the automotive industry since then.

United States. The development of the automotive industry in the United States was heavily domestic. Manufacturers relied on domestic sources for raw materials, parts, components, and production equip­ ment, built their vehicles here, and for the most part marketed them here. Domestic manufacturers maintained virtually exclusive control of the U.s. market from the first decade of this century through the middle of the seventh decade. Although the European industry influenced the do­ mestic manufacturers in technical and design areas, the industry in the United States was truly domestic. From the late 1940s through the end of the 1960s, Detroit produced vehicles increasingly tailored to the needs, preferences, and pocketbooks of the American driver. The American consumer wanted, and Detroit de­ livered, products highly tailored to North America, with limited appeal elsewhere. Imported vehicles filled niches, competing for the relatively small sales volumes available in the sports, extreme luxury, and budget small car markets. Detroit was not concerned about the small import mar­ ket share in these relatively low-volume niches. Lack of concern was the predominant response even to the sharp surge in imports by Volkswagen in the late 1950s and early 1960s. By and large, the importers had little in­ terest in challenging this situation. The North American sales of foreign automobiles were small by Detroit's standards, but they were often large and indeed quite profitable by the importers' own standards. The U.S. companies became active quite early in producing offshore

90 FLYNN AND COLE for offshore markets. That, combined with their market-tailored domes­ tic production, resulted in the domestic operations of the U.S. manufac­ turers exporting virtually no vehicles. Thus the domestic industry was simultaneously insulated from broad foreign competition and cut off from export opportunities. American automotive suppliers were more ac­ tively engaged in export, but the larger supplier companies also estab­ lished facilities abroad to service European manufacturers and offshore U.S.-based manufacturers. The size of the automotive market is largely determined by economic variables such as real income and fuel prices and characteristics of the ve­ hicle, such as longevity and the level of quality for price. In the view of most observers, the domestic automotive market is now mature, and only modest increases in size, on the order of 2 percent per year, are likely for the foreseeable future, as replacement demand rather than new users constitute the bulk of sales.

Industry structure. Since 1900, there have been thousands of vehicle nameplates and hundreds of automotive manufacturers in the United States. The lion's share of domestic production has long been held by the Big Three-General Motors, Ford, and Chrysler: 36 percent in 1910, reaching close to 90 percent just before World War II, and touching 98 percent in 1980.3 But there were twelve manufacturers in 1950, and the familiar "traditional domestic industry" of the Big Three plus American Motors was really a creature of the 1960s. Most of the early manufactur­ ers were short-lived; they were makers of specialty or niche vehicles, and for the most part they struggled along as marginal producers. In that sense, the automotive industry concentrated fairly rapidly, leaving just a few companies to dominate the manufacture of vehicles. The Big Three and the major independent suppliers concentrated their activities in the automotive sector. While GM and Ford, for example, were long active in other economic arenas, from household appliances to aerospace, and many of their automotive goods have nonautomotive ap­ plications and markets, their business remained overwhelmingly auto­ motive. The Big Three typically reported 90 percent or more of their production and sales in their automotive business lines. 4 They met their capital needs through earnings, equity financing, and loans; they did not become linked or associated with other manufacturing firms, with the ex­ ception of GM's relationship with Du Pont in the 1920s. These manufacturers typically engaged in the final assembly and production of the vehicle and also manufactured large portions of the major subsystems, such as the power train. In addition, each of the Big Three had major divisions to manufacture a wide variety of parts, com­ ponents, and subassemblies for the final vehicle.

91 THE U.S. AUTOMOTIVE INDUSTRY

The level of vertical integration of the manufacturers has varied widely since the early days of the industry. Henry Ford's dream of a nearly complete vertical integration of vehicle manufacturing came close to reality in the River Rouge complex of the 1930s: the raw material was brought in, steel produced, metal stamped, bent, and shaped, and the myriad parts of the car manufactured and then assembled. In the postwar period, until quite recently, the Big Three have had fairly stable levels of vertical integration, with GM vertically integrated at about the 55 percent level, Ford hovering around the mid-40 percent level, and Chrysler at the mid- to high 30 percent level. These manufacturers depend on a host of smaller companies for the intermediate production of goods and raw ma­ terials that compose the balance of the vehicle. The supplier companies provide anything from nuts, bolts, and other fasteners to engines, trans­ missions, and major body stampings. Supplier companies range in size from the Mmom and pop" concerns with few employees and sales mea­ sured in the thousands of dollars to very large and substantial manufac­ turing companies with thousands of employees and sales measured in the hundreds of millions of dollars. The U.S. automotive industry is a highly diverse and diffuse collec­ tion of manufacturing companies, spanning the automotive assemblers, their many divisions, and a wide variety of processors and producers of raw materials, parts, and components that ultimately are incorporated into motor vehicles. As much as 55 percent of the purchased value of a u.s. automobile is provided by suppliers whose home industries range from steel and rubber to plastics and electronics. These Mupstream" suppliers, numbering some 40,000 firms, enjoyed $40 billion in sales to the four domestic manufacturers in 1980, by which time the downturn in the industry was in progress. Approximately 4,800 of these firms, however, accounted for roughly 85 percent of these sales, and, in fact, some 120 firms alone accounted for 45 percent of this total. Moreover, the very large suppliers typically have a relatively low percent­ age of their total sales concentrated in the automotive sector, while the many smaller suppliers' sales are more concentrated in the automotive sector. These suppliers and their own automotive-related suppliers were estimated to provide 1.4 million jobs in 1979, at least a third of which had disappeared by the time the upturn began in 1983. Historically, the sup­ plier industry is estimated to provide approximately 40 to 50 percent more jobs than the assemblers themselves. 5 So the automotive supplier industry is a critical component of the U.S. automotive industry; at the same time it is a highly varied group of firms. It includes companies that supply the manufacturers directly and those that do so through other supplier firms; a relatively small number of large suppliers tend to be less dependent on the assemblers, and many

92 FLYNN AND COLE

small suppliers tend to be more dependent upon them. Companies that are primarily automotive suppliers span a wide variety of home indus­ tries, from rubber to plastics and from steel to electronics. The automotive industry is too closely identified in the public mind with the Big Three. The problems, concerns, and interests of the manufacturers are not nec­ essarily the same as those of the industry as a whole. Industry characteristics. Relations between the manufacturers and the suppliers in the traditional automotive industry have often been stormy. The manufacturers have the in-house capability to perform most of the work that the suppliers do, and however stable the levels of vertical integration have been, the exact mix of the make-buy decisions by the manufacturers has varied, often from year to year. The supplier, then, often competes with the manufacturer itself for the manufacturer's busi­ ness. Historically, the manufacturers have preferred maintaining multi­ ple sources for parts and components, partly to assure themselves of uninterrupted supply, but also to reduce piece prices through the direct competitive bidding of suppliers for shares of the total business. The United Auto Workers is an important player in the U.5. automo­ tive industry, since it represents workers at the Big Three and at many major supplier locations. Although management-union relations in the automotive industry are sometimes characterized by high levels of suspi­ cion, distrust, and resistance on both sides, there is also a history of rea­ sonable levels of cooperation and of recognition of shared interests. It is clear, however, that the attempts by management to "idiot-proof" the pro­ duction system and the attempts by the union to protect their members have resulted in elaborate and unwieldy job classifications and work rules. Most observers see these as major barriers to the efficient deploy­ ment of the work force and thus as hindrances to productivity. The "rules of production" that have governed the industry for manu­ facturers and for many of the suppliers are suitable to large volume mass production in a protected market. Perhaps the most important rule has to do with production: get the product out the door. Capital equipment should never be idle, and inventory must be maintained to ensure the continuous flow of production. Questions of quality, cost, and effective­ ness all give way to the imperative of production. Human labor must not be allowed to interfere with production, and therefore jobs must be de­ signed to be as basic as possible and to make it easy to substitute one worker for another. When a job requires human skill, it must be a clear re­ sponsibility of designated workers. The industry attitude became one of "if it ain't broke, don't fix it," and as long as vehicles rolled out the door, it was difficult to regard anything as "broke." Technological development. The first few decades of the automotive 93 THE U.s. AUTOMOTIVE INDUSTRY industry were characterized by technological revolution, as a spate of major technological innovations in both the vehicle and the way it was manufactured occurred and took hold. By the 1930s, the basic vehicle had evolved in its essential characteristics: fuel, basic configuration, power train, and major subsystems were all there. So, too, were the basic elements of mass production technology: the movable assembly line, transfer lines, and a commitment to automating the process. Innovation since then has largely evolved through small, incremental improvements within the basic parameters already established. That does not suggest that innovation has been absent or that when it occurs it is unimportant. One need only consider the rapid growth of productivity that character­ ized the industry through the 1950s and 1960s to understand that many Nlittle" innovations can add up to the equivalent of a HbigH innovation. But the process and the diffusion of innovation throughout the automotive industry followed a pattern of incremental rather than radical innovation and reinforced the conventional definitions of problems and solutions. Statistics on research and development are difficult to interpret, and conservative definitions of the companies that constitute the auto­ motive industry miss the important role that many supplier companies play. Even so, the automotive industry is an important source of indus­ trial research and development activities, with GM and Ford typically ranking in the top five in total amounts spent. Their expenditures par­ tially reflect the size of the companies, but other information suggests the important role of the automotive manufacturers in research and de­ velopment and, of course, the importance of research and development to the manufacturers. Throughout the 1980s, the automotive Big Three have spent, on the average, in excess of 3.5 percent of their sales on re­ search and development. Research and development expenditures across all industries have risen from 2.0 percent to 3.1 percent during that period, however, so the automotive industry is no longer as much above average as it had been. 6

Government policy. Government policy has not been central in deter­ mining the development of the automotive industry or in preventing it from developing in other ways. Most, if not all, government action that was targeted to the automotive industry happened in the 1960s and 1970s, with the development of regulations in the areas of safety, fuel economy, and pollution. Earlier activity, such as the development of a fine highway system, was equally beneficial but less noticed. On balance, the actions of government targeted to the automotive industry have not had clear positive or negative influence. General government actions not targeted to the industry, but affecting the industry as well as the rest of so­ ciety, have had greater influence, although again it has been mixed. In

94 FLYNN AND COLE some cases, the consequences of an action have changed with time. The low price of fuel, partly reflecting its low tax content, certainly helped the industry in the sense that it produced more customers. Low fuel prices became a major drawback to the industry when gasoline shortages caused large car sales to plummet after the OPEC cutback in exports of 1973. To be sure, government policy shaped the general environmentthe industry faced and from time to time an immediate, major element of that environment. But on balance, its role has been primarily indirect and has alternated between being positive and negative.

Japan. The prewar Japanese industry was considerably smaller than the American industry, never producing 100,000 vehicles in one year, a level the United States reached in 1909. Government action in 1926 resulted in the emergence of three primary manufacturers, and by 1936 there were six. That year saw the forced removal of both GM and Ford from partici­ pation in the Japanese industry, an event with perhaps more symbolic than real importance today. As in the United States, the Japanese indus­ try shifted massively into wartime production and, unlike the U.S. indus­ try, required rebuilding after the war. In the postwar period, the Japanese motor vehicle industry special­ ized in small, fuel-efficient vehicles for its formally protected domestic market. The Japanese assemblers manufactured some vehicles from "knock-down kits," under license from European manufacturers, and reached their first 100,000-vehicle year in 1956. Imports constituted a substantial share of the Japanese market in the early 1950s, but the est~b­ lishment of trade barriers swiftly reduced their share, and by 1960 pro­ duction and sales were both virtually 100 percent Japanese. Significant export activity by the Japanese industry developed dur­ ing the second half of the 1960s and helped fuel the sudden production surge the industry experienced during that time. But export activity was not as important in that upsurge as the sharp increase in domestic sales. Exports came to playa more key role in the continuing expansion of the Japanese industry after 1970. The growth of the Japanese market parallels the growth of the Amer­ ican market, but with three important differences. First, growth in Japan happened much later. The American industry recorded its first 100,000- vehicle year in 1909 and by 1918 reached a production level just under 2 million. Japan experienced the same growth from 1956 through 1965, nearly a half-century later. Second, since 1965 the growth of the Japanese industry has been much smoother over a shorter time than in America, even if we take the Depression and war years into account. The pattern in the American market has been one of general growth, followed by down­ turns and recovery years that yield new records. Japan's growth has been

95 THE U.s. AUTOMOTIVE INDUSTRY more steady and gradual with a few scattered downturns, to be sure, but those pale in comparison with the steady and stable increases in volume. Third, the role of heavy vehicles, including trucks and buses, in the ex­ pansion of the motor vehicle industry has been more important in Japan than in the United States. The U.s. motor vehicle industry is dominated by passenger cars for personal transportation. In Japan, the motor vehicle industry is less dominated by personal transport vehicles, and the impor­ tance of a variety of commercial vehicles is correspondingly greater. The Japanese automotive market is influenced by the same factors as the American market. Some key differences, however, suggest that the total available market in Japan, on a population basis, is likely to be smaller at maturity than the American market. These include the size and quality of the highway system, Japan's greater population density, the availability of a better alternative public transportation system, and the higher "fixed costs" of operating a vehicle, from higher licensing and in­ spection fees to higher parking costs. At this time, most observers agree that the Japanese market is not yet completely mature, although expecta­ tions differ about when, and at what level, complete maturity will occur.

Industry structure. The concentration of assembly in just a few compa­ nies has not occurred in Japan, and the nine assemblers compete fiercely in Japan's domestic market. Toyota and Nissan, however, have accounted for the bulk of passenger car sales in Japan, with a combined market share near 60 percent and a bit higher share of the export market. Most observ­ ers, however, believe that the competition within the Japanese market is much fiercer and more price-based than it has been in the United States. While this may be accurate, the differences in concentration and degree of competition between the American and Japanese domestic automotive markets may be somewhat less real than they appear to be. In both coun­ tries there is a dominant manufacturer, and although there is fierce compe­ tition over a few points of market share, year-to-year variations are objectively fairly small (though important) in both markets. The structure of all industries and companies in Japan is generally quite different from their structure in the United States, and that is cer­ tainly true of the automotive industry and companies. Large industrial groups in Japan have an importance that defies any parallels in the United States. Typically organized around a major bank or trading com­ pany, these groups include companies from the major industrial sectors and form an important nexus of business transactions in Japan. A group company usually prefers doing business with another member of the group unless there are compelling reasons to go to a nongroup company. The companies within a group often operate according to complicated systems of equity participation, which are reinforced by habit and per-

96 FLYNN AND COLE

ceptions of common interests. The connection of Japanese automotive as­ semblers to the groups with which they are allied ranges from full mem­ bership to a status perhaps more accurately described as associate member or even friendly nongroup. These ties, however, were important in securing the capital necessary to establish the industry in postwar Japan and to fuel its initial growth stages. While these groups are no longer as important as sources of capital for a now-successful automotive industry in a burgeoning economy, they still serve a number of functions that benefit the assemblers and provide a broad context for their business decisions. The American manufacturers, by contrast, are subject to both the benefits and the costs of their greater independence from specific sets of other industrial companies. The Japanese assemblers, like their American competitors, perform the final assembly for the vehicle and manufacture some of its main subsystems and components. In general, however, they are much less vertically inte­ grated than the American manufacturers; that is, they perform a smaller proportion of the manufacturing activity and themselves account for a lower percentage of the value added in the completed vehicle. Toyota is by all re­ ports the least vertically integrated Japanese assembler.

Industry characteristics. Since they are less vertically integrated, the Japanese assemblers must rely on outside suppliers for an even greater proportion of the vehicle than do the American manufacturers. The re­ lationship between the assemblers and their suppliers is quite different from that found here. A later section discusses in more detail the more cooperative, stable, and efficient manufacturer-supplier relations in Japan. While the Japanese assemblers do not have major divisions that provide competition for outside suppliers across a range of parts and components, they do have very close ties to major or first-tier suppliers, which in many ways approximate the captive supplier divisions found in the U.S. manufacturers. The Japanese automotive supplier industry appears to be more con­ centrated than its U.S. counterpart, numbering some 8,000 firms. Fur­ ther, roughly 400 firms, or 5 percent of the total, account for over 90 percent of the supplier sales to the Japanese assemblers. These very large, first-tier (or direct) suppliers in Japan appear to have a higher concentra­ tion of their sales in the automotive sector than either their U.s. counter­ parts or smaller, second-tier (indirect) suppliers in Japan. Much more often than in the United States, a Japanese supplier will have only one rather than multiple customers and be more dependent both on automo­ tive sales and on sales to one manufacturer. The manufacturer will often hold an equity position in these large, dedicated suppliers, increasing their similarity to the captive or internal supplier divisions of the U.S.

97 THE U.S. AUTOMOTIVE INDUSTRY manufacturers. At the supplier level, then, the Japanese industry is more concentrated than the U.S. industry, which is the reverse of the situation for the vehicle manufacturers. The work forces at the assemblers and most major suppliers are rep­ resented by unions, although again there are marked differences be­ tween the United States and Japan. A number of key differences between the United States and Japan appear to contribute to a markedly less ad­ versarial system of union-management relations. First, the automotive w unions at the assemblers are U enterprise unions, and thus membership is limited to employees of the company. An umbrella Japan Auto Workers organization somewhat consciously patterns itself after the UAW, but it is not nearly the industry force that the UAW has become, partly because it does not control the bargaining of its member unions. Second, member­ ship in the union covers workers in both the white-collar and blue-collar ranks, including managerial levels, tending to blur the line between man­ agement and labor issues in ways that prevent the sharp divisions found in the U.S. industry. Third, the traditional permanent employment sys­ tem and the system of seniority-based wages are firmly entrenched in the Japanese automotive industry. The first two factors probably reduce the level of rancorous conflict that the udivided loyalties" of separated union and employer permit here. The third factor, in combination with the high levels of growth the Japanese industry has enjoyed, means that bargain­ ing on both job security and wage increases occurs in a context that pro­ vides each individual with virtually certain employment and some level of wage increase each year. The rules of production in the Japanese automotive industry are ex­ traordinarily different from those in the American industry. Waste reduc­ tion and quality improvement are the governing themes, and use of capital equipment frequently takes second place. Human labor is seen as an important and valuable resource and as one that must be nurtured and developed. Jobs are designed and workers trained so that flexible assign­ ment is possible, but that requires developing multiple skills rather than the reducing skills that the capital substitution imperative emphasizes in the United States. Finally, a drive toward ultimate excellence pervades manufacturing in Japan, and the automotive industry is a leader in that drive. The American industry has only recently begun to learn that this pursuit of perfection can pay enormous dividends, rather than incur costs for fixing something that is not obviously broken. Technological development. The Japanese assemblers in the postwar period initially borrowed product technology heavily, especially from the European manufacturers that provided them with knock-down kits. Since the middle of the 1950s, however, they have increasingly relied on a

98 FLYNN AND COLE mixture of borrowing, adapting, and innovating themselves and are now clearly first rate in many of the areas of product technology. In the area of process technology, they also initially relied on technologies and strate­ gies borrowed from the European and American industries. But even in the early 1960s they were improving their applications of these technolo­ gies rather than borrowing directly. They have rapidly established them­ selves as the leaders in applying process technologies and in developing the supporting environment that the full exploitation of these technolo­ gies requires. The structure of the automotive industry in Japan appears to provide the industry with an edge in the speed with which innovations diffuse. The industrial groups may provide avenues for the more rapid diffusion of nonautomotive innovations in product, process, and materials to the industry, while the closer ties between the assemblers and their suppliers allow the faster diffusion of technological innovations throughout the supply chain of a particular assembler.

Government policy. The role of government policy in the competitive success of the Japanese automotive industry is, if anything, even more hotly debated than the role of government in the development of the U.S. industry. The image of uJapan, Inc. H that portrays Japan as a society with elaborate and successful industrial policies and that attributes the success of the Japanese in competitive business to the activity of the Ministry of International Trade and Industry (MIT!) is at best a crude oversimplifica­ tion. As in the United States, policy was not often directed at the automo­ tive industry, and the results of other policies were mixed in their effects. To be sure, the general protectionism and commitment to preserving scarce foreign exchange that permeated the trade stance of Japan in the late 1950s and early 1960s strongly benefited the domestic automotive industry in numerous ways. So too did the government commitment to developing a strong, competitive machine tool industry, steel industry, and automotive parts industry. The Japanese government also prevented the establishment of U.S. production in Japan or coproduction with Japa­ nese firms, a fact that still rankles many in the U.s. industry. MIT! did, however, try to discourage the development of an automotive assembler industry itself and, when that failed, attempted to bring about a concen­ tration of the industry, another policy initiative that failed. It is probably fair to say that government actions in Japan, whether targeted to the au­ tomotive industry or not, and whether meant to encourage or to discour­ age that industry, had much less to do with the success of the industry than most Americans believe (and than many Americans would find comforting to believe).

99 THE U.S. AUTOMOTIVE INDUSTRY

Recent Automotive Competition

In 1973 the Japanese auto industry ended a run of eighteen years of con­ secutive new records in automotive production. The U.S. industry also enjoyed a record year in 1973, though that was its first since 1965. Japa­ nese vehicles accounted for about 9 percent of the U.S. market, a substan­ tial but not yetthreatening share in the eyes of Detroit. In 1977-1978, the Japanese market share was above 12 percent, jumped to 16.6 percent in 1979, then to over 21 percent in 1980. The Japanese market share peaked in 1982 at 22.6 percent and in 1986 was just below 21 percent. These bare statistics indicate why the traditional American automotive industry now is highly concerned about Japanese competition and at the same time might lead one to ask if that competition has not reached some sort of nat­ urallimiU The current competitive situation of the traditional U.s. automotive industry vis-a.-vis Japan is a result of five critical factors: the trade deficit with Japan; the twin oil shocks of the 1970s and their dramatic effects on consumer preferences; the differing agreements that have governed the importing of Japanese vehicles since 1981; the basic costs of manufactur­ ing vehicles in the two countries; and the changing nature of the competi­ tion between the two industries, especially its effects on the structure of the domestic American industry. These factors are important for under­ standing how the current situation developed and for identifying likely scenarios of future evolution of the domestic industry.

Trade Balance. The U.s. merchandise balance of trade showed a deficit of about $148 billion in 1985, rising to $160 billion in 1986; the bilateral deficit with Japan stood at nearly $50 billion in 1985 and was nearly $55 billion in 1987. We have run substantial deficits with Japan for some time, but they are no longer offset by significant surpluses with other nations, especially those in South America. This change has focused attention on the bilateral deficit with Japan as if it were something new and on the Jap­ anese as the source of our problems. Various arguments have been proposed that suggest the source of the mushrooming U.S. trade deficit is to be found in one or another gen­ eral economic circumstance. One argument describes a Dtoo strongH dol­ lar, driven up in value by U.S. monetarism or by high interest rates brought about by our need to finance the national debt and by the per­ ception abroad that the dollar is a Dsafe havenh currency in an uncertain world. This argument sometimes includes a Dtoo weakh yen, accompa­ nied by the implicit or explicit notion that the Japanese government de­ liberately manipulates the value of the yen to foster exports. Yet another argument focuses on differences in tax codes, with manufacturers in sys-

100 FLYNN AND COLE tems with a value-added tax said to have an advantage over those in more direct systems such as that in the United States. The recent strengthening of the yen against the dollar is providing an empirical test of the strong dollar-weak yen explanation. The Japanese yen strengthened 71 percent against the dollar from September 1985 to October 1987. While monthly statistics have begun to show some im­ provement in the overall U.S. trade balance, we continue to see records for the monthly bilateral deficit with Japan. Still, it is difficult to believe that the increased dollar-denominated costs of the Japanese assemblers and suppliers will not provide competitive opportunities for the domestic industry. Whether the domestic industry will exploit those opportunities remains an open question. Some suspect that our trading partners, perhaps especially Japan, engage in exclusionary trade practices, ranging from tariffs, quotas, and government subsidies to less formal trade barriers such as product certifi­ cation hurdles, restricted access to distribution networks, and the like. With respect to Japan, the vast majority of U.S. imports are manufac­ tured goods, and U.S. exports in this sector are small indeed. Further, au­ tomotive goods account for fully half of the U.S. manufacturing sector trade deficit with Japan, and the United States has become a net importer, not just of vehicles, but of automotive parts and components as well. For automotive companies, this exact trade imbalance is the problem, and it must be recognized that the overall trade balance with Japan could be al­ tered without any improvement in the automotive sector. "Opening" Japan to U.S. goods in agriculture and telecommunications, for example, might well help to balance the bilateral deficit without lowering the auto­ motive trade deficit. These arguments have different degrees of merit, and the actions each suggests have different likelihoods of occurring. It is unlikely that even eliminating all of these sources would erase our trade deficits, and they would have at best negligible influence on our bilateral automotive deficit with Japan. The simple fact is that the Japanese have the reputa­ tion for being the world's high-quality, low-cost producer of most auto­ motive goods. Their suppliers are tightly tied to the assemblers in carefully established and developed relationships, making for a difficult market for U.S. suppliers to enter, even those with demonstrated quality and price advantages. Japanese consumers are not likely to find U.S. ve­ hicles attractive, even if they were to become price competitive, because our strengths lie in types of vehicles that are not well suited to typical use requirements in Japan. At best, eliminating all automotive trade barriers in Japan would present U.S. automotive manufacturers and suppliers the opportunity to invest significant resources and time in the long-range de­ velopment of a potential market for their products. Whether the U.S. in-

101 THE U.s. AUTOMOTIVE INDUSTRY

dustry would even pursue this opportunity is itself open to question. In sum, the automotive trade deficit with Japan will not be solved by more U.s. exports, at least not in the foreseeable future.

Oil Shocks. The oil embargo imposed by OPEC in 1973 surprised the au­ tomotive industry as it did everyone else. The subsequent shortages and price increases resulted in a major shift in consumer preferences to smaller, more fuel-efficient vehicles. The Japanese were very well posi­ tioned to exploit the resulting marketing opportunity, one that Detroit simply could not immediately meet. The response of the U.S. govern­ ment to the oil crisis created a major dilemma for Detroit. On the one hand, government pursued a policy of restraining any further increase in the price of oil, encouraging consumer preferences to drift back toward the traditional larger and more comfortable but fuel-inefficient vehicles that had been Detroit's hallmark. On the other hand, the government legislated requirements that Detroit improve the efficiency of its vehicles. These corporate average fuel economy (CAFE) standards impelled the American automotive industry to develop vehicles that would compete directly with Japanese imports at the same time that cheap fuel attracted consumers back to their historic preferences. Nevertheless, the general economic recovery fueled Detroit to a record production year in 1978- nearly 13 million vehicles, over 9 million of them passenger cars. In 1979 the second oil shock hit, and the price of gasoline again in­ creased sharply. The light vehicle (passenger car and light truck) market skidded from 11.2 million sales in 1978 to just under 8 million in 1982, with Detroit's share of production at just over 5112 million. In FY 1978- 1979, the Japanese marketed about 1.43 million passenger automobiles in the United States, taking nearly 12.5 percent of the market.s Two years later, in FY 1980-1981, Japanese sales reached 1.9 million. This impres­ sive 32 percent sales gain took place while the total U.s. new car market fell over 23 percent to about 8.8 million sales and gave the Japanese 21.5 percent of that year's market. The Japanese were obviously well posi­ tioned, offering an attractive range of high-quality, fuel-efficient auto­ mobiles at competitive prices at a time when fuel prices and availability, interest rates, and a developing recession caused a dramatic shift in the traditional purchasing pattern of the U.S. consumer. The oil shocks of the 1970s, then, had two major effects on the do­ mestic automotive industry. First, they severely depressed the total mar­ ket for cars, through both their general economic effects and their specific effects on the price of gasoline. Second, they made possible sharp in­ creases in the share of the domestic market held by Japanese importers through their effects on the price of gasoline and the increased consumer awareness of the quality and reliability of Japanese vehicles.

102 FLYNN AND COLE

The sharp decrease in the price of oil since the middle of 1986 has not smoothly transferred sales back to the domestic producers and will not. They simply do not have the capacity to produce the old Hboulevard ride, gas-guzzling" cars of old, nor is it clear that the consumer now would shift back to them. In a sense, Detroit has done very well in meeting the chal­ lenges of improved fuel economy, and today's U.S. fleet no longer faces the competitive domination by the Japanese on this dimension that ex­ isted just a decade ago. To the extent that fuel economy is a less differenti­ ating factor now than it once was, there is less reason to expect changes in the price of fuel to result in changes in consumer preference. The drop in fuel prices is welcome in Detroit, to be sure, because of its direct and indi­ rect effects on the size of the automotive market; but it is not likely to af­ fect Detroit's share of sales substantially.

Market Restrictions. A variety of Magreements" have governed the import of Japanese vehicles since April 1981. These agreements called for the Japa­ nese to limit their exports to the United States and were founded on the ra­ tionale that Detroit needed both time and the money from recaptured sales to become competitive. The original agreement called for the Japanese to ex­ port no more than 1.68 million passenger cars to the United States, the aver­ age during Japanese fiscal years 1979 and 1980. The voluntary restraint agreement (or VRA) was kept in force for three years, then extended at a higher level (1.85 million vehicles) for a fourth year. In 1985 the U.S. govern­ ment elected not to ask for a fifth year of restraints, but the Japanese govern­ ment imposed a voluntary export restraint (VER) of its own, setting a limit of 2.3 million vehicles, and has kept this in force through 1988. Additional ar­ rangements limited the importation of four-wheel-drive vehicles and im­ posed a 25 percent tariff on light trucks. It is unclear how well the VRAs worked and who really benefited from them. Even the automotive industry, huge as it is, is subject to exter­ nal events and forces over which it has little control. The unexpected strengthening of the dollar against the yen and other currencies offset much of the domestic industry's improvement in manufacturing effi­ ciency. The weakening of the yen throughout 1986, if it continues to trade below 150 to the dollar, will provide Detroit some further breathing space. The VRA set numerical rather than market share limits, which un­ dercut its effectiveness for the first two years: in the falling U.S. market, the numerical limits resulted in an increased Japanese share and do not appear to have provided any sales protection for Detroit. The increased American sales, however, afforded the Japanese quite handsome profits, which were then available for investment in facilities and products. There have been clear and dramatic increases in the perceived quality of U.S.­ produced vehicles, but it is unclear how rapidly, if ever, that might con-

103 THE U.S. AUTOMOTIVE INDUSTRY vert to recaptured sales and customers. Some observers point to industry profits and bonuses for the past few years as evidence that the VRA was not in fact necessary. As with any major government action, it can be quite difficult to de­ velop a consensus regarding total costs and benefits and their distribu­ tion among relevant actors. Even the manufacturers are divided on their views of the relative costs and benefits of VRAs to them, with GM op­ posing and Ford and Chrysler supporting their continuation after the fourth year. Not surprisingly, these differences reflect the competitive positions and strategies of the manufacturers. Many argue that the con­ sumer has paid dearly through increased prices for the less-than­ spectacular post-1981 small car capital investments of the manufactur­ ers.9 The manufacturers' cost-containment efforts have put price pressures on suppliers that have denied suppliers the returns they re­ quire to support their own investments to become competitive. The in­ fluence of VRAs on automotive prices, Japanese profits, Japan's view of VRAs in relation to bilateral trade in other sectors, investment decisions of U.S. manufacturers, and the U.S. commitment to free trade have all been widely reviewed and analyzed. Whatever the wisdom of VRAs and VERs in any specific version, they did not buy the traditional domestic industry the time it required to become competitive with the Japanese, if being competitive means re­ ducing the Japanese market share to the 10 percent level, or, for that mat­ ter, being able to hold it at about 20 percent. Most observers believe that the Japanese share of the U.s. market has not peaked and that it could rel­ atively quickly expand to 30 percent or more if Japan had completely un­ restricted access to the U.s. market. The traditional U.S. industry has come a long way, but it still has quite some distance to go. Whatever the effective level of protection the VRAs afforded, any further protection will come from Japanese self-imposed restraint out of fear that some type of formal protection will be reimposed. The Japanese industry today faces a situation in which its internal needs for growth in a limited domestic market clash with the limits on ex­ porting to the United States, whether arranged VRAs or unilaterally self­ imposed out of realistic fears that unlimited exports will eventually result in policies that shut them out of the most open and largest market for their exports.

Manufacturing Cost. The general economic uncertainties, such as oil shocks or general levels of prosperity, and the political actions of nations, such as VRAs or VERs, are often so removed from the control of a manu­ facturer that they are best viewed as distractions. Such "distractions," of course, can make or break a particular manufacturer, and they must be

104 FLYNN AND COLE recognized as important parts of the business environment. But on bal­ ance, they should not be allowed to distract the manufacturer from the basic tasks of manufacturing and attending to the factors that are more or less under its control. The costs associated with manufacturing a product are more controllable by the manufacturer than are the availability of oil and government limits on imports. In the long run, as the effects of the less controllable factors even out or become neutralized by the manufac­ turer's responses, the basic efficiency of the manufacturer's operations is going to be the key to its survival. An elusive number-the manufacturing cost difference (MCD)­ has come to symbolize, for both the industry and the public, the com­ petitive disadvantage of the V.S. industry vis-a.-vis the Japanese. This is unfortunate because it oversimplifies a complex comparison. Any cal­ culation of the MCD depends on the vehicle (or mix of vehicles) com­ pared, adjustments for the level of vertical integration of the production process made by the analyst, the capacity utilization rate of the manu­ facturers or plant sites compared, and the level of technological content of the manufacturing process. It is not surprising that the publicly avail­ able reports show a wide range of specific estimates. Nevertheless, these reports support the argument that in the period 1978-1981 the V.5. assemblers faced a substantially higher cost of production than did their Japanese competitors, perhaps as much as $1,500 for a compact or subcompact vehicle. 10 The immediate significance of any sizable MCD is clear: if the Japa­ nese can manufacture a vehicle at considerably lower cost than we can, they can cover the transportation costs of delivering that vehicle to the U.S. market and still be in a position to compete on price. If their vehicles are higher quality and cost less, ultimately they will win in the market­ place. But the Japanese have not yet chosen to compete on price and in­ stead have converted their lower costs into a higher unit profit margin. Why, then, one might ask, is Detroit worried about this uncertain manu­ facturing cost disadvantage that has not been activated in the market? Should Detroit be concerned that Japanese companies make a higher re­ turn? The answer is that of course Detroit should be concerned. The MCD serves as a competitive weapon in ways other than actual price competi­ tion. The MCD is a major threat, and the Japanese control its exercise. Manufacturers should not be comfortable when a competitor can dictate the basis of competition in their industry, nor should they rely on a com­ petitor's good will or concern about political retaliation to restrain such a potent competitive resource. The MCD is competitively important be­ cause, if it is not exercised in a price-competitive fashion, it implies higher profits, which can fund a variety of actions, from investing in manufac­ turing facilities to underwriting a range of new product developments.

105 THE U.s. AUTOMOTIVE INDUSTRY

These investments can strengthen a manufacturer on a number of com­ petitive dimensions other than price, including quality and rapid re­ sponse to changing consumer tastes. The MCD, then, gives the Japanese not only a significant competitive edge, but also a range of options in its exploitation. These reports identify a variety of sources for this cost disadvantage, from taxes and exchange rates to wage rates and productivity. Different reports consider different factors, make different assumptions about the operation of these factors, and follow different rules in partitioning the cost difference among its many possible sources. All of these reports con­ sider two factors: the number of hours it takes to produce a vehicle, or Uunit labor productivity,' and the wage costs associated with those hours. Each report estimates that over 50 percent of the cost difference is ac­ counted for by this ulabor content.' The reports differ widely, however, in the extent to which they attribute the cost difference to each of these un­ derlying components of labor content. Productivity in the Japanese in­ dustry is reported to be anywhere from 20 percent to 240 percent higher than in the U.S. industry, and this differential is estimated to account for about 10 percent to 54 percent of the total cost difference. Wages in the Japanese industry are portrayed as constituting 45 percent to 60 percent of those of the U.s. industry, and this factor is estimated to account for 25 percent to 80 percent of the total cost difference. Many of the reports also consider material costs-the costs to the manufacturer of purchasing raw materials, parts, and components from its suppliers. The estimates here vary considerably and are subject to distortion, but the reviews suggest that this is an important component of the manufacturer's MCD. Mate­ rial costs include, of course, wage and productivity differentials of the suppliers of the two automotive industries. It is difficult to estimate exactly what these cost comparisons are today. The U.s. assemblers are functioning at much higher capacity utili­ zation rates, labor costs have been restrained through renegotiations and altered work rules, specific savings have been made from inventory prac­ tices and pressure on suppiiers, and break-even points have been sub­ stantially reduced. At the same time, the exchange rate for the yen has first weakened and then strengthened against the dollar, the ratio of re­ tired to active workers has increased, and the Japanese industry has not been standing still. The strengthening of the yen against the dollar in September 1985 provides a current example of the volatility and complexity of the MCD. One recent report by a respected industry analyst estimates that the MCD may have substantially increased, reaching $2,100 for a subcompact and as much as $3,100 for a midsize vehicle, a product line that the earlier studies generally suggested might face less of an MCD. The effects of

106 FLYNN AND COLE changes in the yen against the dollar, he noted, would be mitigated by the fact that so much of the Japanese offshore purchases of raw materials is in dollars. 11 The importance of this is clear: if the price of oil falls from $30 a barrel to $15, U.S. purchasers experience a 50 percent fall in the cost of oil. If at the same time the yen strengthens from 240 to 140 to the dollar, the Japanese purchaser, using dollars, experiences a 71 percent decrease in the cost of that oil. So the fluctuation of the yen against the dollar has quite different implications for Japanese manufacturing costs incurred at home (wages, for example), which will urise" in comparison with U.S. costs, and those incurred abroad (ore and coal from Australia, for exam­ ple), which may well fall. To further complicate the issue, major Japanese assemblers are heavily dependent upon export sales, and most of these are in currencies that have weakened considerably against the yen. So some of the cost reductions afforded by dollar-denominated purchases are offset by yen income reductions from those sales. A Ford spokesman has suggested that the MCD was reduced from $2,500 to $1,600 as the yen increased from 240 to 175 to the dollar, but it is unclear whether this estimate includes the indirect cost reductions the Japanese enjoy with the strengthening yen. 12 There is little question, though, that the strengthening of the yen has markedly reduced the Japanese manufacturing cost advantage. As the yen moves from 240 to 160 to the dollar, the dollar-denominated cost for the Japanese increases by 50 percent. That means that a $2,000 manufac­ turing cost advantage at 240 yen is eliminated at 160 yen if the base cost at 240 yen to the dollar was $4,000. If that base cost was $3,000, and the Japanese advantage $2,000, then at 160 yen to the dollar the Japanese ad­ vantage falls to $500. The strengthened yen gives U.s. manufacturers and suppliers a window of opportunity to pursue their own efforts to be­ come competitive, but if they simply rely on the continuation of the cur­ rent exchange rate to maintain their competitiveness, they will find themselves again facing a major manufacturing cost disadvantage: the Japanese automotive industry will find ways to reduce costs in response to the problems created by a strong yen. Moreover, it is entirely possible that the yen will again weaken against the dollar. Wage differentials are less of a long-range concern than productivity differentials. There is evidence that these reports underestimate the ac­ tual wage costs incurred by the Japanese industry;13 more important, the permanent employment system, the seniority-based wage system, and the aging labor force in Japan will combine to increase these costs for Japan. The United States will continue to face a disadvantage in labor rates, be it from Japan or from somewhere else, such as Korea, later; we will have to compensate for that disadvantage through efficient use of labor or ultimately lose high-wage jobs to offshore competition.

107 THE U.S. AUTOMOTIVE INDUSTRY

The compensation system in Japan, as distinct from the level of wages, probably provides the Japanese with a competitive edge. It is an impressive system that promotes loyalty, identification, and effort from all levels of employees. It is in many ways similar to the familiar U com- pany town" of our own earlier history, although it lacks the more exploit­ ative aspects of that system. Unfortunately, just as the permanent employment system reduces labor mobility, so too the compensation sys­ tem reduces economic choice. Neither system is a candidate for direct ex­ port to the United States, however well they function in Japan. 14 The productivity differentials are of major and enduring competitive significance and concern. First, the Japanese have evolved a highly effi­ cient technically and managerially sophisticated production process em­ bedded in a supportive social system within the factory. Because of the long-term, close relationships between the assemblers and their supplier companies, information and assistance in these areas have spread rather rapidly throughout the industry, whether involving research and devel­ opment on hard technologies, their implementation, or the development of social structures and technologies to support them. For a variety of rea­ sons, the relationships between U.s. assemblers and their suppliers­ even their own internal supplier divisions-have been considerably less close and frequently short term. Much more time is therefore required to identify and implement advanced manufacturing techniques and their supportive frameworks. Second, the U.S. assemblers face tremendous pressure to compensate for these productivity differences by sourcing from abroad, where factor prices are lower, even though the differences in both labor rates and productivity appear to be lower at the supplier level of the industry. The decision to purchase abroad might permanently alter the shape of the U.S. industry, as it denies the supplier industry the time and resources it requires to improve its own competitive position. Third, closing the productivity gap requires both time and resources, commodities that might be in scarce supply for the U.s. automotive in­ dustry if it were to face aggressive competition from the Japanese. It is im­ portant to remember that there is no evidence that the Japanese have elected to compete on the basis of price, although that is ultimately the significance and the threat of a substantial MCD. Since they have been able to sell all the vehicles that they have shipped here, they have not had any reason to compete on price. The profits they have earned here, though, have funded investment programs that contribute to the compet­ itive excellence of their products, making those profits unavailable to the traditional U.s. industry.

The Changing Nature of Competition. In the 1970s competition be­ tween the U.s. and Japanese industries was fairly clear and easy to under-

108 FLYNN AND COLE stand: the Japanese built vehicles in Japan and shipped them to the United States where they competed with the products of the traditional U.S. manufacturers-products that were overwhelmingly produced in the United States or Canada. To be sure, there were some blurred lines. Each of the American Big Three held an equity position in one or more Japanese assemblers, although not in Toyota, Nissan, or Honda, the major exporters of passenger cars to the American market. So, too, the Big Three sourced some of their parts and components from Japan (and other offshore locations). But by and large, the idea that these two national in­ dustries were in direct competition with each other had a clear and unam­ biguous referent. That sharp division has blurred with time and has already dramatically affected the structure of the traditional U.s. auto­ motive industry. GM markets a Chevrolet vehicle that is manufactured in an old GM facility in California but is managed by Toyota as a joint-venture partner. Nissan is building trucks and passenger cars in Tennessee, Honda manu­ factures cars in Ohio, and Mazda has started production in Michigan with much of the output targeted for Ford. A Chrysler-Mitsubishi joint venture will build cars in Illinois, Toyota is establishing its own facility in Kentucky, and Isuzu and Subaru are jointly building a plant in Indiana. All these plants will be in production by 1989. Numerous Japanese sup­ plier companies are opening manufacturing facilities in the United States, from Nippondenso in Michigan to Topy in Kentucky. Some are joint ventures with established American suppliers like Kelsey-Hayes; many of them, however, are independent. These transplants, as they are generally called, complicate the issue of competition between Japan and the United States. They typically have high levels of sourcing from Japan, especially for the high-value-added components like engines, transmissions, and transaxles. Although it is highly unlikely that they will ever approximate the traditional role of manufacturer or supplier as it once existed here, because they are located here and have adapted to a variety of local circumstances they are differ­ ent from their Japanese roots. The strengthening of the yen from 240 to 160 to the dollar decreases investment costs for the Japanese in the United States by 33 percent, and, as would be expected, the planned es­ tablishment of U.s. production facilities by Japanese automotive suppli­ ers has increased markedly during that time. Somewhat balancing that development are the announced increases in targeted sourcing from tra­ ditional domestic suppliers by transplant assemblers. These transplants are an important competitive threat to the tradi­ tional industry. They will compete directly with U.S. manufacturers for sales and may well derive the benefits, but not the costs, that the market associates with imported Japanese vehicles. The Japanese suppliers

109 THE U.S. AUTOMOTIVE INDUSTRY drawn here by Japanese nameplate manufacturers not only are a direct threat to the traditional suppliers' access to the transplant manufacturers but also will undoubtedly compete for their business at traditional do­ mestic manufacturers. To the extent that these transplants eventually re­ place sales that would otherwise have been lost to imports, they may play a critical role in maintaining automotive production in the United States. Moreover, to the extent that they provide a path for transferring some of the competitively successful practices of the Japanese industry to tradi­ tional U.S. suppliers, they may constitute an important competitive re­ source for those suppliers. The forms of cooperation developing between companies in the two national industries, from joint ventures to vehicle sourcing to the estab­ lishment of Japanese production in the United States, are profound. It is a safe assumption that a description of the domestic industry ten years from now will be much more complex, and the meaning of competing with the Japanese will probably be much less clear and sharp.

The Current Competitive Task

The U.S. automotive industry experienced a lengthy and severe eco­ nomic downturn from late 1979 through 1982. Sales, employment, and the market share held by domestically produced vehicles were all dra­ matically lower than pre-1979 levels. In 1986 the industry, at least the Big Three manufacturers, looked healthy on some of these measures. The market rebounded to above its 1978 level, although imports currently ac­ count for approximately 28 percent of new vehicle sales, and both Yugo­ slavia and Korea have begun marketing vehicles here. The profits of the Big Three have been quite strong for three years now, reflecting dramatic decreases in their break-even points. Employment has rebounded from its 1982 low point. Some argue that the industry is in good shape, that the competitive situation with Japan has stabilized, and that the domestic in­ dustry, like its vehicles, has been downsized and made more efficient. Others are concerned that the impressive strides the industry has made are insufficient and that turbulent times are still the order of the day for the traditional domestic industry. There is no question, in our view, that the domestic industry still faces a major competitive challenge from the Japanese automotive indus­ try. The traditional industry needs to make major improvements in pro­ ductivity and to continue improving its quality. To accomplish these goals it must make major changes in the ways that the manufacturers and sup­ pliers do business with each other and in the ways that human resources are deployed. These are not easy tasks, and carrying them out will incur a

110 FLYNN AND COLE variety of costs. But the alternative is a further erosion of market share and the movement of more economic activity offshore.

Productivity and Employment. The task of restoring competitiveness requires increased productivity in the manufacturing and support func­ tions that pervade the complex work of producing an automobile. At a given volume for a standard unit, increased productivity will inevitably cause the elimination of jobs. The pressures on the industry to reduce costs are enormous, and its truly impressive efforts to date have not en­ sured its competitiveness with the Japanese. Reorganization of the manu­ facturers, closings of older production facilities, improvements in design for manufacturing, introduction of new technologies for both production and support activities, and the offshore sourcing of vehicles and compo­ nents all point to substantial reductions in the automotive work force. The automotive industry often pays penalties for its central role in the manufacturing economy. The economic downturn of the early 1980s hit the industry hard in terms of employment, and the simultaneous in­ crease in Japanese market share further lowered production and thus em­ ployment. Hourly jobs at the Big Three fell from 736,000 in 1978 to 455,000 in 1982. The recovery of the market since 1982 has restored some 95,000 hourly jobs at the Big Three, raising their hourly employ­ ment to about 550,000 in 1985. For 1985 hourly employment was just under 75 percent, and production was back to nearly 88 percent, but the market was at just over 101 percent of the 1978 levels. The Big Three pro­ vided 26 percent fewer hourly jobs in 1985 than they would have if all conditions from 1978 had held (101 percent - 75 percent); half of that loss is due to lower production from lost market share and half to the in­ creased productivity of the Big Three.1s A variety of information suggests that job loss in the industry will have to be on the order of a further 25-30 percent over the next five years or so for the industry to begin to approach cost-competitiveness with the Japanese. 16 That reduction in jobs would constitute a total loss of about 46 percent of 1978 hourly jobs by 1990. Unfortunately, even recaptured market share cannot come close to offsetting that level of loss, although further share loss would certainly add to it. Moreover, if those jobs are merely transferred to the supplier level, even at lower labor costs, then the industry will have failed in its efforts to become competitive. In that case, the looming threat represented by the manu­ facturing cost advantage of the Japanese will continue. Their exploita­ tion of it through price competition would create major problems for the traditional domestic industry. Further job reductions are likely to result in the disproportionate loss of salaried jobs, to some extent reflecting the more rapid removal of

111 THE U.s. AUTOMOTIVE INDUSTRY hourly jobs that has already occurred; but it also results from the techno­ logical and organizational innovations that increase the efficiency of tasks traditionally falling to professional, technical, and clerical workers. The computerization of many routine functions such as scheduling, drafting, and billing will drastically lower the need for certain categories of salaried employees. Organizational changes in the management of the companies, from participative management to employee involvement, will lower the need for many jobs that routine supervision and monitor­ ing have required. The likely dislocation of these numbers of workers, and perhaps es­ pecially the high number of white-collar workers, raises national issues of the allocation of these social costs. Current programs of unemployment insurance are almost solely income maintenance, and while recent U/WIl­ Big Three contracts begin to address issues of retraining, these will not cover the white-collar work force. Many white-collar jobs in the automo­ tive industry are very narrow and repetitive with the annual production run. These jobs have little market value, and those who hold them are quite a few years beyond their general training. Some debate on this issue is already emerging, but it is one that is probably going to become more rather than less urgent over the next few yearsY It is inevitable that the automotive industry will provide less em­ ployment in the future than it has in the past. Total market growth will not keep abreast of the loss of jobs required for the industry's competi­ tiveness. The surest way to minimize this job loss, then, is to increase the market share of the traditional manufacturers' U.S.-built vehicles with high levels of domestic part and component sourcing. Job losses tied to productivity improvements protect remaining jobs and can secure the extra jobs associated with competitive success; jobs lost to a decline in market share and offshore sourcing are simply lost.

Automotive Suppliers. The companies that constitute the traditional supplier base to the automotive industry face a number of risks over the next few years. First, observers agree that fewer companies will directly supply the manufacturers as the manufacturers rationalize and reduce their transaction costs. The typical domestic assembly plant, for example, has about 800 suppliers, but that is likely to be reduced to 300 or so in the next few years. A significant change in the role of suppliers in the produc­ tion of automobiles will typically provide them with lower levels of profit. Second, the total number of suppliers, both direct and indirect, will shrink as the industry adopts the tiered structure that exists in Japan. Direct suppliers will themselves rationalize and reduce their own sup­ plier base. Suppliers that hope to be direct suppliers to the manufacturers will find that their level of responsibility for design, engineering, and the

112 FLYNN AND COLE coordination of modules (higher-order assembled components and sub­ systems) will increase, while indirect suppliers will find themselves in­ creasingly competing on the basis of manufacturing excellence. Third, the domestic automotive industry in the United States already differs dramatically from 1978. Two Japanese nameplates are produced here and accounted for 2.5 percent of the 1986 market; one began pro­ duction in 1987, and three more will soon come on stream. Traditional suppliers must gain access to this different domestic business, because it is an opportunity for offshore suppliers to enter domestic production. Many major Japanese suppliers are setting up production facilities here, and it would not be surprising if the Koreans soon follow, especially in light of Hyundai's decision to produce in Canada. Fourth, the Big Three have increased their levels of offshore sourcing of parts, components, and raw materials, a trend that is likely to continue. It is difficult to overestimate the significance of the competition from vehicle and parts imports, as well as from nontraditional domestic manu­ facturers and suppliers. These companies are, more often than not, proven world-class competitors, and they appear to have succeeded in transplanting much of their competitive advantage to their operations in North America. The industry has generally recognized that a major source of Japan's competitive advantage has been its superb execution of actual manufac­ turing processes coupled with a systems view of manufacturing that en­ compasses functions such as design and purchasing that U.S. manufac­ turers have traditionally viewed as distinct activities within the seg­ mented manufacturing organization. There is also no question that the Japanese manufacturers are more efficient and more effective in coordinating their own efforts and those of their suppliers than are the Big Three. U.s. manufacturers have relied on practices such as dual sourcing, repetitive evaluations of the make-buy decision, and dual engineering of supplier-produced parts and compo­ nents. These practices increase the transactions costs, since they maintain capacity to cover a variety of just-in-case scenarios. Perhaps most often, these practices enable the manufacturers to obtain a low piece price, without regard to system efficiency. To compete effectively with Japan, the U.S. industry will have to continue to monitor and improve its own performance in addition to that of its constituent companies.

Product Quality. Traditional North American manufacturers and suppli­ ers must overcome their competitive disadvantage on a number of di­ mensions that they have traditionally viewed as incompatible. One of the lessons the U.s. industry is still learning from the Japanese, for example, is that quality can reduce rather than increase costs. The industry ap-

113 THE U.S. AUTOMOTIVE INDUSTRY proach to improving quality relied heavily on inspection to detect defects and then on rework and repair to correct those defects. The Japanese, by emphasizing process capability and worker self-inspection, have reaped enormous savings in lowered scrap and rework costs, as well as higher labor productivity through lower inspection requirements. The simple point that it is cheaper to do it right the first time than to repair, rework, and even scrap products a high percentage of the time was overwhelmed in the United States by the production imperative: keep cranking the iron out the door. The U.S. industry has made a fundamental shift in its thinking over the past few years. The shift was necessary for its survival, but is no less impressive for that. Seemingly simple points such as the advantages of defect prevention over defect detection for improving quality are neither simple nor obvious when they are small parts of an overall production philosophy, a philosophy that was enormously successful under the competitive conditions of the industry before the 1970s. Beliefs do not change rapidly or easily, and the very complexity of the industry only in­ creases the time required for general acceptance of new ways of defining problems and seeking solutions. Data from 245 North American suppliers, collected by the Joint U.S.-Japan Automotive Study in late 1983 and replicated on four sam­ ples since then, suggest that suppliers recognize the complexity of their task. They report that quality and delivery performance now outweigh short-term price as criteria in the purchasing decisions of the manufac­ turers and that manufacturing and engineering competence soon will. Short-term price has not lessened in importance, however, nor is it ex­ pected to do so in the future; other dimensions are simply becoming more important than they were in the past, creating an additional challenge for suppliers. Improved quality in parts shipped too often reflects a culling of parts produced rather than the reductions in scrap and rework required for real cost reductions. IS Although there is little question that the quality of the traditional do­ mestic industry has improved substantially, current comparisons with the Japanese are difficult to make because they depend on the exact di­ mensions of quality that are compared. A 1983 survey of technical ex­ perts in the traditional industry asked for comparisons between the two industries on thirteen dimensions of vehicle quality.I9 These panelists rated the traditional industry ahead on seven dimensions and behind on six, although the extent of the differences between the industries ranged from quite small to extreme. Unfortunately for the traditional industry, some of the areas in which it attains superior quality may be less impor­ tant to consumers than some of the areas that Japan executes well. The ar­ eas of clear advantage for the traditional U.S. industry include basic

114 FLYNN AND COLE structural integrity of the body and chassis, safety, corrosion resistance, and ride and comfort. The Japanese are rated higher on fuel economy, drivability, fit and finish, and total car reliability. Three of the four dimen­ sions of quality that favor the domestic industry may be less visible to the consumer, while the four dimensions of Japanese advantage are all fairly accessible to the prospective purchaser. It is worth noting that the major­ ity of the survey respondents believed the two industries will rank the same on ten of these dimensions by 1990, and over one-third believe that will be the case for the remaining three dimensions. The suggestion is that quality, broadly defined, will become competitively neutral over the next few years. While these panelists are in a position to influence the outcomes they expect and that makes their views particularly important, that will happen only if both industries work hard on these component dimensions of quality. The Japanese are a moving target and appear to maintain a substan­ tial edge on some critical dimensions of quality. Ninety-four percent of the technical experts rated the fit and finish of the Japanese vehicles higher. Twelve domestic nameplates averaged 87 percent, and the seven Japanese imports averaged 114 percent of the industry average in a recent survey of customer satisfaction, perhaps the most critical measure of quality for the marketplace.20 Other information, some of it proprietary, shows that the U.S. industry has improved its fit-and-finish quality, relia­ bility, and warranty performance over the past five years or so, but that the Japanese still appear to hold a lead in these areas. It is probably fair to say that in the downturn of the business cycle in 1980-1982 the automotive industry began making serious efforts to re­ dress fundamental industry problems, rather than just taking temporary measures and waiting for the upturn of the business cycle to carry them along. The competitive strength of the Japanese vehicle manufacturers played a large role in these reactions, leading the U.s. manufacturers to undertake major efforts to reduce cost, improve quality, and achieve pro­ ductivity gains. By all reports, the industry is continuing these efforts and may well increase them now that the voluntary restraint agreement with Japan has ended and the self-imposed voluntary export restraint by the Japanese appears to be tenuous.

Manufacturer-Supplier Relationships. The surveys of suppliers dis­ cussed above reveal some of the changes taking place in relations be­ tween the manufacturers and their suppliers. The effective coordination of suppliers and manufacturers contributes both to the Japanese manu­ facturing cost advantage and to their high quality levels. The traditional North American manufacturers have recognized this and are actively pursuing changes in their traditional relationships with their suppliers.

115 FIGURE 3-1 CHANGING PRACTICES OF ORIGINAL EQUIPMENT MANUFACTURERS WITH A MODERATE RATE OF IMPLEMENTATION Rate of implementation 4.0

4 = Rapid rate 3 = Medium rate 3.0 2.8 2 = Slow rate 2.7 2.7 1 = None

2.0

1.0 ~~ ______~~ ______~~~~~-L ______~ Reliance on Quality self Earlier supplier certification supplier engineering involvement SOURCE: Michael S. Flynn, HSupplier Perceptions of Customer Quality Expecta­ tionsH (Paper presented at the annual meeting of the American Society for Metals, Chicago, Illinois, November 1985).

These changes include the reallocation and rationalization of tasks be­ tween the manufacturers and their suppliers and altered business prac­ tices, as well as the altered sourcing criteria already discussed. Supplier views about these changes are important for two reasons: first, suppliers can observe what is actually happening; second, while there may be rea­ son to be cautious about the accuracy of supplier perceptions, they can re­ veal the suppliers' own premises for action. Suppliers were asked their views of a number of changes in the way the manufacturers do business with them. The practices included repre­ sent programs, intentions, and wish lists of both manufacturers and sup­ pliers. Virtually all of the changes reflect aspects of the manufacturer­ supplier relationship as it is reported to exist in Japan. The results from the March 1985 sample are presented in figures 3-1 and 3-2.

116 FIGURE 3-2 CHANGING PRACTICES OF ORIGINAL EQUIPMENT MANUFACTURERS WITH A SLOW RATE OF IMPLEMENTATION Rate of implementation 4.0 4 = Rapid rate 3 = Medium rate 2 = Slow rate 1 = None

3.0

2.4 2.4 2.3 2.3

2.0

J-I-T Multiyear Sole Design Order Bidfree contracts sourcing standard­ release contract ization stability SOURCE: Same as source for figure 3-1.

Suppliers report variable rates of implementation for these differ­ ent manufacturers' practices, and none are reported to be moving at a rapid rate. The three slowest moving practices, however, are moving at an accelerating rate: each averaged at least half a scale point higher (on a four-point scale) in early 1985 than it did in late 1983. Earlier supplier involvement in product and process design also increased by this amount. Since all of the efforts are connected, it is 'not surprising that they might almost lurch along in this fashion. The implication for sup­ pliers, of course, is that they must respond across a broad range of changing demands. The two most rapidly moving dimensions are technology and qual­ ity, both of which raise a fundamental issue for suppliers: are the manu­ facturers trying to rationalize the allocation of tasks, or are they simply shifting a particular cost burden to suppliers? The same issue arises in the case of just-in-time (JIT) production, a minimal inventory manufacturing

117 THE U.S. AUTOMOTIVE INDUSTRY

system. Many suppliers view it as a shift of inventory costs from the man­ ufacturer to the supplier, rather than a stripping of inventory from the en­ tire system. Finally, the practices that bear most directly on the continuous coor­ dination of supplier and manufacturer efforts have very uneven rates of implementation. JIT and order-release stability are half a scale point apart, for example (though they were a full scale point apart in late 1983). These results are not disheartening. An industry as large and com­ plex as the automotive industry is expected to move slowly and unevenly to change traditional practices. The important point is that it is moving, and data collected at different times suggest that the rate of change is ac­ celerating, rather than merely reflecting alternating program emphasis by the manufacturers or a return to traditional patterns with the upswing in the business cycle. The automotive industry faces a complex challenge, and time is a scarce resource. It must improve its productivity and certain areas of quality that are important to consumers, and those improvements must be large indeed. Because manufacturers have habitually thought of pro­ ductivity and quality-perhaps especially quality on these consumer­ visible dimensions-as negatively related they must change some very basic traditional patterns of thinking. The industry has identified paths to improved productivity and quality that are highly complex, will take time, and will incur some major human costs. The critical questions are, of course, how these efforts will be coordinated and whether they hold the promise of gains sufficient to restore the industry to competitive par­ ity rapidly enough to be of use. Those questions are the focus of the bal­ ance of this chapter.

The Role of Technology

The organization of this discussion respects the traditional divisions among product, process, and materials technologies. These divisions are observed somewhat reluctantly, since the treatment of technology in rigid categories can obscure the point that innovations in anyone of these three technologies may be the source of developments in either of the other two. New materials may allow the development of new or altered products that require new processes; so too, new processes may spur the development of new products and materials. There are real world as well as analytic consequences to the ways that we think about problems. The distinction between product and process technologies, for example, can reinforce a conceptual and then an actual separation of the design and manufacturing functions. That separation may itself be a source of some of the competitive disadvantages that the traditional American automo-

118 FLYNN AND COLE tive industry faces. The integration of these two functions is a vital part of the industry's agenda. At certain points, then, the distinctions among these technologies will blur. The competitive task of the traditional domestic automotive industry is serious and complex, in both its sources and its possible remedies. This chapter focuses on the potential role of technology in the automotive in­ dustry and whether its response to the competitive challenge can be suc­ cessful. Much of the current competitive edge of the Japanese is rooted in their superb execution of the manufacturing process. Differences in the effective use of process technology are competitively significant now, and the technological strategies of the U.S. industry suggest that they will continue to be important over the next decade. Experts disagree whether there are significant differences in the areas of product and material tech­ nologies between the Japanese and the U.S. industries, and, if so, what they are. On balance, these technologies appear to be competitively more neutral, and neither industry has a clear competitive edge over the other at this time. Differences between the industries in product and material technologies that are competitively important may well emerge in the next few years, but what differences become important will depend on a wide range of market factors, largely driven by forces outside the indus­ try. The Japanese edge in the product technology of fuel efficiency of the early 1970s was competitively neutral in the U.S. market-until the oil embargo. For these reasons, the bulk of this discussion focuses on issues of process technology.

Product Technology. Product technology is an especially difficult area to forecast, since it reflects consumer preferences, manufacturer mar­ keting strategies, and technological developments, often including dra­ matic breakthroughs rather than incremental change. At this time, however, some broad generalizations can be made about likely develop­ ments in the light duty motor vehicle. Clearly, the manufacturers that successfully develop these product technologies for the market early will reap a competitive advantage, but it is virtually impossible to pre­ dict which manufacturers will develop which products most rapidly.21 We discuss some broad developments likely in three key product areas of the car: the power train, the chassis, and the use of electronics throughout the vehicle.

Power train. The basic engine will remain the familiar reciprocating, gasoline-fueled, spark-ignited internal combustion power plant. Front­ wheel drive will become even more dominant, although there will be continued demand for rear-wheel-drive vehicles for applications that re­ quire high ratios of power to weight, such as station wagons. Transmis-

119 THE U.S. AUTOMOTIVE INDUSTRY sions will increasingly be embodied in transaxles. Continued broad de­ velopment of already emerging trends allows myriad possibilities for new products, especially in the component and ancillary parts of the basic power train. At this point the most interesting, and perhaps likely, major change in the transmission is the development of the continuously variable transmission (CVT). This type of transmission allows an almost limitless selection of speed ratios between the axle and the engine, rather than the preset three-to-four ratio typically available today. Combined with elec­ tronic controls, the CVT permits optimized engine performance under all conditions. The primary block to the development of this transmission has been the lack of a durable segmented belt, although it appears that a major U.S. supplier may have succeeded in developing such a belt. Most of the currently available engines for U.s. cars are reasonably old designs, and many will probably be redesigned in the next five years or so. Most current designs are equipped with advanced electronic con­ trols. Two significant changes will occur, although to what degree is not completely clear. First, the engines will be lighter in weight, most proba­ bly through the increased use of aluminum. Second, most of the internal components will be redesigned and manufactured with far greater preci­ sion than is the case in today's engines.

Chassis. The past decade has seen the transition from a separate body and frame design, with a body attached to a chassis frame, to an in­ tegrated or unibody design. This major transition is still under way, but already new developments are on the horizon. Perhaps the Pontiac Fiero, in spite of its poor market performance, offers the best current glimpse of the possibilities. The Fiero has a bird-cage or space-frame design in that the chassis itself is a drivable unit, and body panels are simply attached to it, much as the walls of a skyscraper are hung on the frame. The primary advantage of this design is that it permits many different vehicle styles to be inexpensively produced on the same basic platform: some economies of scale can be retained while producing low-volume niche vehicles, or frequent major body redesigns can be introduced over the life of the vehi­ cle. This attractive possibility is further enhanced when the body panels are plastic, as is the case with the Fiero. This development is an example of the importance of recognizing the interconnections among process, product, and materials technology. Braking and suspension systems are quite likely to change with the introduction of electronic control systems. Antilock braking systems and advanced suspensions that adjust to road conditions should become fre­ quent options if not standard equipment within the next few years. The body-whether attached to the chassis or an integrated part of 120 FLYNN AND COLE the chassis-will continue to be more aerodynamic with continued low­ ering of the drag coefficient. The metal content of the body is also likely to decrease as plastic and composite technology more fully develops.

Electronics. The foregoing sections suggest the growing use of elec­ tronic control in light duty vehicles in both engine and chassis subsys­ tems. The potential effects of electronics across the total vehicle, however, are so significant that they merit separate mention. The full development of automotive electronics will probably include signifi­ cant application of electronic components such as sensors, computers, actuators, and other solid state-based componentry. Multiplexing and advanced information displays will be broadly used. The present-day advances are significant, but the future may lead to an explosion in the role of automotive electronics. The U.S. automotive industry forecast, Delphi IV, predicts that electronics will constitute nearly 20 percent of the cost of the average vehicle by 1995, despite the presumption that the unit cost of electronic components will decrease and that there will be significant component integration. Practically every function that has been or is controlled by mechani­ calor hydraulic means will probably be brought under electronic control. The complex and expensive wiring harness in vehicles is likely to be al­ tered by the expanded use of multiplexing, particularly in areas of the ve­ hicle where packaging is a significant problem such as the steering column and the driver side door. Multiplexing essentially permits control signals to be passed over either electrical or fiber-optic channels to a con­ trol unit at or near the function site (headlight, stoplight, window motor, radio control)-for example, a signal to a taillight controller will turn it on or off and, when on, will draw current from a common bus wire that is the source of electric power. Consequently, rather than a maze of fifty wires or more leading into the driver side door, a simplified harness con­ sisting of a small number of wires is possible. We have already seen some application of this technology, but it will expand dramatically in the years ahead. In most areas of the vehicle the role of electronics will not be appar­ ent to the owner, who will focus on the function or feature provided. Thus, antilock brakes, active suspensions, electronic road maps, and so on will provide enhanced overall vehicle function, but the role of elec­ tronics will be almost invisible. A major growth area for electronics is in vehicle diagnostic systems for the electrical, mechanical, and hydraulic-based components. In addi­ tion this technology will permit forecasting of pending failure or mainte­ nance needs. Reasonably advanced diagnostic techniques are already used extensively in the engine, transmission, and climate control system.

121 THE U.S. AUTOMOTIVE INDUSTRY

During the past few years we have seen significant expansion of en­ tertainment systems and cellular telephones in passenger vehicles. These entertainment and business functions are likely to expand further in the next few years.

Materials Technology. Materials and their related processing technolo­ gies set important limits on vehicle weight, reliability, and efficiency. The potential effects of new material on the automobile are enormous. This brief section considers only two types of materials and their possible fu­ ture uses. One of these materials-plastics (and polymer-based composites)-is already a major competitor of steel, an industry covered in chapter 4. The other-ceramics-may well become quite important in another decade or so, as indicated in chapter 6.

Plastics. We often think of plastic as a simple, singular material. Plas­ tics, however, comprise an incredibly complex technology and variety of materials that might be broadly classified as either thermoset or thermo­ plastic materials. These in turn can be subdivided into a multitude of dif­ ferent materials with many properties and potential applications in automotive vehicles. This technology is still at an early stage of develop­ ment, and the prospects for future applications in automotive vehicles may be limited only by the imagination and creative skills of the engineer and designer. It it critical, however, as we look at future materials not to disregard traditional materials such as steel, which will remain the primary vehicle construction material for many years. And, in fact, with advances in steel technology (quality control, processing technology, and so on) the chal­ lenge plastics face in replacing steel are more formidable than originally thought. Plastics have had a significant role in the automobile for some time. They have been used for the interior trim, seat covers, many of the Hrub­ berH hoses under the hood, tires, and even the body of the Chevrolet Cor­ vette since its introduction. They are not new, although new variants of plastics and new uses for them have expanded dramatically since the mid-1970s, when concern for fuel economy led to an emphasis on downsizing and lightening the vehicle. Weight reduction beyond simply reducing its size called for extensive material substitution. Between 1977 and 1985, the average dry weight of the American passenger car was re­ duced by almost 25 percent, and the percentage of iron and steel in that new vehicle's weight fell 8 percent. Plastics increased from 4 percent of vehicle weight in 1977 to 9 percent in 1985. Perhaps the most dramatic near-term development in plastics is the expansion of its use in body panels. Vehicle plans are already largely in

122 FLYNN AND COLE place for 1992, and steel body panels dominate those plans. Beyond 1992, however, the use of plastic panels may well increase substantially. Five basic advantages are claimed for plastics over steel. Plastics are lighter in weight, ding resistant, more resistant to corrosion, potentially less costly to fabricate and assemble, and more flexible in shape, thereby offering increased styling options and reduced numbers of parts. The cost advantage in fabrication and assembly, much of which comes from the cost of tooling, is thought to be particularly significant at low volumes. These advantages will be especially important if more models and more frequent model changes become the rule. Among the processing problems to be addressed before plastics be­ come fully competitive with steel are the length of time required for the material to set in the mold and the problems in the surface finish and painting of plastics. Neither of these appears insurmountable, however. The use of plastics in areas of the vehicle other than panels should also increase. Plastic composite springs offer significant weight savings, and plastics give designers the option of more contoured surfaces, an im­ portant asset for seating and interior trim appointments. Optimistic forecasts about the use of plastics, however, are often based on production costs for volumes that reflect best practice for plas­ tics but current rather than best practice for steel. The Japanese automo­ tive industry has continued to use steel at volumes below the economical point for switching to plastics, at least in the view of u.s. industry. The tooling cost for steel stamping can be much lower than current U.S. prac­ tice would suggest, making the tooling cost for stampings competitive with plastics at lower volumes than previously believed. In fact, the tech­ nological capacities and constraints of the two materials are far less deter­ minant of the proper selection of plastic or steel for a particular application than one might expect. Here again, issues of work-force train­ ing and deployment, as well as organizational coordination among tool producers, raw material suppliers, and manufacturers, playa much larger role in the current cost structure of manufacturing with steel than has generally been recognized. The cost gap between the technology of steel fabrication and assembly as applied and the technology as it could be im­ plemented in many instances is as great as the cost gap between current steel technology implementation and plastic technology in theory.22

Ceramics. Chapter 6 discusses the potential developments of ceram­ ics in automotive applications, highlighting its major potential advan­ tages. The major application of ceramics is likely to be in the engine, as the development of this material technology may allow the commercial exploitation of a product technology-the gas turbine engine. The higher operating temperature required to improve the fuel efficiency of gas tur-

123 THE U.S. AUTOMOTIVE INDUSTRY bine engines has prevented their commercial development to this point, and the high temperature capabilities of ceramics promise to remove this barrier. Such ceramic gas turbine engines would increase fuel efficiency, reduce exhaust emissions, and eliminate the complex cooling systems re­ quired for today's engines. Furthermore, the use of ceramics may allevi­ ate high temperatures and problems of wear and friction in conventional engines. Representatives of the automotive industry who participated in Delphi III were asked which ceramic engine components they believe will be commercially developed first and when that will happen.23 They see pistons or piston parts (25 percent), cylinder head components (21 per­ cent), and combustion chamber coating (12 percent) as the engine parts most likely to incorporate ceramics first. Valves (8 percent), exhaust man­ ifold components (7 percent), and turbochargers (4 percent) were the only other parts to receive more than scattered mention. When any of these parts will be commercially developed elicited widely varying esti­ mates from the panel, ranging from the mid-1980s to the mid-1990s. The low consensus among these experts on what parts will be developed first and when that development will occur is not surprising. Accurately fore­ casting further development of technology or market may not be an in­ herently easier task than forecasting a first-time development, but time will probably create a stronger consensus. Isuzu and Toyota have already introduced ceramic components for their diesel engines. (We suspect that the Delphi forecast reflects the na­ ture of the American market and that the panelists focused on gasoline rather than diesel engines in responding to the question. Very limited use of diesels is forecast in the U.S. light vehicle market.) Nissan has intro­ duced turbochargers with ceramic parts in a low-volume sports model re­ stricted to the Japanese market, and other manufacturers are slated to produce a limited number of such vehicles in the years ahead.

Process Technologies. Because of the complexity of the competitive challenge and the multidimensional nature of the strategic responses it requires, this discussion relies on a broad rather than a narrow conceptu­ alization of process technology. Specifically, the discussion of process technology here goes beyond the hard technologies that are incorporated into the machines that manufacture a product to include the soft technol­ ogies that are embodied in the routine, patterned human activities that surround, support, and manage the machine activity. We believe that the competitive problems of the traditional industry are rooted less in the hard technologies it employs than in the soft technologies that constitute the environment for exploiting those hard technologies.

124 FLYNN AND COLE

Soft technologies. Numerous soft technologies are critically important for understanding the sources of and possible responses to the competi­ tive challenge of the automotive industry. Soft technologies provide the immediate context for the work accomplished in a particular production process and determine the effective utilization of the hard technologies of that process. Soft technologies may have even broader implications for the lower U.S. productivity and quality than the hard technologies em­ bodied in a particular machine or process. Statistical process control (SPC) and various material scheduling philosophies and procedures such as just-in-time OIT) and material requirements planning (MRP) are exam­ ples of soft technologies. There are two other reasons for adopting a broader conceptualiza­ tion of process technology and thus for covering material that at first glance might seem more appropriate to discussions of management be­ havior or style. 24 First, a focus on the narrow, traditional hard technolo­ gies in isolation risks underestimating their importance for competitive revival. Second, the narrow conceptualization of hard technology must radically expand to incorporate important facets of the emerging, computer-based technologies. The traditional, limited focus on the hard technologies of the manu­ facturing process is too narrow for understanding the role of technology, either in our current competitive position or as a resource for improving that position. A simple count of robots in use in the Japanese and Ameri­ can industry, while important, says little about the comparative produc­ tivity of the industries. Even at the level of specific processes, such comparisons can be misleading. Chrysler, for example, uses robots in en­ gine manufacturing operations that Toyota accomplishes without robots. Yet Toyota has nearly six times the unit labor productivity for that proc­ ess. 25 That difference does not mean that Chrysler is not more productive than it was before it introduced robots: it is. But it does suggest that the simple counting of robots and the logical inferences from that count would be misleading. Nor does this mean that there are no hard technol­ ogy solutions available for addressing many productivity problems. There are, and considerable attention will be devoted to them. The indus­ try must, however, exploit such technologies more effectively than it has in the past. Because the soft technologies are an important determinant of the actual returns a manufacturer receives from hard technologies, they must be included in any discussion of the effects of hard technologies in manufacturing competition. The second reason that coverage of hard technology alone would be misleading is that it increasingly presumes too limited a view of technol­ ogy. Computers are causing a technological revolution, an important part of which is a blurring of the traditional distinctions among areas of activ-

125 THE U.S. AUTOMOTIVE INDUSTRY ity. The machines of the production process represent traditional process technology, and the scheduling of material for those machines represents traditional management. Yet a number of computerized MRP scheduling packages are available, and many manufacturing facilities have already implemented them. The data collection, interpretation, and adjustment activities that constitute the application of SPC can be implemented through machine vision, computer analysis packages, and computer nu­ merically controlled (CNC) machine tools. So these soft technologies can be implemented through, or enhanced by, hard technologies as they be­ come incorporated into computer operations. Any discussion of technol­ ogy that firmly respects the traditional boundaries of technology and management issues risks being dated very rapidly. We generally agree with the analysis of the importance of technol­ ogy and management systems offered by the National Academy of Engi­ neering and the National Research Council in 1982: that the levels of process and product technology in the two industries are comparable and that the differences in their productivity reside in the quality of their re­ sources and their management systems. 26 But much of what they de­ scribe as management practice-just-in-time, for example-we would prefer to call soft technology. And that means that we depart from the in­ terpretation that technology has a minor role in the competitive fortunes of the two industries. The levels of hard process technology are compara­ ble; the levels of soft process technology clearly are not.

Linking technologies. Beyond the focused process technology-hard or soft-of a particular manufacturing operation, important linking technologies provide the integration of the production process across different stages or locations. These technologies are of major impor­ tance for an industry that involves such complex production and that al­ locates that production activity to different sites and multiple compa­ nies. These linking technologies also have their hard and soft compo­ nents, and again both are important in understanding the overall effectiveness of the hard technologies. The discussion focuses on the evolution of both hard and soft linking technologies, emphasizing a belief that many of the competitive prob­ lems of the automotive industry are caused by the ways it coordinates the activities required to produce a car or light truck. These activities are allo­ cated across the industry, necessitating exchanges between manufactur­ ers' divisions and plants, as well as between those divisions and plants and their suppliers along the whole chain of value added in the vehicle. The ways the activities are allocated and the transactions these entail are arenas for enormous cost reductions by the traditional industry. Here,

126 FLYNN AND COLE too, hard technologies are emerging that can significantly benefit the in­ dustry if the supporting soft technologies are effectively implemented. Types of technologies. Process technology, then, can be categorized along two dimensions: hard versus soft and focused versus linking. These distinctions are not rigid, and observers are likely to disagree about the placement of specific technologies. The distinctions are not fixed, be­ cause over time some of the soft technologies will more easily become in­ corporated into traditional treatments of hard technology. They are somewhat arbitrary, since whether a technology is coded as linking or fo­ cused in large measure depends on how broadly one defines a production operation. The purpose of introducing these distinctions is not to provoke scholarly debate, but rather to highlight some issues that are of immedi­ ate importance for the competitive prospects of the traditional automo­ tive industry. The discussion of process technologies can be made clearer by cate­ gorizing them in four groups: (1) soft, linking; (2) hard, linking; (3) soft, focused; and (4) hard, focused. Hard, focused technologies comprise many of the familiar, tradi­ tional hard technologies of the manufacturing process such as cutting tools, lathes, stamping presses, and the like. The machines that do the work of a limited process-perhaps just one operation-are the arche­ types of this form of process technology. They perform the divided work that is all combined into the process of manufacturing a light vehicle. The placement of a technology in this category is not based on the length of time that its machines have been available: newer, automated manufac­ turing equipment often belongs in this category, as do some robots and most CNC machine tools. Statistical process control, the collection, analysis, and interpretation of data on the performance of a particular process or machine, is a soft, focused technology. SPC identifies the process capability of a particular (hard, focused) machine and then permits the selection of appropriate remedies for processes that are not "in control.H The design of experi­ ments (DOE) is another soft technology that focuses on one machine or process. This technology involves the careful design of actual experi­ ments to identify and thus allow the correction of the sources of problems encountered in a production process. In the automotive industry, the transfer line is an example of hard, linking technology. It is hard technology, but rather than performing work it transfers material for equipment and humans to shape, form, cut, bend, and finally assemble. Perhaps the majority of robots in use in the automotive industry perform these kinds of tasks. The pick-and-place robot that moves a workpiece from one location to another would fit in

127 THE U.s. AUTOMOTIVE INDUSTRY

TABLE 3-1 EXAMPLES OF TYPES OF PROCESS TECHNOLOGY Function Type Linking Focused Soft Design for manufacture Design of experiments Just-in-time Statistical process control Group technology a Group technology· Hard Computer-aided design- Computer-aided compu ter-aided manufacturingb manufacturing Electronic communications Computer-aided design technologyC Computer-integra ted Automated in-process manufacturing inspection a. Group technology has both focused and linking functions, within CAD and between manufacturers and suppliers. b. Includes robots, CNC machines, and the like. c. Includes electronic order release, billing, bar-coding, and the like. this category. Automated guided vehicles (AGVs) and the elaborate auto­ mated storage and retrieval systems used in some factories are leading­ edge technologies of this type. Computer-integrated manufacturing, or CIM, is also a hard, linking technology: it may be the core technology the U.S. automotive industry needs to achieve the improved performance that it must. Finally, just-in-time scheduling for the delivery of materials, parts, and components typifies the soft, linking technology. In this system, lit­ tle or no inventory is maintained; so the on-time delivery of production goods from one location to another is paramount. The principles of de­ sign for manufacture (DFM) constitute another soft, linking technology, since they are meant to ensure that the design product can be manufac­ tured efficiently and with repeatable quality. Thus they crucially link the activities of designing and manufacturing a product. Table 3-1 dis­ plays these and some other examples of the four types of process technology. This discussion makes no attempt to report comprehensive statistics on the prevalence of all of these technologies in the u.s. and Japanese au­ tomotive industries, their value in reducing costs, the appropriate strate­ gies for maximizing their competitive benefits, and their likely future role in the competitive situation of the two industries. Rather, this chapter re­ views an exemplar technology from each of the two linking technologies.

128 FLYNN AND COLE

Both of these exemplar technologies are important in themselves, but the basis for their selection is that they readily allow coverage of technologi­ cal responses in ways that reinforce their connection to other aspects of the competitive challenge and other dimensions of appropriate response. The selected technologies, then, immediately illustrate the broader chal­ lenge and the role of technology as a component of the competitive reaction.

Just-in-Time Technology

The complex manufacturing required for much of the production of a motor vehicle involves holding inventory. The decisions about how much inventory of each kind to hold and the actions required to manage it are critical components of the routine, patterned human activities that sup­ port machine activity. As such, they are what we have called soft technol­ ogies. In the case of inventory, both the decisions and the activities required by inventory have even been embodied in a variety of computer software packages. There are also sets of assumptions and imperatives about inventory management that, while not yet existing as software, are sufficiently coherent and developed to be considered technologies rather than guidelines. This discussion focuses on one of these approaches, just­ in-time, or JIT. JIT is a manufacturing approach that emphasizes the pro­ duction of parts when needed, where needed, and in the quantity needed for the next production process. 27 We consider JIT to be a linking technol­ ogy because inventory decisions and practices most often focus on the re­ lationship among the machines in the production process. The purpose of inventory is to reduce the effect of one machine failure on the entire process or to insulate that machine from the effects of machine failure elsewhere in the process.

Inventory. One can categorize a type of inventory by why it is held and where it is located in the production process. For purposes of this discus­ sion, four kinds of inventory are of major concern: (1) stock includes raw materials, parts, components, subassemblies, and so forth that are held before they enter the production queue; (2) work in process is the stock as it actually undergoes manufacture-the workpieces as they move through the various stages of completion; (3) buffer inventory or stock is partially completed workpieces that may be held in inventory at different stages of the process; (4) finished goods are the actual products, com­ pletely manufactured and awaiting shipment. How much inventory is necessary for each stage and how inventory levels relate to other func­ tions of the production operation are subjects of some debate. Carrying inventory costs money. There are opportunity costs, since 129 THE U.s. AUTOMOTIVE INDUSTRY the money invested in inventory is not available for other purposes. There are facility costs, since inventory must be housed. There are per­ sonnel and often equipment costs associated with managing, maintain­ ing, and moving the inventory. There are costs associated with inventory decay: damage, deterioration with age, and changed demand that ren­ ders the inventory superfluous. Finally, in the event of a major quality problem, inventory must be scrapped or repaired. Balancing these types of costs are benefits, including the avoidance of larger costs. Large purchases of stock may reduce its purchase cost. Larger stock inventory generally allows larger production lot sizes, which can reduce setup costs. Larger inventories of stock that requires longer lead time or that is often defective avoid interruptions of the pro­ duction schedule. Work-in-process inventory at some level is necessary, since it permits the production rate to exceed the time required to pro­ duce one piece. Buffer stock may be required for efficient use of the manufacturing equipment, since it ensures that equipment breakdowns or quality problems at one stage do not stop production at subsequent stages, idling both capital and labor. An inventory of finished goods permits immediate response to increased customer demand and ensures continued delivery during unanticipated work interruptions such as strikes or equipment failures. In general, inventory provides insurance in the face of the uncertain­ ties inherent in the supply chain, manufacturing operations, and the marketplace. These uncertainties are the whats, wheres, and whens of production. It is difficult to estimate exactly what quantities of materials, parts, and components will be required for a day's production. Customer orders vary, as to both quantity and exact mix, and vagaries in prior pro­ duction may require changing both the level and the mix called for by the customer's order. Where production goods will be needed can be difficult to estimate, because machine breakdown, employee absenteeism, orma­ terial quality problems can interfere with planned production at numer­ ous intermediate stages. Finally, when replacements for unavailable production requirements will be needed cannot be foreseen. In all three cases, inventories ensure that the process can keep producing at or near the maximum.

Traditional Inventory Practices. The traditional domestic automotive industry relied on levels of inventory that it now considers excessive. To say that the inventory level is too high means that its costs outweigh its benefits. The industry has reevaluated the costs and benefits of inven­ tory and today views them both quite differently than it did in the past. Many of the past practices of the U.s. industry that look unwise today, 130 FLYNN AND COLE however, were logical in light of the past conditions, structure, and tradi­ tions of the industry; that is certainly the case with inventory practices. Vehicle manufacture has for some time been a typical high-volume, mass-production operation. Economies of scale were of prime impor­ tance, capital equipment investments enormous, and break-even points high. The industry was naturally insulated from foreign competition, and factors such as price and product condition were by and large competi­ tively neutral. In these circumstances, it is not surprising that the produc­ tion imperative (keep the line running to get the product out the door) reigned supreme in the industry. Delivering a product to market was the major concern, and the condition or price of the product was of secon­ dary importance. The quality problems that inventory can generate, even when recognized, were not seen as especially important and certainly did not outweigh its benefits for maintaining production. So the industry em­ phasized ensuring production through inventory, and the competitive situation permitted this approach. Theoretically, the costs and benefits of particular levels of inventory can be calculated and a clean decision reached as to the appropriate level of inventory for a specific process. Practically, of course, this rarely hap­ pens. The dollar amounts of some of the costs and benefits are not readily available, the likelihood of events such as increased demand or work stoppage are uncertain, and, once a decision is made, force of habit be­ comes a respected rule of operation. Moreover, while the direct costs of inventory were well recognized, the automotive industry fell into a pat­ tern of identifying indirect benefits of inventory that appeared to out­ weigh these costs. In a sense, inventory became a panacea for multiple scenarios that might shut the line down. Inventory became the remedy Ujust in case" any number of events that might occur did occur. These two factors distorted inventory decisions called for by the theoretical model. Decisions that are in theory clear and comprehensive often become murky, contingent, and sequential in practice. Several conditions and practices in the industry contributed to exces­ sive inventory levels, including the poor climate of both manufacturer­ supplier relationships and labor relations, the emphasis on piece price, and the concern with minimizing the frequency of tool and die changes. These factors contributed to the levels of total inventory held throughout the sys­ tem and sometimes to levels of specific types of inventory. The relationships between manufacturers and suppliers, and be­ tween each of these and their work forces, caused concern about the reli­ ance that could reasonably be placed on the other party. There were understandable apprehensions that labor troubles, transportation prob­ lems, quality of incoming parts and components, and other events might

131 THE U.s. AUTOMOTIVE INDUSTRY disrupt the flow of work. All of these contingencies could be met, at least briefly, by maintaining inventory. Rather poor coordination among different plants and companies characterized the industry, and the responsibility for production was quite fragmented and clearly assigned. Inventory decisions were often made at very low levels, covering small segments of the total system. Re­ sponsible individuals-managers, supervisors, or foremen-were con­ cerned only with their immediate operations, and the imperative of keeping the line running translated operationally into building buffer stock and finished goods inventories throughout the process. After all, this is how they protected themselves from responsibility for shutting the line down. Line A would build finished goods inventory to ensure that it would not shut down line B, the next process downstream. Line B, of course, would build stock inventory to avoid being shut down by A, its adjacent upstream supplier. Since line 1\s finished goods inventory is the same item that is line B's stock inventory, there is more buffer inventory for the AB system than is required. Unfortunately, decisions that optimize inventory at the subsystem level cumulate to a suboptimal level of inventory for the entire system, and thus the industry's fragmented decisions inevitably resulted in excessive inventories. The major focus of the automotive industry's sourcing decisions was piece price, and that was the basis for rewarding and penalizing its pur­ chasing agents. Downstream problems with purchases, such as low qual­ ity, measured by either defect level or nonconformance to specification, create cost problems throughout the manufacturing operation. Yet these were not charged back to purchasing and did not influence the evalua­ tion of purchasing's performance in the short run. Since large orders often benefit from unit price reductions, it is not surprising that the in­ dustry accumulated large levels of stock. One of the main reasons for lost time in automotive manufacturing has been the need for equipment changeover to meet altered production schedule requirements. When the dies for a heavy stamping press are changed from one hood or fender model to another, for example, it can take hours and even days to go from Mlast good piece stamped" to Unext good piece stamped." The length of time required for equipment setup and the high variability of that setup time resulted in considerable em­ phasis on long runs between changes. That often implied building fin­ ished goods inventory to accomplish smaller but necessary runs while minimizing the frequency of die changes. Standard long runs would be made for small requirements, the inventory banked and then drawn upon to meet subsequent small lot size requirements. The costs of setup and the costs of carrying inventory were balanced against each other to arrive at the lowest total cost.

132 FLYNN AND COLE

The priority of the industry was to keep the production line moving amid multiple uncertainties. Inventory served the extremely important function of providing insurance against events that might shut down the line. Building inventory throughout the process could minimize the ef­ fects of, if not completely eliminate, numerous threats to the production schedule.

Changes in Inventory Practice Using Just-in-Time Technology. Over the past five years the automotive industry's view of the costs and bene­ fits of holding inventory has changed rather dramatically, although its current levels of inventory are still generally high by Japanese standards. Nevertheless, many of the traditional manufacturers and their suppliers have greatly reduced the size of their inventories. The system is changing from one that carefully plans the requirements for production (however many safeguards and Mfudge" factors may actually undermine the Hcare­ fu!" aspect of the planning) to one in which parts are produced on an as­ needed, replacement basis. The term "just-in-time manufacturing" has been used to characterize this more recent approach. For this discussion, the key point about JIT is that it runs with mini­ mal inventory throughout the manufacturing system, providing benefits in all the areas in which inventory incurs hidden and unrecognized costs. The scheduling of production becomes an integral part of the production process and is driven by the production activity itself, instead of as a sepa­ rate, detailed, and elaborate activity that is then imposed on the various segments of the production system. JIT is based on the view that inventory is more often a source of costs and problems than it is a solution to them. It is exactly the just-in-case scenarios that management must address, resolve, and reduce to a smoothly functioning system. If buffer inventory is required because a machine might break down, then it is imperative to take steps-such as preventive maintenance and performance monitoring-to ensure that the machine will not break down. It is counterproductive to set up contin­ gencies to work around breakdowns, since doing so virtually ensures that breakdowns will occur. If one predicts that a supplier might miss a deliv­ ery time or deliver a defective lot, the proper reaction is to select and de­ velop suppliers that will deliver reliable products on time, rather than to stock inventory to keep production going when suppliers deliver prod­ ucts that are defective or late. The thrust of just-in-time manufacturing is not inventory reduction for direct financial return but for the benefits that JIT provides through­ out the manufacturing system. JIT is predicated on quite different calcu­ lations of the costs and benefits of holding inventory, and thus inventory relates differently to other tactical responses to manufacturing uncertain-

133 THE U.s. AUTOMOTIVE INDUSTRY ties. On the cost side, the differences include recognizing that poor qual­ ity has clear costs. Scrap and rework costs, the costs of maintaining an elaborate defect detection system, warranty costs, and the loss of repeat sales because of customer dissatisfaction are all costs of poor quality. To the extent that holding inventory contributes to these costs, either di­ rectly through inventory decay and damage or indirectly by promoting tolerance for routine if minor repair costs, then inventory should be as­ sessed these costs. If holding inventory results in assigning low priority to preventive maintenance to avoid sporadic equipment downtime, then inventory should be charged these costs. Traditional approaches assign inventory positive value for avoiding total shutdown of the system; JIT approaches assign the same inventory negative value for allowing partial shutdown of the system. Zero inventory is the goal of JIT, and it is an important considera­ tion in all manufacturing decisions. Traditional approaches ask how much inventory is necessary after major decisions about the manufac­ turing process are made. JIT approaches ask whether inventory is neces­ sary while such decisions are made. Inventory levels, then, are an important constraint on manufacturing decisions in a JIT approach, while they tend to be important consequences of such decisions in the traditional approach. Decisions about how best to configure an assembly line in a JIT ap­ proach, for example, are made in the context of how much inventory each configuration implies. Configurations that require more inventory must offset the cost of maintaining the inventory, and that cost, consis­ tent with the basic JIT approach, includes a variety of direct and indirect penalties. Traditional approaches are likely to estimate those costs at much lower levels and readily to allow (if not encourage) trading higher inventory for other benefits such as faster line speed or reduced cycle time. Traditional approaches balance inventory with setup time to deter­ mine the most economical quantity of stock to order. Setup time is treated as fairly fixed, as is the proper lot size; so inventory level is based on these factors. JIT, with its emphasis on reducing inventory, focuses on minimiz­ ing setup time, so that lot size and the order quantity can be smaller. The emphasis on large run lengths (often exceeding one million pieces) and realizing economies of scale has led U.S. manufacturers to equip stamp­ ing and engine plants to service several dispersed assembly plants. This entails distribution costs, of course, but also creates an inventory of stampings and engines, with all its costs, for longer periods of time. Smaller dispersed engine and stamping facilities are more characteristic of Japan, reflecting the inventory reduction priority of the JIT approach. Within the factory, this point-of-use manufacturing component of JIT similarly trades centralized economies of scale for dispersed, minimal in-

134 FLYNN AND COLE ventory layout, decreasing material handling costs and problems and work-in-process inventory, but often requiring more capital equipment. Finally, JIT focuses on balancing the entire production system, to avoid the buildup of inventories resulting from the higher operating rates of some segments or machines. Traditional approaches balance at the seg­ ment level, generating inventory between those segments to permit dif­ ferent cycle times for machines. During actual operation, inventory in traditional approaches is a major constraint, while in JIT approaches it is largely a consequence of those operations. Traditional approaches rely on inventory to facilitate other manufacturing decisions, and these inventories become major sources of problems for the efficient operation of the whole system. The problems associated with different types of inventory are essentially built into the production system for the sake of efficiencies at the segment or machine level. Even in a completely developed JIT system there will be inventory. Suppliers, for example, do not deliver one unit at a time, and while daily or hourly deliveries result in lower inventory than weekly deliveries, they do result in inventory. Again, all the costs of inventory are balanced against the costs of more frequent deliveries. JIT and the corrective ac­ tions it requires will not eliminate all uncertainty in complex manufactur­ ing activities. Delivery trucks will break down, and quality problems will crop up; unanticipated equipment problems will develop, and labor problems will occur. But in the completely developed JIT system each manufacturing operation produces according to a replacement schedule: as its output is used by the next process downstream, it produces another unit. Interruptions, then, do not result in excessive inventory buildup be­ cause the process, not just an individual segment, quickly stops produc­ ing. The reasoning behind this is that the corrective actions forced by JIT have reduced controllable interruptions to such a degree that the scat­ tered uncontrollable interruptions can be allowed to bring the whole sys­ tem down briefly. The process can afford this luxury. Moreover, the staggered inventory loads produced by keeping part of the process run­ ning while another part is down contain significant if hidden costs from a JIT perspective. For the Japanese, perhaps especially in the case of Toyota, low inven­ tory drives the manufacturing system, exposing problems and requiring solutions that result in cost-efficient manufacturing of high-quality prod­ ucts. It is probably not an exaggeration to view the emphasis on low in­ ventory as the keystone of the production philosophy that underlies the competitive success of companies such as Toyota.

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JIT Implementation in the United States. A large survey by the Indus­ trial Technology Institute focuses on the introduction of technology among midwestern durable goods manufacturers. Preliminary results show high implementation rates for JIT manufacturing. Over 10 percent of the sample of nearly 1,400 manufacturing locations report implement­ ing this technology, and those companies identifiable as automotive sup­ pliers have higher implementation rates than other manufacturers. Other data suggest that automotive suppliers are more likely to implement JIT in response to customer requests and that automotive manufacturers are more likely to demand JIT from their suppliers. JIT, then, is spreading in the United States, and especially in the automotive industry, where it is driven throughout the production chain by manufacturer request.28 There is no question that the U.S. industry has much to learn from Japan in the area of inventory management, and there is evidence that such learning is happening. We have a long way to go, however, and our early efforts highlight that situation. It may be the case that we have fo­ cused on the techniques that flow from the philosophy and have tried to copy them without fully understanding the philosophy. Perhaps as a re­ sult, we have neither fully realized the benefits of the techniques nor ap­ propriately adapted them to our own manufacturing environment. Three examples highlight this situation. First, we have developed a rather odd hybrid called a JIT warehouse. These warehouses hold inventory from suppliers and then deliver it to their customers on a JIT basis. They become an inventory junction to serve a system designed to eliminate much of that inventory. The difficul­ ties of establishing JIT manufacturing throughout the entire chain are enormous, but it is clear that that is what must happen if its full benefits are to be realized. If JIT serves only to externalize the costs of inventory, then its benefits will be sharply curtailed for both the manufacturer and the supplier: the direct carrying costs of inventory are generally lower the earlier in the system it is held, but these savings from inventory shifting are small compared with the direct and indirect benefits of its minimiza­ tion. Distance and offshore sourcing may require some sort of warehous­ ing accommodation, but warehousing as a routinized schedule­ smoothing device will subvert JIT. Second, many companies see JIT as a capstone to other efforts. Their view is that JIT will reduce costs tremendously by eliminating inventory carrying costs but that JIT is feasible only when every other aspect of the manufacturing system is functioning smoothly. Operationally, JIT must come after quality is improved, after machinery uptime is increased, and after reliable supplier performance is ensured. The problem is that JIT as­ sumes that inventory interferes with attaining those objectives and that inventory must be eliminated through JIT if they are to be achieved. Es-

136 FLYNN AND COLE sentially, one cannot hold inventory to cover the just-in-case contingen­ cies while trying to remove the sources of those contingencies: the inven­ tory itself is a major source of them. JIT must drive other efforts, and its introduction must be carefully coordinated with progress on other di­ mensions of manufacturing. But many companies here still think of it as the culmination of or final payback for those efforts. Third, U.S. industry has a well-developed tendency to think of tech­ nology primarily as a means for improving unit efficiency. Many Ameri­ can companies inevitably have seen JIT as a system just waiting for computerization, perhaps in hopes that this will allow them to leap ahead of the Japanese. In particular, the ready replacement of the kanban card used by Toyota with online tracking is often used as an example of how computers can increase efficiency and the factory can be made paperless. At Toyota, however, the kanban serves functions for JIT other than track­ ing production like a movable data base. It is part of the "visual manage­ ment" system, an attempt to make the production process immediately visible to all concerned. The kanban card attached to the engine block or parts container provides information to whoever glances at it, not just to those who recognize a need for information and who must have access to a data base to get it.

Prospects for JlT. What is the promise of JIT manufacturing for the United States? JIT promises to reduce costs in numerous ways, both di­ rectly and indirectly, that will be important for the industry to remain competitive in the decade ahead. The pervasive benefits of JIT will proba­ bly make it the most promising technology available to the U.S. industry: it requires low capital investment, can save capital currently dedicated to storing and handling inventory, can eliminate hourly and salaried labor that adds no value to the product, and can drive quality efforts with its as­ sociated cost reductions. If, as many observers believe, the major issues facing the U.S. industry beyond cost and quality are the need to increase the emphasis on manufacturing and to simplify our operations, then it is hard to conceive of a more broad-based assault than JIT. A frequent esti­ mate is that JIT can produce 20-30 percent cost reductions in direct labor and materials. 29 There are, of course, substantial savings in material han­ dling, expediting, and storage too. What are the prospects for JIT manufacturing in the United States? They appear to be good, although changing traditional ways of thinking and operating is never easy. Initial moves in the direction of JIT appear to have worked reasonably well and will provide impetus to its adoption. The Big Three are all moving in that direction, as evidenced by GM's Buick City complex, Chrysler's Windsor Minivan plant, and programs at a number of Ford facilities. The industry has learned the lesson that qual- 137 THE U.s. AUTOMOTIVE INDUSTRY ity can be a driver for cost-reduction efforts, rather than the result of such efforts, and it seems likely that this same learning will occur withJIT. For a number of reasons the U.S. industry is likely to continue experimenting with JIT. Perhaps the largest attraction to JIT is that it is a low-investment technology, at least in terms of identifiable additional expenditures that must be approved. Another major attraction, of course, is the view that JIT is at the heart of Toyota's success, and, in the opinion of most of the U.s. industry, Toyota is the world-class manufacturing competition that they must equal, if not surpass. Some factors are likely to impede the adoption of JIT. One is the rela­ tionship that exists between manufacturers and their suppliers, and an­ other is the climate of labor relations in the industry. Though both of these areas have shown major improvement over the past few years, sup­ pliers are still suspicious of the manufacturers, and, as discussed earlier, there is a long history behind this feeling. Manufacturer and supplier re­ lationships here are arm's length, and in many cases suppliers compete with the manufacturer. Suppliers often view JIT as simply an inventory reduction technique and thus are worried that the manufacturers' effort to introduce JIT is merely a way to externalize inventory costs by forcing the supplier to bear them. The manufacturers have, in fact, required sup­ pliers to hold stated levels of inventory to ensure JIT delivery, just in case the supplier faces an unexpected production interruption. The emphasis on JIT delivery as opposed to manufacturing reinforces the suppliers' con­ cern and clearly limits the potential benefits of JIT throughout the manu­ facturing chain. Again, the industry's experience in regard to quality is instructive. The efforts of Ford to require SPC of their suppliers were first met with hostility and resistance because suppliers believed Ford was trying to make them pay the costs of quality, which were high indeed under the traditional defect detection approach. As suppliers adopted a defect pre­ vention approach to quality, they shared in the benefits of their efforts, and some of this resistance has abated. The understanding that quality can be a driver is by no means fully accepted in the industry, nor have all suppliers fully realized the benefits available to them, but there has been substantial change in the industry'S thinking on this issue over the past five years and many reasons to expect those developments to continue. It would not be at all surprising to find that suppliers' views of JIT evolve in a similar manner. The labor relations climate in the industry also presents a potential stumbling block to the implementation of JIT. JIT will make numerous jobs in the industry superfluous. Because significant effort goes into maintaining, shifting, and tracking invenfories, eliminating the need for these tasks will remove jobs in both the salaried and the hourly work

138 FLYNN AND COLE

force. To the extent that JIT drives preventive maintenance rather than re­ pair programs for manufacturing equipment, it may further eliminate jobs. JIT almost certainly will present the opportunity for, and may well require, changes in work rules and perhaps job classifications. Reduc­ tions in jobs and changes in their content and assignment are not small adjustments in the automotive industry. The amount of resistance JlT elicits from the work force will probably depend on how smoothly such changes are managed and how well they are directed toward perceptible improvements in efficiency. If the changes appear to be mindless, or worse, simply exercises in arbitrary control, they will be strongly resisted. In particular, if they are targeted to decreased labor content for its own sake rather than to efficiency benefits, they will meet stiff resistance. One advantage for the industry is that the UAW takes some pride in being a union that has accommodated productivity improvements. One draw­ back is that work rules and job classifications are the union's central de­ fenses against arbitrary behavior by management. Accommodating JIT has not yet been a major labor relations issue, though it might become one in the future. A particular concern in the labor area is the potential effect of the un­ ion's decision to strike a plant over local issues. Inventory has provided protection against all but the longest work stoppages in the past. Full im­ plementation of JIT could mean that even a very short stoppage would quickly close numerous plants as they almost immediately find them­ selves lacking required materials, parts, and components. Although JIT provides a much more potent weapon for the union, it is also a more costly weapon to activate because it interrupts the earnings of other workers as well as of the company. Because of the heightened immediate consequences of a strike in a JIT system, strikes might be used less fre­ quently, especially over local issues. It does not appear that JIT so much alters the "'balance of power" between the company and the union as it es­ calates the consequences for both of a strike situation. It is interesting to speculate about how JIT might affect manufacturer­ supplier relations and the labor relations climate of the industry. Because JIT requires thoroughly revising the manufacturing system, it might well influence these two aspects of the system, however much they might con­ strain its adoption. The complaints of suppliers about manufacturers are remarkably like the complaints of labor about management. There are also close parallels between the manufacturers' view of suppliers and manage­ ment's view of labor. One side sees the other as arbitrary, untrustworthy, and unmindful of the costs they impose, and the other side sees the first as unreliable, mistrusting, and short-sighted. In both relationships, JIT might result in an increased emphasis on coordination of efforts rather than on control of one party by the other. If discipline is required for a system to op- 139 THE U.s. AUTOMOTIVE INDUSTRY erate well, and if that discipline is clearly perceived in the logic of the sys­ tem rather than imposed for unclear reasons by one party, it is likely to be less adversarial and more cooperative. In summary, JIT is a promising technology, and the prospects for its successful implementation are reasonably good. It will not drop in place overnight, but it appears that the rate of implementation will accelerate over the next few years. The implementation efforts will refine and sharpen our understanding, and the returns from JIT will grow.

Computer-integrated Manufacturing

The descriptive information on the U.S. automotive industry presented earlier in this chapter reveals a large and highly complex industry domi­ nated by three manufacturers, each one a huge company; but the indus­ try also relies on the significant participation of many thousands of supplier companies. The final assembly of a vehicle requires coordina­ tion among all these companies, a task of major proportions using huge resources. The manufacture of passenger vehicles and light trucks, or their parts and components, constitutes the main line of business for most of these companies, but virtually all of them have other significant businesses and devote substantial resources as well to complementing or supporting their manufacturing activities. Internal coordination and integration are central requirements for the automotive manufacturers and their suppliers.

Coordination and Integration. Manufacturers and their suppliers have addressed their coordination and integration needs differently over time. Ford, for example, was somewhat more centralized and autocratic in its internal coordination and control practices than GM. Neverthe­ less, some practices and procedures generally characterize the industry, although they may not apply equally to all companies. Integration, co­ ordination, and control are the issues that linking technologies address, and the management practices and procedures targeted to their resolu­ tions are what we have called soft technologies. As with inventory, soft and hard technologies are currently available for addressing these is­ sues. The available material on Japanese and other management ap­ proaches to both internal and external coordination of the business enterprise could fairly be called a growth industry in recent years, but here we focus on the response of hard technology. Computer-integrated manufacturing (CIM) is the use of computer hardware and software to ensure that activities are properly coordinated. It is an example of hard technology serving primarily a linking function. The massive, complex activity that underlies the manufacturing of a

140 FLYNN AND COLE car requires the coordination of virtually unlimited functions and tasks. Because the activities are so varied, almost any conflict over integration, control, and coordination that can occur probably does occur somewhere during the assembly of a vehicle. Inventory practices, for example, are one response to the integration requirement. The present discussion draws heavily on one internal integration issue and one external (be­ tween companies) coordination problem for examples, although by no means exclusively. The focus is on the internal coordination of the design and manufacturing functions and the external coordination of the manu­ facturer and supplier. Though examples from many areas could be pre­ sented, this approach should provide a more detailed basis for assessing the potential of CIM as a response to coordination problems more generally. Coordination, integration, and control cost money. They constitute the bulk of management activity and are a significant cost factor in manu­ facturing. To the extent that these functions are performed by people, the costs are largely for salaries and wages and facility and equipment re­ quirements of managers, although there are also opportunity costs, since the time required to perform these functions may interfere with other management tasks, such as strategic analysis. In general, how well these issues are addressed is a critical constraint on the effectiveness of the company. The smoother the coordination of activities, the more effective the company will be in bringing to market a high-quality, low-cost product. The costs of poor coordination, integra­ tion, and control are tremendous. Poor control of quality has cost the tra­ ditional automotive industry enormous amounts of money, both in direct costs of scrap and repair and in indirect costs of lost market share. The costs of shutting down a line because of the lack of required components or delaying a vehicle introduction because design decisions did not prop­ erly allow for manufacturing constraints are huge. Major personnel and time costs are incurred when decisions routinely have to be made at too high a level of the company because of poor coordination and integration at lower levels.

Traditional Coordination and Integration Practices. The inefficiency and ineffectiveness of its coordination and control practices has been one of the major competitive weaknesses of the traditional American auto­ motive industry. The problem has been pervasive, both within companies-manufacturers as well as suppliers-and between the com­ panies. Their sheer size, the complex nature of their production and re­ lated activities, and the myriad exchanges they conduct all contribute to this. One would not expect them to function as effectively as smaller, less complex manufacturers, but no doubt many of their practices and stan-

141 THE U.S. AUTOMOTIVE INDUSTRY dard procedures contribute to their inefficiency. Many procedures can be and are being changed because the industry has recognized these prob­ lems at a general level. The question is how well and how rapidly it can re­ spond in detail. The U.S. automotive industry has recognized two general sources of Japanese competitive advantage that reflect basic differences in the ways the industries are organized. One of these differences is largely a question of intraorganizational integration, the other of interorganizational coor­ dination. The first is the way that the design and manufacturing func­ tions within the companies are integrated; the second is the type of relationship that exists between the manufacturers and their suppliers. These sources are general because they are implicated in a wide variety of quality, cost, and productivity differences that greatly affect the competi­ tive disadvantage the U.s. industry faces. The integration of the design function and the manufacturing oper­ ations has been problematic in the traditional industry. Manufacturing engineers complain that vehicles are designed in ways that make them, if not impossible to manufacture, at least difficult to manufacture within quality and cost constraints. A high proportion of vehicle quality problems reportedly arise from design errors, and these problems be­ come more costly as their detection occurs further downstream in the production cycle. Design engineers, however, resist the limitations placed on them by the manufacturing engineer's preference for tradi­ tional manufacturing and assembly processes and practices. They com­ plain that changes are implemented at the manufacturing stage that are tantamount to design changes and that these changes are often unre­ corded and unapproved, thus creating problems for redesign. Manufac­ turing engineers, in turn, complain that needless design changes and variations are introduced that create problems for manufacturing. The first six months of production may well involve a few dozen design changes on a part or component, many of which will necessitate manu­ facturing changes. 30 Design engineers want products manufactured ac­ cording to design, while manufacturing engineers want products designed for manufacture. Designers, to the extent that they do attempt to design for manufac­ ture, often find themselves designing for manufacturing operations that are outdated. They simply lack timely information on current manufac­ turing practices and are often only dimly aware of the options for manu­ facturing embodied in emerging technologies. Yet designers are involved throughout the product development cycle, while manufacturing engi­ neers all too often become involved only at its end. Design and manufac­ turing decisions typically proceed as separate, if parallel, activities that come together shortly before production begins. Designers are often pic-

142 FLYNN AND COLE

tured as working for years on designs and then "tossingh the prints over a wall to manufacturing just before the production launch date. This image does typify the traditional practices that have developed in the industry. Designers spend substantially less than half of the total product cost, but the decisions they make commit well over half of those total costs. The in­ formation to make these decisions effectively is simply not available to them at the time they must make them. The cost of redesigns and engineering changes, the problems occa­ sioned by unrecorded changes, and the cost and quality implications of designs necessitating difficult manufacturing operations are all poten­ tially enormous. Unfortunately, these integration issues are neither read­ ily nor easily resolved. Perhaps the most important aspect of traditional manufacturer­ supplier relations was its emphasis on piece price, the unit cost of an item. It would not be accurate to say that price was the only factor considered in the selection of an outside source, but it clearly was the primary one. Be­ yond the obvious difficulty of forcing suppliers to compete, a major prob­ lem was that they could not demand higher prices for intangible services and competencies that they felt merited such treatment. An example is the supplier's recovery of research and development costs. Suppliers that spent relatively more in this area often found it difficult to recover their higher overhead by spreading it over their existing business because they risked being underbid for any particular business by suppliers that in­ vested less. In addition, a supplier's reputation as a reliable supplier of good quality products seemed to matter little in the bidding for any par­ ticular piece of business. The focus on piece price excluded consideration of the effect of suppliers' performance on the manufacturer's total costs. The manufacturers were, however, willing to pay somewhat more to maintain dual or even multiple sourcing for most of their outside pur­ chases. They maintained ready capacity beyond their immediate needs in case unforeseen difficulties interrupted the flow of materials, parts, and components from a supplier. How they split the business among the mul­ tiple suppliers primarily reflected piece price, and, in light of the tradi­ tional annual contracts in the industry, suppliers were uncertain how much business they would receive over the typical five-year life of a model. This uncertainty of course put the suppliers' own investments at greater risk. Because of the practices of dual sourcing and annual contract negotiations, suppliers that did develop product technology advantages through research and development sometimes found themselves under­ bid the next year by a competitor that simply "made to printh -from prints the supplier, not the manufacturer, developed. All automotive manufacturers have divisions that make various parts and components, and they frequently shifted the exact mix of buy- 143 THE U.S. AUTOMOTIVE INDUSTRY ing and making particular parts and components between these Pcaptive supplierH divisions and outside suppliers. The reasoning of the manufac­ turer was clear: given a large capital investment in a plant, it makes sense to let that plant manufacture production goods when the variable cost is lower than the supplier's price, reflecting the supplier's fixed and varia­ ble costs. But since contracts are renegotiated annually, if a supplier un­ derbids a captive supplier plant for its last year's product, that captive plant might be shifted to another product. For the supplier losing the business in the second year, this decision often appeared to be random, or worse, targeted, and trivial to the manufacturer but of major conse­ quence to the supplier. The existence of these captive supplier plants has been a source of strain for another reason. Suppliers often felt that their proprietary technology was shared with these plants and thus could not provide them the protection it should. Whether this was a major problem is unclear, but it certainly was an apprehension widely shared in the sup­ plier community. The traditional automotive supplier did the bulk of its business within the industry, quite often with one or at most a few customers among the manufacturers and other suppliers. The outcome of a particu­ lar sourcing decision, then, was often critical to the supplier's overall suc­ cess. Since many of these practices existed to discipline the suppliers and they had few alternative customers, the relationship between manufac­ turers and their suppliers was generally one of suspicion, distrust, and apprehension. This atmosphere and the practices that contributed to it did little to improve the coordination and integration of the industry and tended to center attention on issues of control. Manufacturers focused on the piece-price benefits of the system and paid insufficient attention to the other costs it created, such as the costs of moving from one supplier to another and of maintaining multiple sources to provide that option. One could almost say that the manufac­ turers inventoried suppliers just in case something went wrong. The costs of supplier quality and reliability for the manufacturer's own operations were too often ignored or overlooked in the purchase decision. The fail­ ure of the manufacturers to value many supplier contributions properly may well have retarded the technological development of the industry. The climate of the relationship promoted levels of concealment and se­ crecy by suppliers that undoubtedly impeded the diffusion of useful technical advances, especially perhaps in the process area, throughout the supplier base. All of these costs ultimately are borne by the manufac­ turer and then the consumer, but the decision system ignored them.

The Influence of elM on Manufacturing. Before the significant entry of the Japanese into the U.s. market, most of the inefficiencies in coordi-

144 FLYNN AND COLE nation, control, and integration of the manufacturing enterprise were competitively neutral. They afflicted the entire industry, and the costs they entailed were passed on to the consumer. The availability of Japa­ nese vehicles sensitized the market to the quality problems that resulted from many of these situations, and while price remained competitively neutral, the manufacturers became concerned about the longer-term im­ plications of the higher profit that lower manufacturing costs provide their Japanese competitors. All of the Big Three, and many of their suppli­ ers, have made serious efforts to streamline their operations, to locate and implement control structures properly, and to coordinate their activities rationally. They have extensively reorganized, concentrating on "core businesses" and paying particular attention to their manufacturing activities. The manufacturing of an automobile or light truck uses virtually every type of production machine known, from machine tools to presses and from robots to extruders. These machines embody a variety of hard technologies, and most of them have become increasingly automated over the past forty years. The computerization of many of them has opened significant new possibilities for improving efficiency and control. Computer-integrated manufacturing, or CIM, is a manufacturing process using machines that are themselves controlled by computers; the flow of work between the machines is computer-controlled, and all the machines are coordinated and integrated by computers. Ideally, all manufacturing and support functions share an integrated data and control base, and changes anywhere in the system are appropriately adjusted for every­ where else. Work-force scheduling, material ordering, accounting, the hourly production schedule for the fourth lathe in the third line, and the tool changes that schedule requires all are coordinated by computers that are themselves linked together by a main computer or computer network. CIM is built on computerized operations that might range from a scheduling routine or inventory management software to a materials­ handling robot or a machining center. These constituent technologies of CIM have their own characteristic implementation and operational prob­ lems. It is critical to the success of CIM that these problems be addressed and resolved, but discussion of them is beyond the scope of this review. Although planning for CIM must recognize these difficulties, it is also im­ perative that constituent technologies of CIM be implemented with CIM potentials and constraints in mind. CIM is emerging as a central element of the American technological response to Japanese competition and as an element that allows hope for maintaining significant manufacturing activity within the United States. CIM does not yet exist as an off-the-shelf technology, nor has it been suc­ cessfully implemented in its entirety for any complex, multistage produc- 145 THE U.s. AUTOMOTIVE INDUSTRY

tion processes. It is an emerging technology that will probably develop quite rapidly. Computer technology has evolved rapidly in the past dec­ ade, and the major technical blocks to full implementation of CIM are fairly clear and are already subject to intense research and development work. One major block has been the inability of computerized equipment from different vendors to Htalk" to each other, for example. But GM has now announced, in concert with a number of other major customers for computer-controlled manufacturing equipment, that it will no longer buy such equipment unless it conforms to a compatibility standard.3! Moreover, the Big Three and many of their suppliers have begun to move aggressively in CIM. The amount of effort being devoted to CIM and the limited and small-scale applications that are developing are likely to re­ sult in the removal of remaining barriers to its full implementation. CIM has cost-reduction benefits and also should improve product quality and rapidity of response to customer changes. But a more impor­ tant if less tangible benefit of CIM is that it provides the opportunity to re­ vitalize earlier efforts, to integrate a variety of functions productively, and to coordinate the activities of a manufacturer and its suppliers effi­ ciently and effectively. Computer-aided design. The U.s. manufacturers are investing major efforts and resources to implement computerized operations within, and computerized linkages between, their internal functions. Computer­ aided design (CAD), the creation or modification of a design through the use of computer-based graphics, is expected to have major influence on the costs of the design function. 32 The use of the computer to produce a design is simply much more rapid than the traditional drafting approach. The CAD system will typically store designs in a data base structured on group technology principles. Designs stored in such a CAD data base have three immediate advantages over filed copies. First, older designs that may form the base of a new design can be readily retrieved and effi­ ciently altered. So the alteration of old designs will eliminate the need to create completely new designs. Since as little as 20 percent of the design work on new products is really new, the potential cost savings are enor­ mous.33 Second, the use of such a data base ensures that designs that must themselves be altered to reflect engineering changes are changed si­ multaneously. This eliminates the problems caused by the existence of multiple hard copies of designs at different stages of development, a not infrequent occurrence under the traditional approach. Third, the use of the computer improves the accuracy of these multiple representations of the design: human copying of intricate designs often produces errors and variations, some of which can be significant at the manufacturing stage. CAD systems can, of course, be used to design the manufacturing

146 FLYNN AND COLE operations that are required for a particular design. If both the product and process design activities are done using CAD, simultaneous engi­ neering becomes quite feasible, reducing the frequent downstream costs of a design incurred when these two engineering activities are performed sequentially. CAD allows each type of design to proceed within the con­ straints imposed by the other, optimizing total design and manufacturing decisions. Computer-aided manufacturing. Computer-aided manufacturing (CAM) is the use of computers to link manufacturing equipment and to control the operations of specific machines. Linking CAD and CAM is ex­ pected to provide further benefits through the integration of design and manufacturing and thus throughout the manufacturing sequence. De­ signs executed on a CAD-CAM system can reflect the manufacturing constraints of the equipment that will be used. The designer will be im­ mediately alerted to the fact that the design generates a tool-path for a grinding operation that is beyond the capability of a particular computer numerically controlled (CNC) machine tool. If the tool-path is within the machine's capability, the design data can be downloaded to the computer controlling the machine, without a separate step of producing a tape or program for the machine. CAD, then, is a targeted technological response that promises to im­ prove the effectiveness and efficiency of the design process itself but, more important, to integrate design and manufacturing. It is, then, a spe­ cific technological response to a broad range of integration problems. By its very nature CIM is integrative, and so are its specific, constituent tech­ nologies like CAD. CAD builds on group technology, for example, and provides capabilities in the engineering analysis and simulation areas as well as in design and its integration with manufacturing. Because of its in­ tegrative aspects, CIM offers managers the opportunity to monitor pro­ ductivity and to target improvements in the subsystem and the process rather than in the final product. The nature of the relationship between the manufacturers and sup­ pliers is related to the CIM efforts of any particular company in two ways. First, the relationship is an important constraint on how fully the benefits of CIM can be realized by anyone company or by the entire manufacturing system. Second, the efforts of either the manufacturers or the suppliers to implement CIM will require changing some dimen­ sions of their relationship.

elM Implementation in the United States. American manufacturing, especially in the automotive sector, is undergoing a wave of computeriza­ tion. Programmable, computer-controlled equipment is becoming more

147 THE U.s. AUTOMOTIVE INDUSTRY and more commonplace, from the office to the shop floor. The computer­ based technologies underlying this equipment are the constituent tech­ nologies that CIM integrates. Perhaps because of these increasingly widespread applications and the integrative emphasis of elM, the manu­ facturers have looked beyond the walls of their own plants and have begun to explore ways to coordinate their activities better with those of their suppliers. Whatever its source, the manufacturers' increased aware­ ness of the importance of their supplier base to the final cost and quality of their vehicles is a healthy development and one that might help bal­ ance the supplier's dependence on the manufacturer. Balanced depen­ dency relationships have their own problems, but it is probably easier to establish mutually beneficial exchanges within relatively balanced rela­ tionships, since unbalanced ones often promote exploitation by the less dependent party. Most companies in the automotive industry are well on the way to computerizing their collection, storage, and retrieval of day-to-day busi­ ness information such as accounting information, employee attendance records, inventories, schedules, billings, and receipts. elM provides the management and integration of these computers and information bases as their coverage expands, making it possible to ask questions that were simply too expensive to answer in the past. It provides the capability, al­ though not the necessity, for tracking the downstream costs associated with the purchase of a particular part or component and thus allows pur­ chase decisions based on cost factors other than piece price. In particular, the costs of late delivery and defective material can be determined, and the supplier's quality and reliability become direct considerations in deci­ sions about subsequent sourcing. The consideration of these other factors in the sourcing decision would provide concrete evidence of their impor­ tance and ensure that suppliers pay appropriate attention to them. The use of elM simply to manage the information that companies collect­ thus permitting its effective deployment at the required time-may even­ tually be one of its major contributions to improved performance. The manufacturers are insisting that their suppliers develop a wide range of electronic communication capabilities so that they can establish compatible computer-based communication systems. These investments in electronic communications technology (EeT) span a wide range of functions and activities; in some cases the technologies can be integrated by CIM, and in others they are the actual integration mechanisms of elM. Electronic bar-coding and optical scanning of parts and components constitute an EeT technology that has diffused fairly rapidly within the industry. Much as the grocery store clerk's scanner transmits price infor­ mation to the cash register, a variety of information about a part or com­ ponent can be stored on its label and quickly recovered and processed

148 FLYNN AND COLE when needed. The efficiency and accuracy of the computer underlie the direct cost-reduction benefits of this technology, and the use of the com­ puter allows the storage and efficient retrieval of much more information than was previously practical. More typically, however, computers are linked directly, allowing them to exchange data. This link may, of course, require translation devices if the software and data structure of the com­ municating computers differ. Other forms of electronic communication will facilitate placing and monitoring orders, including order release and billing. In general, these technologies are expected to reduce a variety of transfer costs and to eliminate substantial duplication costs incurred by the present system. The much-publicized paperless factory and corpora­ tion is the ultimate, perhaps unrealistic, goal of these efforts. But there is no question that the ways manufacturers and suppliers currently conduct and monitor their transactions are expensive, and although exact figures are suspect, ECT realistically promises substantial potential savings in many instances. The investment requirements for many suppliers to im­ plement ECT, however, may make them reluctant to proceed without some commitment of business continuity from the manufacturers. So for the manufacturers to implement ECT fully with their suppliers may re­ quire them to alter their practice of contracting annually. Integrating design and manufacturing is an internal problem for the manufacturers and for many suppliers. It can also be a coordination problem across companies, of course, when one company designs and another manufactures. Often a manufacturer or a supplier will design a component or part and have another supplier make it or some portion of it to specifications it provides. The problems of internal integration of de­ sign and manufacturing may be greater or less than the problems of coor­ dinating these functions between two companies. One might expect that problems would increase when the functions are located in two different companies, although a supplier can choose not to bid if the manufactur­ ing problems are too great. A major role for ECTwill be to improve the ex­ change of engineering data, including designs, through CAD-to-CAD links, and eventually to make possible the transfer of designs from manu­ facturer CAD to supplier CAM operations. The electronic transfer of design information, especially in the early stages of a project, and the design of a product for manufacturability in another company's facility will require some changes in the manufacturer-supplier relationship. Suppliers will have to become in­ volved earlier than they traditionally have, manufacturers will have to make earlier and probably longer-term sourcing commitments than they typically have, and the terms of the relationship will have to assure both parties that proprietary information will be respected. It may be that the 149 THE U.s. AUTOMOTIVE INDUSTRY benefits of CAD-to-CAD data transfer will drive these changes, but if the changes do not occur, they will certainly limit the benefits derived from the technological capacity. CIM has potential for reducing the direct transfer costs between manufacturers and their suppliers, but perhaps its broadest potential for cost reductions will come indirectly, from its influence on the practices and procedures that have defined the standard business relationships in the industry.

Prospects for CIM. CIM is a sensible strategy for the U.s. industry for a number of reasons, although it may not be a particularly attractive strat­ egy for the Japanese. The Japanese have beaten us on integrating manu­ facturing, and their organization and management methods have been adopted and adapted here with only limited success by most of the tradi­ tional domestic manufacturers and their suppliers. The computer offers another way of providing and ensuring integration and control. More­ over, the major changes required to computerize the manufacturing proc­ ess may provide the opportunity to change traditional organizational and managerial patterns in ways that approximate the success the Japanese have had in these areas. For the United States, the use of computers allows the redeployment of labor. In some critical areas, such as manufacturing engineering, we face severe shortages of people to fill available positions. Computeriza­ tion of some positions will alleviate the need for personnel, and compu­ terization of other functions, such as design work, will allow the redeployment of personnel to the manufacturing area. Computerization of many of the routine information-gathering and -monitoring functions of the current plant will also reduce overall labor content. The Japanese do not face the same shortages, and the upermanent employment" system at their leading companies lessens their ability to benefit from potential labor reductions. Significant layoffs would violate that tradition and quite likely produce rather severe labor conflicts; such changes would un­ dercut their current relationships, which are an important basis of their effective coordination. There is reason to believe that the United States still leads Japan in the development and deployment of computers in many, though by no means all, applications. Software is vital to the exploitation of the com­ puter, and the United States leads Japan in this area. Because the Japanese would not immediately incorporate such techniques into their system, CIM is an approach that exploits a possible comparative advantage for the United States. Finally, improvements in the coordination and execution of the proc­ ess technologies that constitute manufacturing will, in the long run,

150 FLYNN AND COLE achieve a shifting, unstable parity with Japan; they are not likely to yield a significant competitive edge. CIM and its constituent technologies may provide the best strategy for developing a competitive advantage over Japan sustainable over the next five to ten years. What are the prospects for CIM in the United States? Overall, they appear to be good if the technology is exploited effectively. There are forces that are driving CIM, but there are also some important potential barriers to successful implementation. Recognizing that CIM is an important element of company strate­ gies, the automotive manufacturers have indicated their intention to move aggressively to implement programmable technologies and to en­ sure that these technologies are integrated and coordinated. Since 1984 each of the Big Three has gained control of so-called high-tech companies so that they might speed their own process of implementing program­ mable manufacturing. GM, with the purchase of both Hughes and Elec­ tronic Data Systems (EDS), is clearly moving to the computer-based, high-technology factory that is the CIM workplace. Manufacturers would like to pare the number of their direct suppli­ ers substantially. If they are successful, the American automotive indus­ try would probably more closely resemble the tiered structure of the Japanese industry: a supply funnel of decreasing numbers of companies taking increasing responsibilities in the value-added chain of production. The catalyst for these changes will probably be the emergence of modular sourcing-the sourcing of complete subsystems and components by the manufacturers. Companies that effectively deploy CIM technologies will be the major players in the evolving supplier industry, for they will be able to assume the engineering and coordinating functions required for first-tier module suppliers. Those that do not will find their automotive business both less secure and less profitable, as their work becomes more like that performed by Japanese subcontractors. This commitment to explore CIM is coupled with an accelerating ex­ perience with the constituent technologies of CIM. The deployment of robots, machine vision systems, and CAD is proceeding rapidly in the in­ dustry. Efforts to implement CAD-to-CAD links and CAD-to-CAM links are also under way, and we suspect the practice of CIM will soon become a reality. Perhaps the most important barrier to CIM is the lack of trained teci:t­ nical staff and workers to implement it and its constituent technologies at anything approaching the speed the industry would prefer. Some of these problems may be lessened by CIM itself, as it releases these human resources for redeployment. But major training investments will be re­ quired for the conversion of the older, more mechanically inclined human resource base of the industry to the more electronically based

151 THE U.S. AUTOMOTIVE INDUSTRY skills required for CIM. There are financial constraints, too, especially at the supplier level. Suppliers must fund their own internal efforts, of course, and must also fund the integration of these efforts with those of their customers. But because the manufacturers have, for example, adopted different CAD systems, CAD-to-CAD linking might require a supplier to commit financial and human resources to parallel invest­ ments in CAD, rather than to CAD and other advanced technologies. The concern of suppliers about this situation is not surprising, since for them it means higher investment costs, possible distortions in their preferred allocations of their equipment investment dollar, or perhaps focusing their business on only one or two of the Big Three. 34 Many of the practices and procedures that are possible barriers to CIM are changing. There are several factors influencing these changes, but the driving one is clearly a desire of the American industry to become more like its Japanese competitors. The evidence is that early sourcing, in­ volvement of suppliers at the design stage, the development of contracts covering more than one year, and an improving general climate in manufacturer-supplier relations all are becoming more frequent. These changes are by no means fully accomplished, and some traditional prac­ tices are still barriers to CIM. On balance, however, it seems likely that CIM will be a force for further changes, rather than be retarded signifi­ cantly by past practices. The introduction of CIM will eliminate much of the labor content of the vehicle, and that must be done if the industry is to survive. The imple­ mentation of CIM is likely to result in the loss of proportionately more salaried than hourly jobs, possibly eliminating entire categories of work­ ers. The traditional role of the draftsman, for example, will inevitably change, and the need for his or her skills will shrink dramatically with the introduction of CAD. While the automotive industry and the hourly em­ ployees of the UAW have learned to adapt to technological change and productivity improvement, the dramatic effects on salaried employees are somewhat new and come, moreover, on top of the sharp decrease in both labor categories since 1978.35 How well the companies handle this transition will have major import for the success of their CIM efforts. If attrition, reassignment, and retraining allow an orderly downsizing of the work force, and the workers that are separated are assisted in finding alternatives, effective implementation of CIM should be possible. If, however, downsizing occurs in an atmosphere of apprehension and inse­ curity, the resulting problems of low morale and resistance could quite ef­ fectively slow down, if not stop, progress toward CIM. There is also a risk that CIM will be viewed as a technological panacea, a drop-in-place technology that will somehow immediately and directly solve a host of coordination and control problems. It will not; and the effective im- 152 FLYNN AND COLE plementation of CIM will require a variety of efforts and decisions. The com­ petitive problems of the traditional American automotive industry are rooted in people more than in technology; resolving them through technol­ ogy will require parallel resolution of human resource issues. Simultaneous engineering of process and product can be made more efficient through the use of CAD, but CAD is not necessary to accomplish it; nor will CAD ensure that it is done with optimal effectiveness. When a design cannot be manu­ factured with an existing process, the decision must stilI be made whether to change the design or the process. That is a human decision, however much it may be facilitated by use of CAD. Viewing CIM as a Utechno-fix H is likely to undercut seriously its po­ tential effectiveness, perhaps to the point that it fails rafher than becomes a successful response. The extreme of this approach would be simply to computerize what already exists: to replace with computerized equip­ ment in a piecemeal fashion, all the machines and functions that cur­ rently are operative. Perhaps it is especially dangerous that CIM might be so viewed. Issues of integration, coordination, and control have tradition­ ally been the domains of soft technologies, and we may be prone to view the computer as simply a tool to increase the efficiency of our traditional responses. There is evidence, for example, that the effectiveness of robots has been somewhat disappointing. One interpretation of this is that our primary motivation for implementing robots has been to replace workers, often on a one-to-one basis. But replacing workers has not reduced costs as much as expected, because of the indirect labor robots require and the difficulties encountered in many factory floor applications. Manufactur­ ers have not usually implemented robots or other advanced manufactur­ ing technologies as elements in a restructuring of the production process. That is what we need to do with CIM, or we risk repeating the same ex­ periences and disappointments. This requires resisting the temptation to exploit CIM simply for more rapid and accurate communication of tradi­ tional information within existing structures. We need to view CIM as KcIM/ capitalizing its integrative role for the manufacturing functions, using the computer as a means to accom­ plish this. If we view CIM as KCim" and focus on the technologies themselves, we risk losing sight of their overall purposes. Continuing to focus on isolated, constituent operations of the manufacturing proc­ ess would seriously interfere with and perhaps prevent the optimal ex­ ploitation of CIM.

The Future of the Domestic Automotive Industry

The traditional U.s. domestic automotive industry-the Big Three man­ ufacturers and their suppliers-has lost its sheltered home market and 153 THE U.s. AUTOMOTIVE INDUSTRY must now compete for that market with industries from around the globe. Its international competitors bring a variety of advantages to that competition, while the traditional U.s. industry still carries some handi­

H caps from its past. The very meaning of the H domestic automotive indus­ try is undergoing substantial redefinition with the establishment of assembly and supply operations of foreign nameplates and suppliers in the United States.

Survival Strategies. We are persuaded that technology is an important element of the traditional industry's required response to that chal­ lenge. Our emphasis has been on process or manufacturing technology because the evidence suggests that the competitive disadvantage is greater there than it is in product or materials technology. Similarly, we have emphasized linking technologies, especially of the soft variety, be­ cause we are convinced that integration and coordination are key ele­ ments of the manufacturing enterprise that afford significant advan­ tage to the Japanese industry. Two major tasks facing the traditional domestic industry are the selection of appropriate technological re­ sponses and the effective implementation of these technologies, coordi­ nated with other necessary changes in their business practices, into their complex manufacturing processes. Technology cannot be the only response, however. We have stressed that the relationships between the manufacturers and their suppliers and those between management and labor must also change. Reworking these relationships should be left to the concerned parties, but unless substantial change occurs we face the ultimate loss of a significant por­ tion of the traditional industry. The Big Three must continue to improve their productivity and prod­ uct quality or face further serious erosion of their market share. The strengthened yen, in our view, provides them with time to accomplish these goals, but certainly does not lessen the need to attain them. There is little question that manufacturers' efforts to improve productivity and product quality will injure some of the current stake holders in the auto­ motive industry. There will be fewer jobs, not only for the future work force, but also for current employees. While increased outsourcing by the manufacturers will probably replace work that traditional suppliers lose to offshore sources, productivity improvements and the entrance of off­ shore suppliers into domestic production will result in lower employment in this sector. The Big Three will all survive in one form or another, but many supplier companies will lose their automotive business to trans­ plant suppliers or to other traditional suppliers, and that typically will mean that they will not survive. These changes may become more difficult to implement as time

154 FLYNN AND COLE

passes and as more companies take actions they believe are necessary for their own competitive survival but that have immediate negative conse­ quences for their work force or their suppliers. It will be difficult to estab­ lish and maintain more cooperative relationships between the manufac­ turers and suppliers and between management and labor in this ,environment. A manufacturer may believe it is essential to buy outside parts or components that it formerly made itself, but this will usually mean a loss of jobs and the termination of some employees. So too, in order to satisfy cost or quality requirements, a manufacturer (or supplier) may feel forced to source parts or components manufactured abroad that were traditionally purchased from a U.S. supplier. Both these situations will occur with enough frequency in the next few years to place severe stress on the emerging changes in both these relationships. Achieving a win-win situation in such a complex industry facing such dramatic changes will involve many actions that do reflect the old win-lose pat­ terns and even more actions that will be so interpreted. Minimizing such actions is an important requirement for longer-term survival. How the manufacturers respond to the negative effects that their ac­ tions have on other industry stake holders will be a major conditioner of the success of their efforts. If they appear to be selecting options that pro­ vide small marginal benefit to themselves at large marginal cost to others, it is difficult to imagine how a successful transition to new relationships can be made. The changes made in the distribution of work within the in­ dustry and the sourcing of parts and components for the industry must be clear and unambiguous requirements, not simply preferences. The al­ most automatic chasing of cheap labor and prices offshore must give way to taking such actions when it is a clear business requirement. The atti­ tude and actions the industry itself takes to alleviate the negative conse­ quences for its current participants will, we suspect, have major influence on the reactions of Hsurvivors" and thus on their attitudes and disposi­ tions in continuing relationships. Changes in the traditional relationships are also essential if the in­ dustry is to improve its product quality. Here the danger is that continua­ tion of past practices undercuts the new commitment to quality or interferes with further progress. Achieving further gains in quality will require the same kind of coordination and integration of effort that pro­ ductivity improvement will require, and, for that matter, gains in product quality through manufacturing improvements will be a major source of productivity improvement. By 1990 the Japanese will have established a capacity to produce 2 million vehicles in North America, presenting a potentially important op­ portunity for traditional suppliers. Not only will securing business at these facilities replace losses at the Big Three, but we believe that supply- 155 THE U.s. AUTOMOTIVE INDUSTRY ing a transplant may be one of the most effective ways for a supplier to be­ come competitive in cost and quality. The transplants will work with the suppliers they select, which seems to be a better learning situation than umodeling" from the outside or trying to uimitate" a partner in a joint venture. The competitive problems of the Big Three and the traditional sup­ pliers are certainly different in degree if not in kind. Each company, then, must carefully select and balance its competitive responses to re­ flect the realities of its own goals and competitive situation. That in­ volves achieving a balance between immediate and more remote problems and responses and carefully evaluating the options with re­ spect to their current and future implications. The effect of short-term responses on longer-term strategies and options is often ignored, and the industry must be especially alert to these possibilities in view of the extreme pressure it faces today.

The Thread of Government Policy. Government policy directly affects the industry only infrequently and even less frequently clearly considers its effects on the industry. The classic case of this may be the CAFE regu­ lations, where government action designed to require rriore fuel-efficient vehicles affected the industry in a variety of ways, presenting a very mixed picture of short- and long-term costs and benefits. The voluntary restraint agreements, for that matter, had unforeseen consequences sim­ ply because they were set numerically rather than as a market share limit. This chapter has focused exclusively on the U.S. and Japanese auto­ motive industries. This is not meant to suggest that the participation of the European and other industries in the U.S. market is unimportant or will diminish, but rather reflects our belief that the competitive situation vis-a.-vis Japan is at once more critical and complex. The share of the U.s. market held by Japanese imports is much higher than the share of all other imports combined, and for the past few years, the automotive trade issue has been part of a larger concern and focus on our bilateral trade deficit with Japan. Our broader relationship with Japan is particularly important, and automotive issues must be resolved in that context. The automotive in­ dustry, though, is of major importance to that broader relationship, not just a small bargaining chip. Two especially critical issues raised by the es­ tablishment of the transplant manufacturing and supplier facilities by Japanese companies are legitimate policy concerns. First, there is a knotty issue of defining the HAmerican automotive industry," at least for pur­ poses of trade policy. Second, there is an issue of what constitutes fair and equitable policy treatment for these new entrants and for the companies that make up the established, traditional American industry.

156 FLYNN AND COLE

The traditional American automotive industry has been multina­ tional for much of its history. It has produced and marketed vehicles abroad, and Ford and GM continue to have a strong worldwide presence outside Japan, as do many major suppliers. The Japanese industry is now becoming multinational, expanding its presence in the U.S. industry be­ yond sales. It seems a fundamental mistake, then, simply to equate the two national industries with their home nations. Any policy that ad­ dresses the automotive industry must recognize that it is no longer simply a question of U.S. versus Japanese automotive manufacturers, but of manufacturers that are predominantly American versus manufacturers that are predominantly Japanese. Policy actions must recognize both the levels of investment and the proportion of total investments that foreign manufacturers make in the United States and not treat the Big Three as 100 percent American and the Japanese as 0 percent American. Protectionist sentiment in the industry and debates about the merits of tariffs and quotas again are moving to center stage, making it particu­ larly important to recognize the multinational character of the automo­ tive companies and their suppliers when addressing trade issues. Treating Japanese nameplate vehicles assembled in the United States as part of an import quota, for example, denies Japan's legitimate participa­ tion in the domestic U.s. economy. The Big Three can, after all, import

U captive" vehicles from countries other than Japan with no fear of quotas or retaliatory government action. The transplants do raise knotty policy issues and legitimate national concerns. Their low level of U.S. engineering content or low value-added manufacturing activity raises legitimate concerns about our domestic economy. But to treat them as identical to imports for trade purposes is simply not appropriate. Increased Japanese investment in automotive production in the United States, spurred by the strengthened yen, raises issues of equity for companies in the traditional automotive industry. New manufacturers enjoy a number of cost advantages over established producers such as lower labor costs due to lower pension and medical insurance costs. Gen­ erally, however, these advantages do not overcome the barriers of large capital requirements that new entrants face. Right now, though, the tradi­ tional automotive manufacturer or supplier sees a high cost of capital in­ vestment for itself and a comparatively low cost for its Japanese competitors. Japanese companies, after all, have profited enormously from their manufacturing cost advantage and have seen their investment costs in dollars fall 42 percent as the yen moved from 240 to 140 to the dollar from September 1985 to September 1987. Some states have of­ fered extraordinary inducements to foreign manufacturers to choose them as the site of one or more of these transplant facilities. In the view of

157 THE U.s. AUTOMOTIVE INDUSTRY

the traditional industry, the effect of a variety of policies is to subsidize the establishment of their direct competitors. A policy that offers induce­ ments to all does not necessarily guarantee that they are available to all, and that is a concern for the traditional industry. These new-entrant advantages enjoyed by transplants do not sim­ ply provide some compensation for the advantages held by the estab­ lished producers. The transplants, after all, have significant competitive advantages over the traditional industry without such inducements. They bring new, effective manufacturing systems and facilities, recruit a carefully selected labor force, and provide a more productive labor­ management climate. One has to sympathize with the traditional indus­ try when it raises the question of whether transplants represent new investments or the premature retirement of the existing investments in the traditional industry.

Summary

The domestic automotive industry has been hard pressed by new compe­ tition, especially from Japan, in the past decade. Although it will survive for the foreseeable future, the exact role traditional companies will play is still unclear. Certainly, however, employment in traditional manufactur­ ers and suppliers will shrink and many supplier companies will not sur­ vive. The costs of this industrial transition will be high, but not as high as the costs of failing to make the transition. Among the beneficial effects of the intensified Japanese competition on the traditional industry are the sharpened efficiency and the im­ proved product of the American automotive industry. The new competi­ tion has reminded the industry of some business fundamentals it has neglected over the years and has refocused attention on process or manu­ facturing technology as both a major source of the U.S. competitive dis­ advantage and a necessary, if not sufficient, means to regaining parity and achieving competitive success. Notes 1. This is not to say that the established offshore competitors in Europe or the new entrants such as Korea are inSignificant. We do believe, however, that the Japanese will challenge across the market and that their volume will continue to equal or exceed the others combined. 2. Robert E. Cole and Taizo Yakushiji, eds., The American and Japanese Auto Industries in Transition (Ann Arbor: Center for Japanese Studies, University of Michigan (English), and Tokyo: Technova, Inc. (Japanese), 1984), pp. 20-21. These calculations are our own, based on data presented in this report. 3. Ibid., p. 18.

158 FLYNN AND COLE

4. Cole and Yakushiji, American and Japanese Auto Industries, p. 25. 5. Ibid., chap. 9; and Michael S. Flynn, "Changing Manufacturer/Supplier Relationships," Testimony before the Subcommittee on International Trade of the Committee on Finance, U.S. Senate, Hearings on the State of the U.S. Automo­ bile Industry, June 27, 1984. 6. R&D Scoreboard, Business Week, various issues, including June 23, 1986, and a special edition of March 22, 1985. 7. See Cole and Yakushiji, American and Japanese Auto Industries, p. 16, for example. 8. April 1, 1978, through March 31, 1979, the Japanese fiscal year. 9. Perhaps the most noteworthy proponent of this point of view is Robert W. Crandall. See, for example, his testimony before the Subcommittee on Interna­ tional Trade, U.S. Senate, Hearings on Automobile Industry. 10. See Michael S. Flynn, nu.5. and Japanese Productivity Comparisons: Stra­ tegic Implications," National Productivity Review, vol. 4, no. 1, pp. 60-71, for ade­ tailed listing and review of these reports. 11. Dave Zoia, nJapanese Cost Edge Put at $2,100-$4,000," Automotive News, February 24, 1986, p. 2. 12. John Saunders, "Dollar Slips to New Low against Yen," Detroit Free Press, March 19,1986, p. 5B. 13. Michael S. Flynn, "Estimating Comparative Compensation Costs and Their Contribution to the Manufacturing Cost Difference," Working Paper Series No. 21 of the Joint U.S.-Japan Automotive Study, January 1984. 14. Michael S. Flynn, "Compensation Levels and Systems: Implications for Organizational Competitiveness in the u.s. and Japanese Automotive Indus­ tries," Working Paper Series No. 20 of the Joint U.S.-Japan Automotive Study, September 1983. 15. It may be that some of these hourly jobs represent transfers to the sup­ plier industry because of increased outsourcing, although the bulk of those jobs probably went out of the country. It may also be that the increased complexity of manufacturing vehicles from 1978 to 1985 masks additional job losses by 1978 standards. 16. Arthur Andersen & Co., Cars and Competition, 1985, projects employ­ ment losses of 23 percent; general manning levels of assembly plants and vari­ ous reports of specific shrinkages by occupation all suggest that this is a minimal likely level. 17. See, for example, Global Competition: The New Reality, Report of the Presi­ dent's Commission on Industrial Competitiveness, John A. Young, Chairman, January 1985. This report considers alternatives such as retraining vouchers tied to unemployment insurance for displaced workers. 18. Michael S. Flynn, nSupplier Perceptions of Customer Quality Expecta­ tions," Paper presented at the American Society for Metals Conference on Customer/Supplier Relationships, Chicago, Illinois, November 1985. 19. David E. Cole and Lawrence T. Harbeck, University of Michigan Delphi Forecast and Analysis of the U.S. Automotive Industry through 1992: Delphi III (Ann Arbor: Institute of Science and Technology, University of Michigan, 1984). The 159 THE U.s. AUTOMOTIVE INDUSTRY discussion that follows is based on table T-9, pp. 29-31. The thirteen dimensions of vehicle quality are fit and finish; basic structural integrity of body and chassis; engine and drive train integrity and durability; maintenance requirements; cor­ rosion resistance; ride and comfort; styling; handling; safety; total car reliability; fuel economy; drivability; and emission level. 20. Matt DeLorenzo, "Mercedes and Subaru Top Satisfaction Index," Automo­ tive News, August 26,1985, p. 22. 21. A recent study, however, reports that across twelve products the Japanese manufacturers are typically at the initial production stage, the Europeans at the prototype stage, and the U.s. manufacturers at the research stage. The compa­ nies that represent each "national" industry are different for different technolo­ gies, emphasizing the point that companies, not national industries, compete. See Helen Kahn, "Europe, U.S. Lag behind Japanese, Study Says," Automotive News, September 30,1985, p. 2. 22. For an interesting and thorough discussion of many of these issues, see Richard P. Hervey and Donald N. Smith, "Steel vs. Plastics, Automotive News, September 1, 1986, pp. D18 and D20. 23. Cole and Harbeck, University of Michigan De/phi Forecast: Delphi III. 24. Two books that were quite popular in the automotive industry in the early 1980s provide examples of approaches to competitive issues that emphasize the soft rather than the hard technologies. These are William G. Ouchi, Theory Z: How American Business Can Meet the Japanese Challenge (Reading, Mass.: Addison-Wesley, 1981); and Richard Tanner Pascale and Anthony G. Athos, The Art of Japanese Management: Applications for American Executives (New York: Simon & Schuster, 1981). These books, failed, however, to illustrate the system­ atic nature of the approaches they discussed and certainly did not clearly link them to the machine activity of production. What we call the soft technologies are unfortunately not often accorded much coverage in works that adopt either a management or a technology focus. 25. John McElroy, "Quality Goes In before the Part Comes Out," Automotive Industries, vol. 164, no. 11 (November 1984), pp. 51-52. 26. National Academy of Engineering, The Competitive Status of the U.S. Auto Industry (Washington, D.C.: National Academy Press, 1982), pp. 90-108. Seees­ pecially pp. 101-4. 27. More detailed discussions of JIT are available in Richard J. Schonberger, Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity (New York: Free Press, 1982); and Robert W. Hall, Zero Inventories (Homewood, Ill.: Dow Jones-Irwin, 1983). 28. Survey conducted by Edith Wiarda and Sean McAlinden. Results reported in Michael S. Flynn, "JIT in the U.S. Automotive Supplier Industry," in Just-in­ Time Produktion: Zulieferung Erfahrungsberichte (Passau: Universitat Passau, Sep­ tember 1986), Band 2, pp. 988-1012. Such data, of course, provide insufficient information to evaluate how well or how completely JIT is implemented. 29. See, for example, Ingersoll Engineering, "Just-in-Time ... 'Their' Way. It

Works! Just-in-Case ... 'Our' Way. It Works Too! But .. .n Management Report, n.d. 30. Many of these changes are minor from a design perspective but may have

160 FLYNN AND COLE major implications for the manufacturing process. A recent annual model change by one manufacturer increased the height of an electronic control by less than half an inch. Because ovens have internal temperature gradients, this change was enough to prevent the reliable setup of the matrix material for the control's inter­ nal electronics. Since the original manufacturing process was an ad hoc rather than a routine solution, it took considerable time and effort to isolate the process problem from possible material and equipment problems. Meanwhile, the scrap rate for this control approached 50 percent. 31. Called MAP, for manufacturing automation protocol, this is a set of opera­ ting communication standards and specifications. The Industrial Technology In­ stitute in Ann Arbor, Michigan, is currently the only operating conformance testing site approved by the U.S. MAP Users' Group, the industry group made up of large customers for computerized manufacturing equipment. 32. We refer to the further use of a CAD data base for engineering analysis and simulation as computer-aided engineering, or CAE. We use CAD in a more re­ strictive sense because that definition is more appropriate to the industry's cur­ rent application of the technology. The full implementation of CAE, of course, permits the development of truly optimized designs, and its benefits will be im­ pressive indeed. 33. Thomas G. Gunn, "The Mechanization of Design and Manufacturing," Sci­ entific American, vol. 247, no. 3 (September 1982), pp. 67-75. 34. Unfortunately, there is not yet the firm commitment to compatibility in the CAD area that exists for more direct manufacturing equipment; there is not yet a MAP equivalent for CAD. It does seem likely that this standard will be forthcoming in the next year or two, however. While that might result in imme­ diate obsolescence of much CAD equipment, it will make investment decisions easier for suppliers. 35. The decrease in hourly jobs was steeper and the recovery of hourly jobs slower during that period, reinforcing the probability that coming reductions will be proportionately higher among salaried employees.

161 4 The U.S. Steel Industry: Strategic Choices in a Basic Industry Donald F. Barnett

Over the past few years the steel industry worldwide, and the U.S. steel industry in particular, has been in turmoil, with large financial losses, siz­ able government assistance, increasing trade barriers, mergers, plant clo­ sures, and layoffs. The American industry has been the focal point of these changes, and while the U.S. industry's financial outlook improved significantly in 1987, the industry may not survive in its current form. Nothing less than a revolution is overwhelming the industry throughout the world and especially in the United States: a revolution in tastes, loca­ tion of demand, technologies, and competitiveness. The survival of many American steel producers is in question, and the choices the United States and other world steel producers will need to make are vital. Less than twenty-five years ago, the U.s. steel industry was consid­ ered the premier world steel industry-by far the largest producer, a net exporter of products and technology, and a vibrant, growing, financially sound industry. Dominated by a few major integrated producers such as U.s. Steel, the American steel industry was at that time the major text­ book example of oligopolistic behavior. In contrast, in recent times the u.s. steel industry has been consid­ ered backward by world standards, a moderately large, but financially very troubled declining industry, with sizable net imports of products and technology-an industry increasingly dominated by atomistic small-scale steel mini-mills, which are the dynamic element of the in­ dustry. The steel industry is a striking example of the industrial revolu­ tion sweeping across the economic landscape and drastically altering industry structure. How did we get where we are today in steel, what are the immediate problems, and where are we going? These are the questions to be an-

The author wishes to thank Peter Marcus, Karlis Kirsis, and Alan Brown for their con­ tributions.

162 DONALD F. BARNETT swered in this chapter. The discussion deals with the past, present, and future, examining the economic environment and the strategies of the steel producers. The aim is to set out a strategic road map for reestablish­ ing a healthy and dynamic steel industry during an era of expected excep­ tional turbulence. By looking anhe U.S. steel industry in this way, we hope to establish a general strategic development pattern useful for future direction for this industry and for other industries facing similar circumstances. Since World War II the strategies adopted by the various major world steel pro­ ducers have ranged from the "stand pat" U.S. strategy of the 1950s to the "massive modernization" strategy (particularly by the Japanese) in the 1960s, through the "aggressive small-scale market orientation" of the U.S. mini-mills in the 1970s, and culminating in the current strategic op­ tions of "predator cost cutting" or "downstream value adding." These, of course, are not all the strategies adopted but are merely examples of some key strategy differences. Each strategy arose out of a particular environ­ ment, and the current environment of hostile economic circumstances coupled with major threats to trade creates the need for strategies whose success or failure may either recreate or doom the steel industry as we know it in the United States.

Roots: The Era of Scale and Integration

The steel industry has long been considered essential for a successful in­ dustrial economy. Industrialized countries have traditionally had major steel industries, and developing countries have emulated the major in­ dustrial countries in encouraging steel production as a means to pro­ mote industrialization. Before the 19 70s the most successful steel producers were seen as the largest (in terms of tons produced), with ensured access to raw materials. Bigness was regarded as essential to realize the economies of scale crucial to efficient steel production, and since scale was crucial, plants were often built in anticipation of fairly rapid market growth. The availability of raw materials was seen as essential to ensure continuous production and to minimize transport costs in a large-scale integrated process. This section discusses the development of the steel industry, with particular reference to the period 1950-1970. During those two dec­ ades, change in the industry was modest, and techniques of production differed little internationally. The steel industry relied on its integrated raw material base and stressed increased scale of production in improv­ ing efficiency.

163 THE U.S. STEEL INDUSTRY

Background. In 1950 the American steel industry was by far the world's largest, with over 45 percent of world steel production. In contrast to the American production of nearly 100 million tons, production in \\'hat is now the European Economic Community (EEC) was approximately 50 million tons and in Japan less than 10 million tons, The magnitude of the preeminence of the American steel industry in 1950 resulted in part from the devastation of other economies and indus­ tries by World War II, but the underlying reason for the dominance of the U.s. industry reflected much longer-term developments. For about 100 years there had been a steady expansion of the C.s. industry as compared with its foreign rivals, reflecting the rapid expansion of the U.s. economy and the steady buildup of infrastructure, including railroads, buildings, the automobile industry, and the like, which was not replicated else­ where. At the same time the United States had a ready- availability- of superior-quality coal and abundant iron ore reserves, both of which were key ingredients to making steel. Because of a sizable and growing home market and the ready availability of critical raw materials, American en­ trepreneurs helped develop and impro\'e the techniques of production essential to transform ore and coal into iron and steel, and from before 1900 through 1950 the American steel industry was the clear leader in steel-making technology. Markets, resources, and technological change were the three key fac­ tors that accounted for the historic success of the American steel industry. The firms in the best position to supply the market, commanding the most favorable resources and applying the latest technology, were in a position to dominate steel production. Because before 1950 the transport of steel and iron ore or coal was very expensive, control of raw materials near the markets was a clear advantage. At that time most foreign steel producers were, in comparison with American producers, limited by market size or immediate resource availability or both. Within the United States the struggle for superior raw materials and the application of in­ creasingly large-scale technologies for transforming ore and coal into steel led to the dominance of the American steel industry by a few large integrated firms that had their own ore and coal mines and that trans­ formed these raw materials into finished steel products in numerous large steel-making plants,

American Supremacy. By the 1950s the American steel industry was by far the world's largest: not only a supplier of the home market, but also a significant net exporter. The American industry's strength depended on a large domestic market, available resources, and superior technologies in place, American steel consumption in the 1950s was approximately 70 mil-

164 DONALD F. BARNETT lion tons of finished steel products a year, over 40 percent of total world steel consumption. The largest markets were in steel for automotive and other transport uses and in construction. No other countries had steel markets that matched the American, in part because their economies had a lower standard of living and were neither as large nor as developed. The other fairly large world markets at the time, outside the Soviet Union, were the United Kingdom, West Germany, and France, in that order. American steel production was about 100 million tons of crude steel, with shipments of approximately 72 million tons. The United States was a net exporter, mainly to Canada. The other fairly large steel-producing areas, outside the Soviet Union, again were the United Kingdom, West Germany, and France; Japan was a very small steel producer in the early 1950s. American steel-producing firms were very large by comparison with other suppliers, and the individual U.s. plants were also very large and up to date technologically. The steels produced in the United States were more sophisticated, with a wider variety (in terms of metallurgy, coatings, sizes, and types of products) than elsewhere. The U.s. steel industry of the 1950s was heavily concentrated: fewer than ten major producers and only one domestic producer (U.s. Steel) held more than 40 percent of the market. For years Washington had viewed this oligopoly as a wayward and intransigent ward of the govern­ ment, necessary for the economy, but virtually refusing to produce in a socially and politically responsible manner, truculently acting in its own self-interest. In the early 1950s, for example, when the government wanted to ensure more than sufficient steel for the Korean War, the in­ dustry was reluctant to increase capacity (believing that it understood the market better than the government) and was almost nationalized before it added capacity. In the mid-1950s after the Korean War, when the mar­ ket declined and the excess capacity added earlier became a costly bur­ den, the industry was investigated for raising prices to cover higher costs. The poor public and government relations indicated by these conflicts were a major handicap to the American steel industry. The industry required numerous raw materials in enormous quanti­ ties, from water to limestone, ferroalloys, iron ore, and coal. The major raw material requirements at the time, as they are now for integrated pro­ ducers, were iron ore and high-grade coking coal (to make coke, which was used with iron ore in blast furnaces to make iron). Since at least the 1850s coal and ore had been the key ingredients to steel production, and the location of steel-producing activities had been principally designed to minimize the transport costs of these two inputs and to a lesser extent transport to the market. In the United States, steel mills had initially lo­ cated in Pennsylvania near coal, while iron had been transported from the Mesabi Range in Minnesota by boat; by the early 1900s, mills were in-

165 THE U.S. STEEL INDUSTRY creasingly located near Chicago closer to iron ore and the expanding western market. Although by the 1950s the United States had a clear advantage over other world producers in abundant nearby high-grade coking coal, by that time the best qualities of Mesabi ore had been mined, and lower­ grade taconites remained. The U.S. industry began to develop are mines in Quebec and Labrador to replace the Mesabi sources. These ores were superior in grade to remaining Mesabi ores but distant from some pro­ ducers and with grades below the preferred levels. Simultaneously with the opening of mines in Quebec and Labrador, the U.s. industry began developing new techniques of concentrating and agglomerating (pelletizing and sintering) to produce a higher-grade, more uniform­ sized blast furnace feed. The United States was well endowed with iron ore, but the cost of production was rising as the grades mined declined; mining costs increased as less accessible ores were developed and be­ cause of the need to concentrate lower-grade ores. In the 1950s the American steel industry was the largest and techni­ cally most up to date in the world. It had pioneered the development of beneficiation and agglomeration of ores, and by the mid-1950s approxi­ mately 40 percent of ores used were so treated; this compares with 10 percent in Germany, the United Kingdom, and Japan. The results were a superior grade (higher iron content) and sized input to the blast furnace, which significantly improved blast furnace throughput and efficiency (in labor use, energy use, and capital costs per ton). Beneficiation, however, was costly, requiring converting the ores to either pellets (usually at the mines) or sinter (usually at the mills), both of which were expensive, large-scale processes. During this time the United States also had the largest blast furnaces, made more widespread use of open hearths (the preferred steel-making technology at the time), and operated superior larger rolling mills. U.s. steel-producing facilities and plants were about double the size of their nearest foreign rivals, and the average U.S. steel firm had approximately five times the capacity of the average steel firm in other countries. U.S. steel-making labor productivity was four or five times that of the Japa­ nese, although more than 500,000 were employed in the American in­ dustry. U.S. labor costs, however, were much higher than elsewhere, offsetting the superior productivity. In addition, partly because produc­ tivity was already so good, realizing productivity improvements suffi­ cient to offset labor cost increases became very difficult. Finally, labor relations in the United States were far from ideal, with a long history of repeated strikes or threats of strikes; and this instability proved a major barrier to maintaining superior U.s. performance. The long history of 166 DONALD F. BARNETT weak labor relations culminated in the longest strike in the history of the U.s. steel industry (until 1986) in 1960. Although in the 1950s the U.S. industry had all the trappings of suc­ cess, its continued success depended on the industry's ability to develop strategies to maintain and build on advantages in raw materials and to re­ tain and enhance U.S. superiority in labor productivity or narrow the dis­ advantage in U.s. hourly labor costs. Conversely, the hope of other industries for success in competing with the U.S. giant depended on their comparative ability to develop strategies to close the U.s. advantage in raw materials while narrowing their own productivity disadvantage without paying too much in higher hourly labor costs. From the position of the early 1950s the contest was very unequal-the American Goliath versus the foreign David. The battle for world steel markets was the American industry's to lose.

Lost Horizons. For the U.S. steel industry, the 1950s seem the golden past, a past of lost markets, lost technological supremacy, and lost profits. The 1950s were the prelude to the more uneasy 1960s, with new compe­ tition at home and abroad, sizable increases in production costs, reduced pricing power, and much reduced profitability. The uneasy 1960s, how­ ever, were mere whispers of the turbulent 1970s and the catastrophic 1980s. The major changes in the position of the U.s. steel industry from 1950 to 1970 set the stage for the turbulence and catastrophe to follow.

Markets. As noted earlier, in the 1950s the U.S. steel market was large by international standards. While the U.S. market was very large, how­ ever, growth in the 1950s was virtually nonexistent, less than 1 percent per year, and steel consumption relative to real GNP was declining. This reflected the fact that much of the American economy's infrastructure was in place and basic steel-consuming industries were well established, with diminishing scope for expansion. In contrast, in economies such as West Germany's and Japan's, which had been devastated by World War II, there were massive needs to rebuild infrastructure, to reestablish in­ dustries, and to meet growing consumer demand for automobiles as well as appliances and other steel-using goods. Consequently, the growth of the steel market in the EEC was over 10 percent per year in the 1950s, while in Japan it was over 20 percent per year. The 1960s saw some improvement in the U.S. steel market, with growth in consumption at almost 3 percent per year, although still declin­ ing relative to real GNP. This accelerated growth was due in large meas­ ure to the Vietnam War and the Great Society programs. By the late 19605, however, the trend of steel consumption began an accelerated de­ cline relative to real GNP, which was to continue through the 1970s and

167 THE U.s. STEEL INDUSTRY

TABLE 4-1 WORLD STEEL CONSUMPTION AND PRODUCTION, 1950, 1960, AND 1970 (millions of tons, crude steel equivalent) Consumption Production 1950 1960 1970 1950 1960 1970 Industrial countries United States 99 100 142 101 99 131 EEC (nine) 49 90 136 58 108 152 Japan 5 22 77 6 24 103 Other 6 23 45 6 22 45 Total 159 235 400 171 253 431 Centrally planned economies 44 97 171 44 96 172 Developing countries 25 50 86 11 35 56 Total world 228 382 657 226 384 659 SOURCES: From data published by the American Iron and Steel Institute, World Steel Dynamics, the World Bank, the International Iron and Steel Institute, and the United Nations.

early 1980s despite a major but temporary upswing in 1973-1974. The 1960s also saw continued rapid growth in foreign steel markets, although at a more sedate pace. The EEC market, for example, grew at about 5 per­ cent per year, the Soviet market at about the same pace, while the Japa­ nese market grew at about 15 percent per year. As a result, as shown in table 4-1, the U.S. share of world steel consumption declined from 43 percent in 1950 to 26 percent in 1960 and 22 percent in 1970. Table 4-1 compares steel consumption and production in the United States with that in other world areas in 1950, 1960, and 1970. The table also shows that in the 1950s growth in both consumption and production was much more rapid in other areas than in the United States. Note par­ ticularly that the markets of the EEe, the centrally planned economies, and the developing countries essentially doubled and the Japanese mar­ ket increased more than fourfold in the 1950s. The strong domestic growth in these countries provided the impetus to increase local steel pro­ duction and set the basis for the development of more competitive and ef­ ficient steel production outside the United States. Production and capacity. As tables 4-1 and 4-2 show, crude steel ca­ pacity and production in the 1950s and 1960s increased very rapidly out­ side the United States but not in the United States. Production by U.s. producers remained the same in the 1950s and increased only modestly

168 DONALD F. BARNETT

TABLE 4-2 WORLD STEEL-MAKING CAPACITY AND CAPACITY UTILIZATION, 1950,1960, AND 1970 Capacity Capacity Utilization (millions of tons) (percent) 1950 1960 1970 1950 1960 1970 Industrial countries United States 116 138 154 88 72 85 EEC (nine) 64 115 165 91 94 92 Japan 7 26 110 83 92 93 Other 7 22 50 83 80 91 Total 194 301 479 88 84 90 Centrally planned economies 50 104 187 89 93 92 Developing countries 13 40 66 83 89 85 Total world 257 445 732 88 86 90 SOURCES: Same as sources for table 4-1.

(by 32 percent) in the 1960s. In contrast, Japanese capacity and produc­ tion grew fourfold in the 1950s and in the 1960s, EEC capacity and pro­ duction almost doubled in the 19505 and increased almost 50 percent in the 1960s, and production in the centrally planned economies more than doubled in the 1950s and almost doubled in the 1960s. The U.S. share of world steel production declined from 45 percent in 1950 to 26 percent in 1960 and 20 percent in 1970. Although U.s. steel production increased very little or not at all in the 1950s, the same cannot be said for U.s. steel-making capacity. During the 1950s U.S. capacity increased at about 2 percent per year, so that U.s. industry operating rates, which had averaged almost 90 percent in the early 19505, averaged below 75 percent by the late 1950s. Much of this in­ creased capacity resulted from an overoptimistic view of the U.s. market in the 1950s, in part resulting from government pressure and the de­ mands of the Korean War. Little increase in U.S. steel industry capacity took place in the 1960s, and operating rates improved as a result of more rapid growth in consumption and production. Nevertheless, the rela­ tively low operating rates of the U.S. steel industry created a cost burden that became a major handicap in remaining competitive with foreign suppliers. The small increase in U.S. capacity in the 1960s was partly a re­ sult of low profits and cash flow, as the U.S. industry steadily lost its com­ petitive position.

169 THE U.S. STEEL INDUSTRY

Raw materials. At the beginning of the 1950s, the access of the U.s. steel industry to abundant low-cost ores and coking coal provided a tre­ mendous advantage over other producers. The best-quality ores, how­ ever, were used up, and the U.s. industry began to search for other nearby ores and to develop ways to use lower-grade domestic taconites. The industry made massive investments in iron ore exploration, develop­ ment, and production to supply the mineral requirements of the U.S. in­ dustry. These developments were in both the United States and Canada (Quebec and Labrador) and were very costly, involving consortiums of U.s. and Canadian steel producers jointly developing mines (except for U.S. Steel, which developed its own mines) through ore development firms such as Cleveland Cliffs, Hanna, and others. In the 1950s, these developments looked capable of providing abun­ dant moderate-cost ore to an expanding domestic steel industry. Much higher-grade ore bodies, however, were also being discovered in Africa, South America (Brazil), and Australia; grades of up to 65 percent Fe (iron) in the ground (versus 30 percent Fe in the ground in the United States and Canada) were discovered with no concentration required and low-cost mining. But the U.S. industry was largely uninterested in such ore bodies, since transport costs to U.S. steel plants were extremely high and appar­ ently precluded economical supply to the United States. The 1950s also saw the beginnings of the revolution in bulk transport, quickly used by foreign steel producers to facilitate rapid decreases in unit costs to trans­ port ore (and other bulk commodities such as coal), so that by the 1970s Brazilian and Australian ores were the lowest-cost delivered ores in the world, cheap even delivered to some U.s. mills. The U.S. industry-led ore developments in Quebec and Labrador began to seem increasingly une­ conomical by comparison. But the American steel industry continued to press ahead with major ore developments in the United States and Canada through the 1960s because of the location of U.s. steel mills. Most were in the Great Lakes area, where it was expected that U.s. and Canadian ores would continue to have lower delivered costs and where the reliable, continu­ ous supply of ore believed essential for a growing steel industry could be ensured-a supply that could be secured only by reliance on domesti­ cally owned ore. During this period there was constant concern about shortages of raw materials, and if a producer's resources were limited, its ability to create the large tonnages necessary to maintain its market share was also limited. The U.S. advantages in iron ore decreased dra­ matically over this period. In the other key raw material, coal, America remained the source of the best quality coal through the 1970s. New coal discoveries were made in Western Canada and Australia, however, which could be delivered to

170 DONALD F. BARNETT steel producers in Japan at costs that became increasingly attractive rela­ tive to delivered costs of American coal to U.s. steel mills over the 1950- 1970 period. Again, this development could in large measure be attributed to rapid changes in bulk shipping techniques with larger and larger vessel sizes resulting in lower and lower per unit transport costs. The U.S. advantage in terms of access to low-cost delivered coal com­ pared with that of other producers such as Japan who had little domestic coal shrank significantly over the 1950-1970 period.

Strategic issues. Throughout the 1950s and 1960s the American steel industry steadily became less able to claim technical superiority, lower cost inputs, superior productivity, and comparative cost advantages. By the end of the 1950s the United States had become a net steel importer, and by the end of the 1960s those net imports were large. Because the U.S. steel industry was then perceived to be having difficulty competing in its home market, trade restrictions were imposed to allow the industry to reorganize. Why this happened can be explained in terms of various performance and input price measures. But before turning to these as­ sessments, we should understand the overall strategic decisions that were made in the United States and abroad, which undercut the American in­ dustry'S advantages. These decisions are quickly reviewed for Japan, Eu­ rope, and the United States.

• Japan. In the early 1950s the Japanese steel industry was still reeling from the aftershocks of World War II. Various international agencies and the Japanese government provided aid to get the Japanese industry back on its feet. The assessment at the time was that the Japanese steel industry was perhaps the most important industry to the long-term success of the economy and that to succeed it must reduce its costs by lowering the prices paid for coal, energy, and iron ore inputs, while dramatically im­ proving efficiency and so building upon low-cost labor. Since Japan had few raw materials, these had to be imported but had to be paid for with steel exports since foreign exchange was short. The Japanese set about building an industry from scratch, relying heavily on U.S. techniques to improve efficiency but adjusting borrowed techniques to emphasize con­ servation of raw materials. Japanese institutions gave the industry prior­ ity in funds, materials, and policies. Raw materials were acquired with trading company contracts to encourage development of nearby low-cost ores and coals. By the mid- to late 1950s the first-generation moderniza­ tion was in place, and while the industry was not yet competitive, it had made rapid progress. The rapid growth in the home market facilitated continued expansion of capacity and provided funds for investment and installation of new technology. Thereafter, successive waves of industry 171 THE U.s. STEEL INDUSTRY expansion and modernization occurred, each employing the latest tech­ niques available. By the end of the 1950s the Japanese steel industry had earned a sig­ nificant share of the world export market for steel and was seen as a rea­ sonably low-cost supplier. The first major exports from Japan to the United States took place in 1960 when a U.s. steel strike forced consum­ ers to seek other sources and convinced the American buyers that Japa­ nese steel was acceptable and competitive. Throughout the 1960s the Japanese steel market and shipments continued to expand rapidly, new and larger modern steel-making plants were installed, new lower-cost sources of ores and coal were developed, and sophisticated techniques of cost and product quality control were implemented. By the end of the 1960s the Japanese steel industry was the major world exporter, was a major source of supply to the United States, and was recognized as among the most efficient steel producers in the world. The Japanese ap­ proach to improving efficiency has been termed Hmassive moderniza­ tion/ which means that the Japanese steel industry attempted to install the largest, most efficient facilities to gain all possible economies of scale, leading to successive waves of ever larger plants whose output was ab­ sorbed by a rapidly expanding market. 1 • Europe. It is more difficult to discern a common strategic theme for Europe, because of the diversity of countries and approaches. Tradition­ ally, West Germany is cited as the example of the European steel industry and will be so used here for purposes of illustration. Europe, with its long tradition as a major steel producer, has developed many of the technolo­ gies still in use today. World War II virtually destroyed the European steel industry, and the 1950s saw the rebuilding of that industry to provide steel for local consumption, for the most part using the latest techniques of production. Steel consumption growth, however, while significant at almost 7 percent per year in the 1950s and almost 4.5 percent per year in the 1960s, was much less marked than that in Japan and the implementa­ tion of modern technology somewhat slower. The European industry generally relied, as it had traditionally, on local low-grade ores and coal, importing only from Sweden, at least initially. European strengths lay in comparatively low-cost labor and reasonably up-to-date techniques of moderate scale. The European industry was largely government owned or influenced and tended to make very optimistic predictions of market growth. Correspondingly, steel capacity in Europe usually far out­ stripped demand. Although the European producers relied principally on the home market, net exports at about 20 percent of home consumption in 1960 and 15 percent in 1970 were also significant. • United States. In the early 1950s the U.S. steel industry was the only one untouched by World War II, with facilities and operations not only 172 DONALD F. BARNETT intact but enhanced by the demands of that war and then by the Korean War. By the 1950s the u.s. industry was by far the most technically effi­ cient steel producer in the world, relying on comparatively low-cost local ore and coal and using large-scale reasonably modern technology. U.S. labor costs were high, though and market growth was slow, especially after the end of the Korean War. And though the pace at which new tech­ nology was installed also was slow, capacity growth exceeded the market's requirements. Throughout the 1950s the industry continued to lose its competi­ tive edge, as the faster-growing and modernizing Japanese and Euro­ pean steel industries caught up in cost and product quality. The U.S. industry did install many new facilities in the 1950s but made many questionable strategic investment decisions, given the limitation on funds available. It invested heavily in the development of ore mines in Labrador and taconite mines in Minnesota to head off what seemed a certain shortage. Shortage was prevented, but at the same time superior-grade, easier-to-mine ores were being discovered in Brazil and Australia. While these ores were seen as inaccessible to the American in­ dustry because of transport costs, they provided a much lower-cost input to the American industry's competitors in Japan and Europe. The American industry in the mid- and late 1950s continued to install open hearth steel making despite the availability of basic oxygen furnace (BOF) technology, because that technology was judged inadequate to provide the tonnage required by existing U.S. plants; BOF technology, though, was judged sufficient by the Hsmaller# Japanese and European plants. Initially, BOFs were small-scale facilities, but rapid technological improvements soon increased the output of BOFs, so that within a few years their performance completely dwarfed open hearths. These ad­ vances assisted the rapid acceleration in size of offshore plants, while American open hearths constrained U.S. scale. By the early 1960s the U.S. industry realized it was losing its compet­ itive advantages and embarked on a major push to modernize, installing new hot-strip mills, BOFs, and the like. Unfortunately, its efforts to en­ hance cash flow by controlling labor costs and by raising prices were aborted in part by government intervention, causing many investment decisions to be deferred. Throughout the 1960s and 1970s the U.S. indus­ try continued its battle with labor, with recurrent threatened strikes usu­ ally settled in the White House and always settled by much higher wages. Wages rose to levels well above those in U.s. manufacturing as a whole (70 percent above about 1980 versus 35 percent above about 1960), espe­ cially after the early 1970s when the U.S. industry reached a no-strike agreement with the union. U.S. steel employment declined from over 500,000 in the 1950s to about 400,000 by 1970, a trend reflecting some

173 THE U.s. STEEL INDUSTRY

efforts to improve productivity, although those efforts were hampered by labor agreements and by inadequate attempts to reduce costs. By the late 1960s the U.s. industry had only partially modernized and had not im­ proved its competitive position, as its rivals had run faster in the race to efficiency. The resulting increased U.S. imports were termed unfair, spur­ ring trade restrictions to assist the industry to weather the storm of grow­ ing competitive pressure from abroad. In the early 1960s, the first glimmers of a new, smaller-scale industry, in the form of steel mini-mills that melted scrap in electric furnaces to produce steel bars, began to ap­ pear in regions of the country isolated by transport costs from integrated producer competition.

Turbulence and Catastrophe. For the U.S. steel industry the 1970s were years of severe turbulence, while the 1980s were the tempest itself. In the 1970s import competition remained a threatening danger, held at bay by successive import protection policies from quotas to trigger-price mecha­ nisms. The threat of import competition led to lower profitability in a pe­ riod of higher energy costs and inflation. The period from 1970 to 1985 has been the most turbulent, even catastrophic, in the history of the U.s. steel industry.

Markets. By 1970 the U.S. steel market was no longer large by world standards, with only 22 percent of world consumption. Furthermore, growth in domestic steel consumption was negative from 1970 to 1980 (-1.2 percent per year) and again from 1980 to 1985 (-0.5 percent per year), and steel consumption relative to real GNP entered a period of ac­ celerated decline (at -3.7 percent per year from 1970 to 1980 versus -0.8 percent in the 1960s). The negative growth of the U.S. steel market reflected the tremendous structural changes at work in the U.s. econ­ omy as a whole, with the energy crisis, new robotic and electronic tech­ nologies, and significant changes in consumer tastes, almost all of which decreased the demand for steel-intensive products, as well as steel-saving technological changes. These changes also affected other steel-consuming groups such as the EEC and Japan, where structural changes begun in the United States about 1970, and accelerated by the energy crisis, soon had their consequences. Steel consumption relative to real GNP declined in all industrial countries, as well as in centrally planned and developing countries. Those countries with higher real GNP growth and economic structures less susceptible to sophisticated technological adaptations, however, continued to have fairly rapid growth in steel consumption. As table 4-3 shows, steel consumption fell or failed to grow signifi-

174 DONALD F. BARNETT

TABLE 4-3 WORLD STEEL CONSUMPTION AND PRODUCTION, 1970, 1980, AND 1985 (millions of tons, crude steel equivalent) Consumption Production 1970 1980 1985 1970 1980 1985 Industrial countries United States 142 127 123 131 115 95 EEC (nine) 136 115 104 152 141 132 Japan 77 80 82 103 121 119 Other 45 46 45 45 53 54 Total 400 368 354 431 430 400 Centrally planned economies 171 230 231 172 230 231 Developing countries 86 183 200 56 123 153 Total world 657 781 785 659 783 784

SOURCES: Same as sources for table 4-1.

cantly in the United States, the EEC, Japan, other industrial countries, and the centrally planned economies beginning in 1980. Only in devel­ oping countries has growth in steel consumption continued, and even these countries experienced a marked decline in the growth of steel con­ sumption after 1980, as the structural changes at work elsewhere began to affect growth in steel consumption in developing countries as well. The decelerating growth in overall steel consumption after 1970 was brought about by structural changes that decreased consumers' steel re­ quirements (for example, lighter cars using more substitute materials, higher-strength steels in some uses, more consumer spending on elec­ tronic than on steel-intensive products, and the like). Unfortunately, steel producers did not understand the implications of these structural changes for steel consumption until well after they had begun to take ef­ fect, and they continued to plan and carry out capacity expansions in an­ ticipation of rapid growth in steel consumption ten years after the era of rapid deceleration had begun. This perpetual market overoptimism has been a major problem for steel producers worldwide.

Production and capacity. As table 4-3 indicates, steel production in the United States declined significantly after 1970. In part this can be at­ tributed to a declining steel market, but a major element in this decline was increased import penetration, in turn partly the result of a loss of competitiveness by traditional U.s. producers. European steel produc­ tion has also declined rapidly since 1970, while Japanese steel production

175 THE US. STEEL INDUSTRY

TABLE 4-4 WORLD STEEL CAPACITY ANDCAPACITYUTIUZATION, 1970, 1980, AND 1985 Capacity Capacity Utilization (millions of tons) (percent) 1970 1980 1985 1970 1980 1985 Industrial countries United States 154 152 130 85 76 73 EEC (nine) 165 171 160 92 82 83 Japan 110 151 147 94 80 81 Other 50 60 65 90 88 83 Total 479 534 502 90 81 80 Centrally planned economies 187 248 248 92 93 93 Developing countries 66 160 186 85 77 82 Total world 732 942 936 90 83 84

SOURCES: Same as sources for table 4-1. has leveled off; again, this trend can be associated with declines in home consumption. Since the mid-1960s the United States has been a net importer of steel, and imports have continued to threaten U.s. steel production. In 1970 net imports were about 8 percent of U.s. consumption, but they in­ creased, in an extremely uneven manner, to almost 25 percent in 1985. In contrast the EEC and Japan were sizable net exporters: European net ex­ ports expanded from about 10 percent of production in 1970 to over 20 percent in 1985, while Japanese net exports increased from 25 percent to 30 percent of production over the same period. The other major net im­ porters were developing countries, where net imports had been 35 per­ cent of consumption in 1970 but declined to less than 25 percent by 1985. These simplifying summaries of changes in import and export shares over time mask dramatic and highly erratic surges in trade flows, re­ sponding to changes in underlying competitiveness, exchange rates, new or excess capacity, trade restrictions, and government assistance of vari­ ous kinds. The volatility of the world steel market and the erratic nature of trade flows are largely attributable to the significant slowdown in the growth of steel consumption worldwide and to the highly politicized nature of steel production in which perpetual overoptimism about steel market op­ portunities prevails. Those making the decision to add unneeded capac­ ity are seldom held accountable for the consequences. Tables 4-3 and 4-4 show the trends in capacity as well as in steel production and consump­ tion. The significant declines in the utilization of capacity worldwide, 176 DONALD F. BARNETT especially in the industrial countries, provide dramatic evidence of the shift in world steel markets and the failure to match capacity to markets. As the most vulnerable market, the United States, with the lowest entry barriers and a marginally competitive industry, became a happy dump­ ing ground for worldwide excess capacity and the efforts of foreign gov­ ernments to export potential unemployment. Since the late 1960s, the United States has implemented many import restraint programs to limit imports or to ensure that import prices are above dumped levels, with the ultimate aim of allowing the domestic industry to regroup and become more competitive to head off the challenge of imports. In 1984 the United States again instituted a five-year program of voluntary restraint to give the domestic industry some respite from imports. By early 1987 these policy efforts had restrained imports, although the exceptionally large devaluation of the U.S. dollar from 1985 to 1987 was probably a more im­ portant import deterrent. Such trade restrictions, however, cannot re­ verse a declining home market, eliminate significant domestic excess capacity, or make steel producers competitive. Nevertheless, the United States now seems to be rebuilding a com­ petitive industry, and there is hope that excess capacity worldwide will be reduced as pragmatic profit objectives replace patriotic social benefit views about the need for steel capacity. In part, this change is already evi­ dent (see tables 4-3 and 4-4) in the United States and Europe, where ca­ pacity cuts have already begun. Although these cuts have yet to match falling consumption and production, at least the gap between capacity and production is no longer widening. The United States has made the most pronounced cuts and will probably continue to do so as the domes­ tic industry restructures to become more in tune with the market as well as competitive changes.

Costs and competitiveness. Table 4-5 summarizes current costs of pro­ duction of traditional steel producers in various countries for a typical product, cold-rolled coil (eRC). For Japan and West Germany the costs are shown at two sets of exchange rates, the 1985 average and early 1987 rates. As the table shows, U.s. steel production costs, until recently, were high by normal world standards, because the costs of labor and ore input were high and because the efficiency of U.S. steel-making plants did not offset these disadvantages. Assuming approximately $70 a ton to trans­ port and import foreign steel, the United States has been a profitable market for most foreign steels. This profitability, however, depends very much on foreign exchange rates, as is evident with Japan and West Ger­ many: at average 1985 exchange rates both countries continued to export profitably to the United States. At 1987 exchange rates they no longer could, because Japanese and European full production costs exceeded

177 >-4 'I 00

TABLE 4-5 PRODUCTION COSTS FOR COLD-ROLLED COIL, 1987 (U.S. dollars per net ton of finished product)

jal!an a Korea Brazil West German!!.a United States (240yen/$) (150yen/$) (BOOwon/$) (50cruzeiro /$) (300DM/$) (180DM/$)

Operating costs Labor 134.50 69.00 110.00 29.50 28.00 71.50 121.00 Iron ore 61.00 45.00 45.00 46.00 23.00 43.00 43.00 Scrap 18.00 7.50 8.50 11.00 Coal 27.50 31.50 31.50 35.50 42.00 31.00 31.50 Other energy 37.00 28.00 28.00 37.00 36.00 32.00 32.00 Other raw materials and supplies 78.00 63.50 97.00 96.50 114.00 70.00 101.50 Maintenance and repair 37.50 26.00 41.50 37.50 37.00 33.50 45.00 Total operating costs 393.50 263.00 353.00 282.00 287.50 289.50 385.00 Depreciation 25.50 36.00 58.00 75.00 27.00 31.00 51.00 Interest 12.00 32.50 52.00 15.00 68.00 18.00 29.00 Total costs 431.00 331.50 463.00 372.00 382.50 338.50 465.00 Input prices Iron ore (ton) 35.00 23.00 23.00 23.50 10.00 25.00 25.00 Scrap (ton) 90.00 80.00 100.00 110.00 110.00 80.00 100.00 Coal (ton) 46.00 52.50 52.50 55.00 65.00 52.00 53.00 Other energy (mmbtu) 4.00 3.50 3.50 3.50 3.50 4.00 4.00 Labor (hour) 24.00 12.50 20.00 3.70 3.00 13.00 22.00 Efficiency measures Capacity utilization (%) 85.00 65.00 65.00 100.00 90.00 65.00 65.00 Coke rate 0.50 0.51 0.51 0.52 0.56 0.50 0.50 Energy (mmbtu) 26.25 24.50 24.50 28.00 29.00 26.00 26.00 Man-hours per ton 5.60 5.50 5.50 8.00 8.60 5.80 5.80 Yield from raw steel to finished product 0.81 0.90 0.90 0.85 0.81 0.84 0.84 Continuous cast (%) 70.00 100.00 100.00 80.00 75.00 80.00 80.00

mmbtu = millions of British thermal units. a. Average 1985, and mid-1987, exchange rates. SOURCE: Estimates by author for typical plant, rounded to nearest $0.50 .

...... 'I \0 THE U.s. STEEL INDUSTRY those in the United States. Most world steel is traded at marginal or oper­ ating costs, however, which has made the U.S. market even more attrac­ tive to foreign suppliers; and even at 1987 exchange rates some continued potential for Japan and West Germany on this basis exists in the United States. Since the mid-1960s the Japanese steel industry has been considered the lowest-cost, most efficient world supplier of typical integrated steel products, and at 1985 exchange rates this still was the case. Japan gained and retained this position by superior performance and comparatively low-cost labor, which offset disadvantages in access to iron are, coal, and energy. Over time, however, the Japanese advantage in labor costs per hour has steadily decreased as Japanese living standards rose, and only through tremendous efforts to improve productivity was this labor cost increase offset. In the late 1970s new producers with advantages in either raw materials (Brazil) or labor (Korea and Brazil) began to expand their capacity and to make some inroads in typical Japanese markets. Recent exchange rate movements have dramatically accelerated the loss of Japan's competitive advantages and indeed opened the way for other world suppliers to capture Japan's position as the major steel exporter. Table 4-5 illustrates the presence of many competitive producers now supplying cold-rolled coil. We have not considered still others such as Taiwan, and the number of potential competitive suppliers is expand­ ing rapidly. Now and then one of these competitors stumbles or, through no fault of its own, loses its competitive edge, but there are many others to take its place. The new producers usually offer advantages in lower labor costs, which more than offset efficiency disadvantages initially and ace a - sionally advantages in other low-cost inputs. This makes the problem for American steel producers very difficult, because even if they succeed in becoming competitive with one supplier, they may fall behind others. Table 4-5 illustrates the problem that has faced traditional U.S. pro­ ducers. With unfavorable exchange rate changes, U.S. producers have, until recently, largely failed to remain competitive, imports have in­ creased over time, and many domestic plants have closed. The U.s. in­ dustry tried in the 1960s and 1970s to keep up with the Japanese through a umassive modernization" program of building large facilities (blast fur­ naces, for example), installing new continuous casting, and the like. It was a case of too little too late, however, with limited investment funds sprinkled over many facilities and plants, some of which had no chance of survival and ultimately closed with new facilities in them. In many cases the U.S. industry used limited investment funds to build overlarge facilities rather than adapt to market changes. In the 1970s and early 1980s the traditional U.S. industry not only lost the war with imports, admitting defeat by pressing for import restric-

180 DONALD F. BARNETT tions, but also lost the war at home. Until the 1960s, steel production in the United States was largely in integrated steel plants relying on iron ore and coal-feeding blast furnaces to produce ghot metal" for charging into steel furnaces to produce steel, which was cast and rolled into steel prod­ ucts. In the early 1960s, however, there arose a new kind of steel pro­ ducer, which melted scrap in electric steel furnaces (EFs) and continu­ ously cast this steel into primary products that were rolled into bars and rods. These mills pioneered a simplified small-scale production process suitable for a regional market; they were protected from the competition of more efficient integrated mills by lower transport costs and by employ­ ing nonunion workers. Through the 1960s these mills continued to im­ prove EF steel making and to refine both casting and rolling. By 1970 they had 7.5 million tons of capacity (in about thirty plants) or 5 percent of total domestic capacity and had improved their competitive strengths enough to challenge integrated mills directly in the traditional mills' mar­ kets in bars and rods. These mini-mills became the forefront of low-cost new technology with rapid improvements in EF steel making, casting, and rolling and tremendous productivity improvements, which offset their competitive disadvantages in scale and energy costs (electricity). By 1980 these mills had over 15 million tons or 10 percent of total U.s. ca­ pacity, and by 1987 they had 22 million tons or 19 percent of total U.s. ca­ pacity. Because of higher yields and operating rates, the mini-mills' share of u.s. shipments was even higher than these numbers would suggest, reaching a projected 22 percent of U.s. shipments in 1987. Table 4-6 shows comparative costs of producing a typical mini-mill product in inte­ grated mills and mini-mills in the United States and Japan in 1987. As table 4-6 clearly shows, integrated techniques for producing wire rod in neither Japan nor the United States are able to compete with mini­ mill techniques. Mini-mills have superior labor and energy efficiency be­ cause they skip the production processes necessary to transform iron ore to iron, and as long as scrap prices remain relatively low, they are much lower-cost producers. Table 4-6 also illustrates that at the exchange rates shown, U.s. mini-mills are much lower-cost producers than those in Japan. Mini-mills' cost comparisons are extremely sensitive to exchange rates, with over 66 percent of a Japanese mini-mill's costs denominated in yen and only one-third in U.S. dollars. Table 4-6 demonstrates that, in the United States, an internationally competitive steel industry has been emerging within the older steel industry. The competitive strength of mini-mills lies in producing those steel products for which small-scale technology has been developed and for which product quality requirements do not preclude use of scrap. When these mills were first developed in the 1960s, they produced rebar and light shapes, neither of which required very sophisticated processes or

181 THE U.s. STEEL INDUSTRY

TABLE 4-6 COMPARATIVE COSTS OF PRODUCING WIRE ROD IN INTEGRATED MILLS AND MINI-MILLS IN THE UNITED STATES AND JAPAN, 1987 (U.S. dollars per ton; 90 percent capacity utilization) United States Japan (150 Yen/$) Integrated Mini-mill Integrated Mini-mill Operating costs Labor 108.00 31.50 78.00 36.00 Iron ore 58.50 44.00 Scrap 16.50 99.00 109.00 Coal 25.00 29.00 Other energy 34.00 37.50 26.00 40.50 Other costs 95.00 65.00 128.00 79.S0 Total operating costs 337.00 233.00 30S.00 26S.00 Depreciation 16.00 12.00 37.00 18.00 Interest 14.00 16.00 33.00 17.00 Total costs 367.00 261.00 37S.00 300.00

Input prices Iron ore (ton) 33.00 23.00 Labor (hour) 24.00 17.50 20.00 20.00 Scrap (ton) 90.00 90.00 100.00 100.00 Coal (ton) '46.00 S5.00 Electricity (mmbtu) 0.04 0.04 O.OS O.OS

Efficiency Man-hours per ton 4.S0 1.80 3.90 1.80 Energy (mmbtu) 28.90 9.10 2S.00 8.10

NOTE: Estimates for integrated U.s. plants are largely hypothetical since this product has been almost entirely abandoned by integrated producers and repre­ sents a much higher-grade product than that produced by a mini-mill. - = not applicable. mmbtu = millions of British thermal units. SOURCE: Estimates by author. qualities. Over time, with refinements in billet casting, the use of electric furnaces and ladle refining, and rolling mills designed for specialized use, the product coverage of mini-mills expanded into other long prod­ ucts such as wire rods and merchant bars. Mini-mills in the United States have now essentially captured these markets from domestic and foreign integrated mills and are developing the technologies that will enable them to begin producing all remaining long products, including large

182 DONALD F. BARNETT structurals and seamless tubes, as well as flat products such as plates and hot-rolled coils. This advancement will open up much larger markets to this low-cost approach to steel making and promises to contribute to transforming the U.S. steel industry into a thriving dynamic interna­ tional competitor. Mini-mills, however, require scrap for the metallic feedstocks, and high scrap prices, perhaps pulled up by the very success of such mills, could limit their place in the U.S. market. Raw materials. By the early 1970s the u.s. access to iron ore appeared more a penalty than a benefit. New sources of low-cost iron ore were being developed in Brazil, Australia, and elsewhere, providing a major benefit to the U.S. industry's competitors in Europe and Japan. Unfortu­ nately, because of transport expenses these lower-cost sources did not ap­ pear to be available to the major U.s. mills, and yet based on market projections at the time, increased ore would be required, not only to re­ place exhausted ore bodies but also to meet additional requirements for steel. Consequently, the U.S. industry expanded its ore development, es­ pecially in the Mesabi Range of Minnesota, by upgrading low-grade taco­ nite deposits, and allocated sizable investment expenditures to this purpose and to transport of iron ore. Many of these developments proved unnecessary and uneconomical in the 1980s because markets did not grow as anticipated and because foreign sources proved far cheaper than expected. In comparison, Japan and the EEC benefited tremendously from their use of lower-cost ores from Australia, South America, and Af­ rica. In all market areas, however, projections of steel demand were exces­ sively optimistic, and steel capacity and iron ore capacity built to meet this mythical demand were far above requirements. By the early 1980s iron ore capacity worldwide was greatly in surplus, and iron ore opera­ tions were being closed or curtailed. U.S. and Canadian iron ore opera­ tions (both producing ore principally for the North American markets) were closed or cut back, with massive layoffs and financial losses. As in iron ore, the 1970s also saw a slowdown in coking coal require­ ments, while at the same time new, low-cost coking coal mines were opened in the United States, western Canada, Australia, and elsewhere. Many of these operations later proved unnecessary and were cut back, with layoffs and closures. The United States is the source of the world's best coking coal, however, and remained in a favorable position despite cutbacks. Nevertheless, U.S. steel companies suffered from the high U.S. coal prices relative to other sources. The high prices weakened the U.s. steel industry's ability to compete, necessitating major cost-cutting ef­ forts by U.S. coking coal producers since the early 1980s. If world energy prices remain low, further major reductions in U.s. coal prices and costs can be anticipated.

183 THE U.s. STEEL INDUSTRY

The United States is the major world repository and generator of scrap, whether from current production activity or from waste recovery. This scrap provided the sole feedstock for the developing mini-mills and a partial source of iron for traditional integrated steel makers. Until the 1970s this input aroused little concern. With the expansion of scrap­ using mini-mills and the growing requirements of offshore buyers, how­ ever, scrap prices began to rise in the 1970s, and in 1973-1974 scrap prices skyrocketed-there was even a scrap shortage, and export controls were imposed. The shortage was short-lived, though, reflecting the un­ usual coincidence of worldwide cyclical demand peaks for steel. From the mid-1970s through 1986 scrap prices remained fairly low, and scrap shortages did not recur, because of the slowing demand for steel. During this period scrap prices were low compared with the cost of metallic sub­ stitutes, pig iron, or direct-reduced iron (DRI). In 1987, however, scrap prices rose rapidly, reflecting the positive effects of the declining dollar on u.s. steel shipments and on U.S. scrap exports. Developed in the 1970s when scrap shortages appeared imminent, direct reduction is a process that reduces iron from ore, using various types of energy, notably natural gas. As a process it was handicapped by very high capital costs and dependence on massive amounts of energy, which ensured that as long as energy prices remained high, ORr could not become a viable scrap substitute. With lower energy costs, higher scrap prices, or both over the long term, DRI may become more economical in those areas of the world where scrap is not available or where scrap trans­ port from other sources is very costly. At one time in the 1970s many steel-making raw materials were of concern to steel makers, who feared the potential of OPEC-style or other curtailment of the supply of ore, coal, and scrap, but particularly ferro­ alloys, chrome, nickel, and rare metals. None of these fears were justified because market forces have been much more robust in finding substitutes or alternative sources than was considered possible in the 1970s. Most of the efforts so attractive to many politicians-to anticipate crises by hoarding materials, building stockpiles, and the like-have shown them­ selves to be a total waste of resources.

Strategic issues. From 1970 to 1985 the traditional U.S. steel industry continued to lose ground to foreign integrated competitors and to domes­ tic mini-mills. Crude steel production in traditional mills declined from over 105 million tons in 1970 to less than 70 million tons in 1985, a one­ third reduction. Most of this decline came in the late 1970s and 1980s and can be blamed on U.s. mini-mills rather than on imports. Declines also occurred, at great cost to the taxpayer, in other traditional steel-producing areas, notably Europe and Japan, but the declines there were less

184 DONALD F. BARNETT precipitous-especially in Europe. Capacity reductions abroad failed to keep pace with these production declines, but sizable capacity reductions are still expected in Japan and Europe. The decline of the role of traditional steel making in the United States can be blamed on rapid changes in and diffusion of technology, which rapidly eroded the competitive position of U.S. mills. But the big­ gest mistake of the U.S. industry and other traditional producers was their failure to develop strategic alternatives and to adjust rapidly to mar­ ket changes. Indeed, many traditional producers added capacity at the same time that market changes clearly indicated that contraction was im­ minent. The strategic choices of Japan, the United States, and Europe from 1970 to 1985 are summarized below.

• Japan. By 1970 the Japanese steel industry had established itself as the preeminent steel industry in the world, the leader in technology, scale, and cost. The Japanese home market had grown rapidly since the 1950s, the Japanese industry had a rapidly expanding overseas market, and it had secured very low cost sources of raw materials through long­ term contracts. The Japanese had built successive generations of steel plants approximately every seven years, each much larger and more up to date technologically than the last and each built to supply existing mar­ kets as well as anticipated markets. The unexpected slowdown in Japa­ nese steel markets in the 1970s caught the Japanese completely by surprise. Indeed, not until the mid-1980s did they fully recognize that the market would grow little or not at all, that they had far too much capacity for current markets, that much capacity would need to be eliminated, and that the massive scale of their plants made for ponderous adjustments to a no-growth environment characterized by continuous and rapid changes in product requirements and competitive conditions. The Japanese industry has a few excellent mini-mills, relying on do­ mestic and imported scrap, though their role is much smaller in Japan than in the United States. Mini-mills do not fit in with the Japanese ten­ dency to operate on a more massive scale, as is evident by their 15- million-ton steel plants. Mini-mills also employ comparatively low cost technology, and the technical changes that have kept mini-mills at the forefront of competitiveness are also low cost. The Japanese have built steel plants all over the world; for the most part they represent attempts to replicate the large-scale technology and facilities developed at home, and, while marvels of engineering, they are often less economical outside a Japanese environment in places where work practices are less disci­ plined, markets unregulated, and competition unfettered. The Japanese have also built mini-mills outside Japan, where again the engineering is excellent, but they are often unsuccessful. Successful mini-mills are built

185 THE U.S. STEEL INDUSTRY cheaply, built quickly, and operated with low-cost, relatively unskilled labor. In contrast, the typical Japanese facility is carefully and laboriously constructed and must usually be operated by a highly skilled work force. The Japanese steel industry, since the market slowdown, has not been in a position to build massive new mills and to continue its historical path to success, which depended upon ever greater economies of scale and implementation of costly new technologies. The Japanese had the option of rapidly increasing reliance on mini-mills but failed to realize their potential except for a narrow range of products. The Japanese chose instead to continue improving their existing integrated plants. They have encountered rapidly diminishing returns, however, since they have his­ torically relied on volume and have had to try to substitute value gains through better product quality. This approach has incurred high capital costs, leaving the Japanese susceptible to high fixed cost penalties in down markets and in times of yen appreciation. The tremendous yen ap­ preciation of 1985-1987 tested the Japanese approach as never before. Since the Japanese were noncompetitive in the world market at the ex­ change rates prevailing in mid-1987, a major restructuring of their indus­ try seems inevitable, with mergers, financial write-offs, plant closures, and the like, much like the United States, but probably in a more coordi­ nated and rapid manner. • Europe. In anticipation of rapid market growth, throughout the 1970s the European steel industry, which was heavily government­ financed for political and social reasons, continued to add capacity. The Europeans did not go quite as far as the Japanese in terms of scale, but did build large, modern, expensive facilities. The mini-mill has as yet only a modest role in Europe, because most of the markets suitable to mini-mills have been assigned by governments to integrated mills to keep jobs. Con­ sequently, the products that can be made more efficiently by mini-mills are still manufactured by integrated producers. In the 1970s when mar­ kets slowed, Europe tried to increase exports rather than cut capacity, and many mills were heavily subsidized for this purpose. The United States and others understandably resisted this practice as unfair trade, and in any case it did not increase the market for steel (although it might have in­ creased the EEC share). Ultimately, the EEC has had to reduce capacity, a process currently under way, although in a ham-handed, costly, multigovernment-directed manner, with comparatively efficient private firms bearing most of the restructuring while subsidized government en­ tities continue to disrupt the market. The European industry still has a long way to go in restructuring and cutting costs. It is true they have, gen­ erally, kept capacity use high by dumping steel abroad. Current exchange rate changes, however, have made many European producers very un­ competitive, will certainly force more restructuring and capacity reduc-

186 DONALD F. BARNETT tions, and will ideally force much greater reliance on market-oriented de­ cision making. Of the European industry, only the United Kingdom has cut costs and capacity sufficiently to return to profitability at mid-1987 exchange rates. • United States. By 1970 the traditional U.S. industry, despite a major reinvestment spurt in the 1960s, had fallen far behind its international competitors, and a major expansion in domestic mini-mill capacity was imminent. These facts were not recognized at the time, and prospects for market growth looked promising. In these circumstances traditional pro­ ducers attempted to expand the capacity for steel making and raw mate­ rial production and to modernize the existing plants. The modernization plans essentially constituted duplication of the Japanese success in using large-scale facilities with the latest capital-intensive technology. Each producer planned to retain its full product coverage and to modernize all its facilities, usually beginning at the front end (iron ore mining, coke ovens, blast furnaces, and steel making) rather than at the market end (cold rolling and coating). This approach demonstrated lack of under­ standing of the market changes under way, which decreased tonnage re­ quirements but increased quality demands. Investments were often made haphazardly, assuming that virtually all facilities would be modernized. Unfortunately, the competitive environment and no-growth market ac­ tually allowed only some integrated capacity to survive, in which case in­ vestment should have been concentrated in survivable plants that emphasized products in which mini-mill and offshore competition was less severe. Producers attempted little of this strategic decision making, consequently committing errors that forced plant closures later. By the early 19805 traditional producers recognized in part the market changes under way and made major efforts to eliminate the most obsolete capac­ ity and to cut costs. Industry capacity was reduced to about 130 million tons by 1985 and to 112 million tons by 1987 (from a high of over 150 mil­ lion tons), employment reduced to about 200,000, and productivity sub­ stantially improved from about 8.5 man-hours per ton (MHPT) (for cold-rolled coil) in 1980 to about 6.5 MHPT in 1985 and 5.5 MHPT in 1987. These achievements are significant, but much remains to be done to turn the U.s. industry around permanently. In discussing the strategy of the U.S. industry, one must distinguish between integrated and mini-mill producers. The 1970s and early 1980s were a period of intensive growth for mini-mills, with rapid increases in the number of mills and a major broadening of product coverage. The original mills produced rebar and light shapes but quickly expanded into wire rod, merchant bars, larger shapes, and, recently, seamless tube. The original mills were regional, relying on local markets pro­ tected by transport costs from their larger competitors, but they have re-

187 THE U.S. STEEL INDUSTRY cently assumed the role of market mini-mills, supplying a low-cost product to a vast geographical area in direct competition with imports and domestic integrated mills. The general trend in mini-mills is to build a low-cost mill producing a specialized commercial-grade standard product and then to upgrade by improving the mill or installing a sec­ ond mill. Mini-mills are built with a short expected life, with moderni­ zation or replacement usually in less than seven years. Each successive generation of mini-mills has dramatically improved upon the last in costs as well as in product quality and type, and each new mill has usu­ ally been larger than the last, although this trend has recently been partly reversed by the development of the micro-mini-mill with still greater specialization and technology adapted to smaller tonnages. Mini-mills are expected to make further inroads in integrated markets and to compete successfully with imports.

The Far Pavilions. The U.s. steel industry has endured a long period of extreme duress, with major bankruptcies, layoffs, strikes, and plant clo­ sures announced and expected. Indeed, like most world steel industries the U.S. steel industry can look forward to continued major change, with capacity reductions and restructuring, layoffs, and financial difficulties. But because of the significant efforts of American steel makers to cut costs and improve quality, complemented by a devaluing of the u.s. dollar, which has encouraged exports and discouraged imports of steel-using products, the u.s. steel industry realized significantly improved ship­ ments and financial prospects in 1987. These improvements indicate that while the way will be very rough, by the early 1990s the American steel industry may emerge from its oligopolistic lethargy and take its place as a competitive, efficient, and technologically up-to-date industry. Tables 4-7 and 4-8 show projected overall trends in world consumption, pro­ duction, capacity, and use of capacity.

Markets. By 1985 the u.s. steel market was only 15 percent of the world market. Furthermore, steel consumption in the United States in crude steel equivalent is expected to decline further by 1995, so that the U.S. share of world steel consumption is projected to be less than 13 per­ cent by 1995. U.s. steel consumption relative to GNP is expected to de­ cline by about 2.5 percent a year from 1985 to 1990 although the lower value of the U.S. dollar is expected to reduce indirect steel imports (for ex­ ample, as cars) and partially offset the negative U.S. trend in steel con­ sumption. For comparison purposes Japanese steel consumption relative to real GNP is expected to decline by about 3.0 percent a year from 1985 to 1995, while for the world as a whole steel consumption relative to real GNP is expected to decline 1.9 percent a year over the same period.

188 DONALD F. BARNETT

TABLE 4-7 PROJECTED STEEL CONSUMPTION AND PRODUCTION, WORLDWIDE,1985-1995 (millions of tons, crude steel equivalent) Consumption Production 1985 1990 1995 1985 1990 1995 Industrial countries United States 118 109 106 88 80 77 EEC (nine) 104 100 100 132 126 124 Japan 82 85 87 119 119 120 Other 45 46 47 54 58 60 Total 349 340 340 393 383 381 Centrally planned economies 231 235 245 231 240 250 Developing countries 200 245 283 153 197 237 Total world 780 820 868 777 820 868

SOURCE: Author's estimates.

TABLE 4-8 PROJECTED STEEL CAPACITY AND CAPACITY UTILIZATION, WORLDWIDE,1985-1995 Effective Capacity Capacity Utilization (millions of tons) (percent) 1985 1990 1995 1985 1990 1995 Industrial countries United States 128 100 91 69 80 85 EEC (nine) 160 150 145 83 84 85 Japan 147 143 141 81 83 85 Other 65 66 68 83 88 90 Total 500 459 445 79 83 86 Centrally planned economies 248 254 266 93 94 94 Developing countries 186 215 255 82 90 93 Total world 934 928 966 83 88 90

SOURCE: Author's estimates. The expected longer-term negative growth of the U.s. steel market, as well as that of other steel markets, especially in industrial countries, will reflect the continuation of the structural changes already at work.

189 THE U.S. STEEL INDUSTRY

These structural changes include further shifts in consumer preferences, from basic products to more highly valued service-oriented goods, as well as application of new technologies and substitute materials. Some structural changes that diminished steel use, such as down­ sizing of cars, will slow or cease, while substitute materials such as plas­ tics can be expected to continue making slow but steady inroads into steel markets. For years major product development efforts have been under way in engineering plastics to make possible substitutes for specific steel­ using products (for example, car fenders, refrigerator doors, and the like). This technological momentum is expected to payoff for steel-competing industries in the 1990s especially, making possible lower-cost, high­ quality alternatives to steel products. Cheaper steels may slow these in­ roads, but the consumer of steel does not compare plastic (resin) with steel but, for instance, a plastic fender with a steel fender. Steel is cheaper than plastic, but a plastic fender may be cheaper than a steel one, because the processes necessary to transform plastic into a fender are less costly than the comparative processes for steel. Plastic manufacturers long ago realized this difference and helped develop these downstream processes, while steel makers have only recently begun such efforts in a modest way. Product developments in plastics and aluminum have dwarfed those in steel, and these substitute materials have had a defined target-steel it­ self. Steel had no comparable target material at which to aim. Because the technological momentum of product development has swung far away from steel, it may be difficult to reverse. As Table 4-7 shows, in all world areas growth in steel consumption is expected to slow, especially in industrial countries and centrally planned economies. For the world as a whole, steel consumption is expected to grow at slightly over 1 percent per year from 1985 to 1995. Negative growth is expected in the United States and Europe, with only slightly positive growth in Japan, other industrial countries, and centrally planned economies. Even in developing countries, growth in steel con­ sumption of only 3.5 percent is predicted over the next ten years, a figure that compares with over 5.7 percent in these same countries over the pre­ vious fifteen years. Most of the growth in developing countries is ex­ pected to occur in Southeast Asia. Many countries have recognized that the world steel industry is in an era of slow or no market growth and have cut capacity. Unfortunately, some countries began new steel projects before they realized that slow growth will be the norm. Although in a few high-growth markets one could rationalize adding low-cost domestic production to replace higher­ cost imports, in most cases the capacity additions still taking place reflect misplaced priorities, overoptimistic planning, corruption, and over­ zealous salesmanship by plant builders.

190 DONALD F. BARNETT

Production and capacity. As tables 4-7 and 4-8 indicate, steel produc­ tion and capacity are expected to decline or grow very little in most indus­ trialized countries through 1995. Only in the developing countries is a significant increase in production expected. The developing world has traditionally been a major net importer of steel from industrialized coun­ tries, and, rather than allowing imports to expand, developing countries are likely to add domestic capacity. Much of this capacity will not be eco­ nomical and may substitute high-cost domestic for low-cost imported steel; nevertheless, that capacity will be built. Despite such additional ca­ pacity and production, however, developing countries will probably not narrow the gap between consumption and production through 1995. Japan and the EEC are likely to remain the major net exporters of steel through 1995. At current exchange rates, though, Japanese and Euro­ pean steel is very high cost and cannot compete with Korean, Taiwanese, or Brazilian steel, a disadvantage that may encourage additional capacity and production in those countries at the expense of Japanese and Euro­ pean sources. Table 4-9 summarizes expected trends in U.S. steel consumption, production, capacity, and other industry measures. As noted earlier, steel consumption in the United States is expected to fall fairly steadily through 1995. In 1987 imports of finished products, which reached over 25 percent of consumption in 1985, were expected to be about 20 percent because of the VRAs. Some increase in finished product imports, to about 22 percent, is expected by 1990, with projected weakening of the VRAs (due to end in 1989 but expected to survive in modified form). Total im­ ports are expected to reach over 30 percent in the 1990s (most of the in­ crease is predicted in semifinished steel, where the current U.S. market is very tight). Domestic shipments of finished steel products will decline somewhat as the market shrinks. The decrease in shipments by domestic producers and the increase in semifinished steel imports will cause fur­ ther reductions in domestic crude steel production by 1995. Steel-making capacity in the United States is still excessive. Much of the current capac­ ity is still obsolete and not economical. This obsolete capacity will be eliminated by 1995; indeed, most of the excess capacity has already been cannibalized for spare parts and could not be resurrected. Reductions in capacity of 12 million tons by 1990 and a further 9 million tons by 1995 are projected. As the projections in table 4-9 suggest, the restructuring of the U.S. steel industry that has resulted in recent mergers, plant closures, bank­ ruptcies, and massive layoffs is not over. Unless the industry remains competitive, even at less favorable exchange rates, the import share of the domestic industry will rise from that indicated in table 4-9. A major com­ ponent of the restructuring has been the growth of mini-mills and their

191 THE U.S. STEEL INDUSTRY

TABLE 4-9 PROJECTED CONSUMPTION, PRODUCTION, AND CAPACITY IN THE U.S. STEEL INDUSTRY, 1985-1995 (millions of tons)

1985 1987 1990 1995 Consumption Domestic shipments of finished product (FP) 73 75 73 71 Imports: FP 23 18 19 20 semifinished products 1 2 4 2 Exports of FP 1 1 1 1 Total consumption of FP 95 92 91 90 Import share (%) 24 20 21 22

Shipments Mini-mill shipments of FP 15 17 18 20 Integrated shipments of FP 59 60 54 47 Total shipments of FP 74 77 72 67 Mini-mills' share (%) 20 22 25 30

Production Mini-mill crude steel production 17 20 20 23 Integrated crude steel production 71 70 62 54 Total crude steel production 88 90 82 77

Capacity Mini-mill capacity 22 22 24 27 Integrated capacity 116 90 76 64 Total capacity 128 112 100 91

Capacity utilization (%) 69 80 82 85 Total yields 0.83 0.83 0.84 0.85 Total productivity (MHPT) 6.20 5.50 5.00 4.00 Total employment (thousands) 239 210 180 135

NOTE: These are trend forecasts, ignoring cycles. MHPT = man-hours per ton. SOURCE: Author's estimates. displacement of integrated steel producers in some product lines. These mini-mills have captured virtually all the domestic shipments of bars, rods, and light structurals and are starting to make inroads into heavier structurals and seamless tubes. Because of technological changes that have made possible smaller-scale production of many steel products, the 192 DONALD F. BARNETT mini-mill capture of domestic shipments will continue. The next major product group into which mini-mills are likely to venture is flat-rolled products. Flat products, the traditional preserve of integrated producers, have until now been immune to mini-mill penetration because of the large-scale requirements of economical production and the difficulty of producing high-quality flat products from scrap rather than iron ore. New technologies, however, such as ladle metallurgy, thin slab casting (that is, casting a slab 1.5 inches thick versus 10 inches thick), and mini­ hot-strip mills make possible superior steels and low-cost production at lower volumes. Mills incorporating these technical changes have already been announced and, combined with other means of producing low-cost steel, will result in a more competitive domestic steel industry. Table 4-9 shows the growing role of mini-mills: the mini-mills' share of domestic shipments is projected to increase from 22 percent in 1987 to 30 percent in 1995. As the 1987 rise in scrap prices indicates, the minis have a finite limit to their capacity potential, and, in addition, problems with the qual­ ity of scrap will limit their expansion into high-quality steel products. The continued growth of mini-mills combined with a reduction in overall steel-making capacity in the United States will, of course, result in a significant retrenchment in integrated capacity. As table 4-9 shows, in­ tegrated steel-making capacity by 1995 is forecast to decline by about 30 percent from 1987 levels, with integrated production by 1995 at about 54 million tons as compared with 71 million tons in 1985. This reduction, of course, will make for a much slimmer and trimmer U.s. steel industry, with obsolete facilities gone, replaced by more technologically up-to­ date and competitive plants. While these technological changes will benefit mini-mills, inte­ grated producers will also benefit from technological advances. For the more distant future, the major technological changes expected are a sub­ stitute for the coke oven and blast furnace (iron smelting) or direct charg­ ing of iron ore into the steel furnace (plasma steel making) and sheet casting in which molten steel is directly cast into a sheet one-tenth of an inch thick, for example, for final rolling only. All these technical changes will significantly reduce the capital costs of constructing steel plants by eliminating coke ovens and blast furnaces and reducing the number of rolling stands on a hot-strip mill. These changes will benefit small-scale mills and also help integrate techniques by reducing the cost of using ore. Although none of these techniques is expected to be in place before 1995, after that they have the potential of significantly altering how steel is pro­ duced, benefiting U.S. steel production relative to foreign sources. A slimmer and trimmer U.s. steel industry will require not only much less capacity but also significantly fewer workers, as the industry tries to improve labor productivity. Employment by 1990 is expected to be

193 THE U.s. STEEL INDUSTRY less than 190,000 and by 1995 less than 140,000. A comparison of these employment levels with those in the 1950s (above 500,000) and 1960s (above 400,000) and indeed even with those just before 1980 (about 350,000) reveals just how drastically employment has fallen. These re­ ductions were occasioned by reduced production and efforts to improve efficiency but were motivated by the much higher U.S. employment costs than those in other countries. One side effect of these high-cost labor contracts, coupled with the very recent acceleration in plant closings and layoffs, is that a number of firms have found themselves with seriously underfunded pensions and with no means to raise the necessary cash. Wheeling Pitt and LTV, among others, sought Chapter 11 bankruptcy as a means to escape these liabilities-passing them to the U.S. Pension Bene­ fit Guaranty Corporation (PBGC) (which has, in part, rejected this gift) before it revised the rules for accepting such liabilities. Many firms in the U.s. steel industry still have substantially underfunded pensions, and the prospects for improvement are not bright, given the likelihood of greater layoffs and plant closures, without government action to raise company revenues or absorb pension liabilities.

Costs and competitiveness. As table 4-5 shows, until 1985 tradi­ tional steel making in the United States had been losing ground against foreign mills. Because of exchange rate changes from 1985 to 1987 and cost reductions, however, traditional mills in the United States have found themselves in the unusual position of being competitive with Japan and West Germany in flat products. Nevertheless, traditional in­ tegrated steel producers in the United States have new foreign competi­ tors in Korea and Brazil, with others (like Taiwan) waiting in the wings. As table 4-6 shows, traditional U.S. mills were well behind mini-mills in competing in certain product lines. In the past few years, however, inte­ grated producers in the United States have done remarkably well in cut­ ting costs and becoming efficient. The efficiency improvements re­ sulted from closing obsolete facilities, installing selected new facilities such as continuous casters, and making numerous significant operating improvements. The cost improvements resulted from these changes, as well as price concessions from suppliers on key inputs such as ore, coal, oxygen, and other materials. The major input upon which concessions have been sought has been labor. Labor problems have been endemic in the u.s. industry. After President Lyndon Johnson refused to allow a strike, labor costs in the U.s. steel industry rose at astronomical rates, from 25 percent above the all­ manufacturing average of labor costs in the 1950s to about 75 percent above by 1980. Such labor costs could not be borne by an industry be­ sieged with competition from foreign producers with low labor costs and

194 DONALD F. BARNETT domestic nonunion mini-mills. In 1983 the union granted modest across­ the-board wage concessions, which were clearly not sufficient to restore a competitive domestic industry. Since then selected steel plants in trou­ ble (Weirton, and McLouth, for instance) obtained some labor cost con­ cessions, and pattern bargaining of the steel companies broke down. In 1985 Wheeling Pitt got more substantial labor concessions, and in 1986 individual company negotiations resulted in still more concessions for distressed firms such as LTV, which, despite the concessions, requested Chapter 11 bankruptcy. Recourse to Chapter 11, and the union pattern of giving concessions to the most troubled firms, which were usually the least efficient, has distressed the more efficient producers and completely reversed what is supposed to be the normal weeding-out process in the industry, in which wise planning is rewarded with profits. This situation led to lockouts and strikes, such as the USX strike in 1986-1987, as the better-off firms sought to survive. In the past two years the effort to become competitive in the domes­ tic industry and to survive when a further 30 percent of integrated capac­ ity could close by 1995 has led to unusual survival methods. Tradition­ ally, when steel producers made strategic market and technical decisions and spent their funds to improve efficiency, the winner was the firm making the wisest choices. This pattern, however, has been partly set aside, and competitive bankruptcies have emerged as a way to cut costs and become efficient. The first major firms to try this gambit have been Wheeling Pitt, with some success, and LTV. Under Chapter 11, the firm ignores most contractual commitments, including obligations to take ore and coal or to pay interest on debt, buys most raw material and energy at spot prices, and perhaps gets the government to take over its unfunded pension liabilities. Table 4-10 shows the effect that filing for Chapter 11 can have on costs of production. A firm in Chapter 11 can reduce its costs over $25 a ton as compared with its most efficient non-Chapter 11 rival. The less ef­ ficient the firm is to begin with, the greater the reductions possible. Under Chapter 11, firms have fewer constraints on their actions, and, under pressure from their bankers, they are prepared to make major facility ra­ tionalizations. The data in table 4-10 are intended to represent the typical situation in 1987 where almost 30 percent of industry capacity had been restructured under Chapter 11. Firms in Chapter 11 put pressure on those firms not in a similar situation, because of their lowered costs. It is tempting to say that the way for the U.s. industry to become more efficient and competitive is for all to go into Chapter 11. The costs of Chapter 11 filing, however, are never clear until the firm tries to exit. The costs of exiting Chapter 11 are believed to be very high for a typical steel firm. The Chapter 11 situation does make clear, though, what the

195 THE U.s. STEEL INDUSTRY

TABLE 4-10 COSTS IN A RESTRUCTURING U.s. STEEL INDUSTRY: COLD-ROLLED COIL (U.s. dollars per net ton of finished product)

Typical Chapter 11 Emerging Mill Mill Mill Mini-mill

Operating costs Labor 134.50 118.50 115.00 63.00 Iron ore 61.00 59.00 52.50 Scrap 18.00 18.00 18.00 116.00 Coal 27.50 28.00 27.00 Other energy 37.00 37.50 35.00 40.00 Raw materials and sup- plies 78.50 77.50 73.00 60.00 Maintenance and repair 37.50 37.00 35.00 25.00 Total operating costs 394.00 375.50 355.50 304.00

Depreciation 25.00 27.00 25.00 35.00 Interest 12.00 3.00 15.00 25.00 Total costs 431.00 405.50 395.50 364.00

Input prices Iron ore (ton) 35.00 34.00 33.00 Scrap (ton) 90.00 90.00 90.00 105.00 Coal (ton) 46.00 47.00 45.00 Energy (mmbtu) 4.00 4.00 4.00 4.00 Labor (hour) 24.00 21.00 23.00 17.50

Efficiency measures Capacity utilization (%) 85.00 85.00 85.00 85.00 Coke rate 0.50 0.51 0.50 Energy (mmbtu) 26.25 27.00 25.00 12.00 Man-hours per ton 5.60 5.65 5.00 3.60 Yield of finished product 0.81 0.81 0.86 0.85 Continuous cast (%) 80.00 80.00 100.00 100.00 mmbtu = millions of British thermal units. SOURCE: Estimates by author in 1987 dollars. integrated firms can achieve. Further, if firms are able to cut costs like those in Chapter II, they are in a position to compete more effectively with even the lowest-cost foreign suppliers, although it is important to recognize that foreigners too can cut costs, with 10 percent cuts abroad (over 20 percent in Japan) likely by 1990. Table 4-10 shows the likely costs of production of a typical inte-

196 DONALD F. BARNETT grated mill ("emergingH mill) as it is likely to emerge by 1990, achieving the operating results and input price results of Chapter 11, but short of Chapter 11 itself. Chapter 11 may postpone closure for a plant or even enable some to reorganize and survive; but if the U.s. industry as a whole is to become efficient and healthy, capacity must be eliminated and the most efficient survive. At the present time the healthy core of the u.s. in­ dustry can be said to be those with continuous casters and good hot-strip mills, and this constitutes only about 50 million tons of integrated capac­ ity or the volume of integrated cap~city seen as enduring through 1995. The emerging mill shown is one with superior operating efficiency and input prices consistent with Chapter 11 results. Table 4-10 also shows the likely costs of production of a mini-mill designed to produce flat-rolled products (cold-rolled coil). No such mills now exist, but one has been announced and several are planned. Such mills would be small and use low-cost facilities, which would handicap product quality. Product quality will improve, however, and by the early 1990s the true mini-mill competitor with integrated producers will emerge. As table 4-10 shows, operating costs in a flat-rolled mini-mill will be significantly less even than in an emerging integrated mill, but capital charges will be much higher, as one would expect in a new mill. These capital charges plus the product quality penalty inherent in reli­ ance on scrap (because of contained residuals) will probably ensure that the share of the flat product market captured by mini-mills will be very small through the mid-1990s. Nevertheless there is some potential for mini-mills to expand into flat products as well as their traditional long products, and if they are able by improving technology and cutting costs still further to improve their competitiveness from that suggested in table 4-10, their role in these products could be much greater. But if the tradi­ tional integrated producers in the United States are able to cut costs sig­ nificantly, the role of the mini-mill will be small. Whether it builds low-cost mini-mills or restructures more cost-effective integrated mills, the U.S. industry has the opportunity by the 1990s to become truly cost competitive with imports, but to do so it must be much smaller. Raw materials. By 1985 the traditional U.S. steel industry's depen­ dence on vertically integrated ore was clearly a liability. The contraction of steel demand and the growing role of imports and mini-mills reduced the need for domestic ore, but most of the integrated steel producers had either ownership of ore mines or strict take-or-pay contracts, both of which became an enormous financial burden. Furthermore, domestic ore was of lower grade, harder to mine, and more costly to transport than off­ shore sources. By the 1980s Brazilian ore had become cheaper in the Great Lakes area than domestic ore, and the domestic ore industry with

197 THE U.S. STEEL INDUSTRY its multiple ownership of mines faced drastic capacity cutbacks and re­ structuring. Numerous mines have been closed at huge financial losses, and several more will have to close in the near future. Only the lowest­ cost, most efficient mines, those capable of delivering ore to domestic steel mills at prices in line with the cheapest foreign sources, will survive. Few such domestic mining operations exist. In contrast to the U.s., Japanese, and European ore sources, Aus­ tralia and Brazil have high-grade, easy to mine, low-delivered-cost ores. Ore prices internationally declined significantly in the 1980s as the steel industry's growth ceased and steel producers fell on hard times. Iron ore capacity worldwide has shrunk, and only the most efficient have been able to survive and will be able to survive through the 1990s. As in iron ore, there has been a pronounced slowdown in coking coal requirements. This has in turn forced a drastic pruning of coking coal ca­ pacity and major cost-cutting efforts both in the United States and in the coal-producing regions of Western Canada, Australia, and Europe. Coking coal prices have fallen, and the surviving U.s. mills will pay less for their coking coal in the future (see table 4-10). The traditional U.S. re­ liance on integrated coal sourcing has also been a casualty of the changes taking place in steel; most steel companies are selling or otherwise dispos­ ing of their own coal mines and relying on purchased coal. Many steel firms may not even own their own coke ovens, but rely on purchased coke instead. Still more steel firms may not even make steel, but rely on pur­ chased semifinished steel from other domestic firms or from abroad, which they will roll into finished products. Steel trade in primary and in­ termediate steel products can be expected to be a growing part of the American and world steel industries, at least in the near term. An increasing share of U.S. steel production will be in the form of mini-mills or electric-furnace-based steel making relying on scrap. The same phenomenon, but to a lesser degree, will occur internationally. Dur­ ing steel market growth, this could be expected to cause scrap shortages and significantly higher scrap prices. But in a slow growth environment, the absolute growth in demand for scrap will be low and balanced by scrap generated from past production. In the United States, slow growth in domestic production will constrain scrap demands while scrap sup­ plies have been augmented by the growing import of products made from steel (such as automobiles). No scrap shortages are expected in the United States, although scrap prices may rise. Scrap supplies will be tighter in other world areas, though, and demand for U.s.-sourced scrap will grow as the value of the U.S. dollar declines. Higher world scrap prices may lead to more production of scrap substitutes such as direct-reduced iron if energy prices remain low. Major efforts are under way to find alternatives to blast furnaces and DRI facilities for converting iron ore to steel. These

198 DONALD F. BARNETT efforts include plasma steel making, direct charging of preheated iron ore into steel furnaces, and the like. Pilot plants for some of these processes have been built or are under construction. In the long term, these efforts are expected to payoff in new lower-cost methods of producing steel. Strategic issues. Until the late 1990s the traditional U.S. steel produc­ ers will be hard pressed to avoid losing ground to foreign integrated com­ petitors and to domestic mini-mills. Crude steel production in the United States as a whole will decline by about 10 million tons, and integrated production will decline by over 10 million tons. Most of the reduction in traditional steel production in the United States can be blamed on mini­ mills or imports of finished products, but a significant factor will be im­ ports of semifinished steel, which will be increasingly relied upon as a source for U.S. rolling mills. An additional factor will be yield improve­ ments brought on by superior technology (for example, more continuous casting) so that shipment levels in the United States will decline less than crude steel production. Declines, or no expansion, in steel production and shipments can also be expected in other areas of the world, notably Eu­ rope and Japan. The continued decline in the role of traditional steel making in the United States and elsewhere can be blamed on market changes and new technologies, which will continue to erode the competitive position of the traditional steel makers. To a great extent, however, the future of the tra­ ditional steel makers depends on their ability to make major strategic ad­ justments to new market and competitive realities. The strategic options facing Japan, Europe, and the United States are outlined below. • Japan. In the late 1980s the Japanese steel industry's position as the premier world steel industry is in danger. Recent exchange rate changes have weakened its international competitive position drastically, many new competitors are on the horizon, and many of its best customers have begun construction of plants in the United States. Since the mid-1970s, the Japanese steel industry's low market growth and excess modern large-scale capacity have made efforts to adjust difficult; and although Japan has made major investments to improve operations and develop new products, these efforts have not fully succeeded in giving the Japa­ nese industry new direction. Some very efficient mini-mills exist, but comparatively little effort has been devoted to this area. The Japanese have essentially practiced a self-defense strategy of se­ curing existing markets overseas by agreeing to measures such as volun­ tary restraint agreements in the United States and long-term agreements with China. Some Japanese steel firms have themselves moved abroad to produce in the country to which they used to export (for example, NKK bought 50 percent of National Steel in the United States). In an era of

199 THE U.S. STEEL INDUSTRY weakening international competitiveness, foreign investment and joint ventures are likely to be increasingly important as means to retain tradi­ tional market shares. The fact remains, however, that the Japanese steel industry must, like the U.S. industry, drastically restructure, laying off a significant portion of the work force, eliminating capacity, perhaps merg­ ing facilities to do so, cutting costs, and reducing scale. As in the United States, a growing role of mini-mills will be a key element of this restruc­ turing, and so too will be an emphasis on value production versus volume production. Despite such efforts, by the mid-1990s the Korean steel in­ dustry may well have taken the Japanese industry's place as the world's leading steel industry. • Europe. The European steel industry of the late 1980s is handi­ capped by significant excess capacity, negative market growth, mis­ guided government intervention, and an exchange rate appreciation that is worsening an already weak competitive position. The European steel industry has already undergone a heavy restructuring effort to eliminate excess capacity, but it did not necessarily result in a low-cost industry be­ cause politics rather than economics often determined who survived. For example, market shares were allocated, virtually eliminating low-cost mini-mills. More drastic restructuring of the European steel industry will be necessary. This restructuring is likely to see more mini-mills, less reli­ ance on subsidized domestic ore and coal, less dependence on subsidized exports to maintain volume, and more emphasis on producing superior qualities of highly valued steels. • United States. The traditional U.S. industry has gone through an extended period of disarray, with huge financial losses, bankruptcies, strikes to get reduced labor costs, plant closures, and a shrinking market despite trade restrictions. In 1987, however, there was some market re­ covery, a much more competitive industry, and improved financial performance. While the traditional producers show some signs of getting a better grasp on their strategic directions, the financial status of many U.S. steel firms is still such that despite huge operating losses they are often un­ able to eliminate capacity they will no longer use or would be better off without, because of the implications such write-offs have for their bal­ ance sheets and those of their creditors. Indeed, some may be too poor to go bankrupt. The mini-mills are having similar troubles because of overcrowding of basic mini-mill product lines (such as rebar). It is recog­ nized that while the steel market may have demonstrated short- or intermediate-term improvement, long-term prospects for market growth are bleak, imports are an ever-present and ever-growing threat despite exchange-rate-induced loss of competitiveness by some

200 DONALD F. BARNETT suppliers, minimill efforts in flat products are imminent, capacity must be reduced by 20 percent, and on the horizon is the looming threat of substitute materials (such as plastics). Times have not been propitious for the traditional producer, and they have been far from happy for most mini-mills. Many plants and facilities still must close before the rest can prosper in the longer term, but which ones? Those struggling to survive have concentrated on cutting costs through improving efficiency and seeking input price concessions (including some from labor). As men­ tioned, this has recently involved what can be described as competitive Chapter 11 filings, in which existing contracts are terminated and lower prices and financial charges secured. Approximately 30 percent of in­ dustry capacity is now in these circumstances, producing pressure on the rest of the industry to achieve similar low costs or also to seek Chap­ ter 11. Whether or not more producers ultimately seek Chapter 11, in order to survive integrated producer costs will have to fall to levels commensurate with Chapter 11 results and competitive with both im­ ports and potential mini-mill costs. In addition to cutting costs, integrated producers will need to cut ca­ pacity, particularly flat product capacity, since much of the integrated long product capacity was eliminated in the past fifteen years' retreat from the mini-mill onslaught. Integrated production by the mid-1990s is expected to be somewhat over 50 million tons of crude steel, roughly con­ sistent with the continuous casting capacity in place or under construc­ tion. By the 1990s, the marketplace will demand continuous cast steel, and no plant will be able to survive without a source of continous cast slabs sufficient to meet all its requirements-any shortfall of in-house supply will have to be purchased. Integrated steel-making capacity in the United States is expected to retreat to a level consistent with caster capac­ ity, and few full-scale casters not now in place or under construction are likely to be built, although some thin-slab casters may be built in inte­ grated plants and some rolling mills may continue to exist by relying on contracts to purchase slab (from domestic or foreign sources). Given lim­ ited funds, steel producers usually installed continuous casting in their most efficient, best-located plants first, and the plants likely to survive through the early 1990s are those with continuous casters. Most other plants will eventually fail, although recourse to Chapter 11 may postpone the inevitable for some less-efficient plants. A key element in the survival strategy of integrated producers will be to ensure they are not left behind in the rush to cut costs. Efficient firms with casters have a head start, despite the advantage of firms seeking Chapter 11. The caster, however, is not principally a cost-reducing tech­ nology, although it does significantly cut costs; its real advantage is that it produces a more consistently high-quality product for the customer, and

201 THE U.s. STEEL INDUSTRY its rapid installation in the past five years in the United States followed customer demands for quality. While cutting costs is essential, the use of casters is really a self-defense strategy by a producer to retain market share. But if anything has been learned by the turmoil of the past few years, it is that the steel makers' aim should not be to retain market share, but to earn a profit. The U.S. steel market is shrinking, but perhaps more important it is fragmenting. Customers are demanding higher quality-steel to meet their own more precise requirements. Customers no longer want off-the-rack steel; they want it tailor-made. This has weighed against volume steel production, encouraging smaller-scale facilities like mini-mills and speeding the rise of service centers that stock and fabricate steel accord­ ing to customer requirements. Service centers now handle over 30 per­ cent of steel products as compared with 20 percent ten years ago and are expected to handle over 35 percent by the mid-1990s. A related develop­ ment in recent years has been the growing role of downstream steel fabri­ cation to serve steel-using industries such as auto assembly. This fabrication includes blanking and stamping, painting and coating, and the like. The growing demand for superior quality steel, the need for more galvanized steels, and the growth of service centers and fabricators point the way to an alternative strategy for some steel makers. Instead of pursu­ ing a purely defensive strategy of cutting costs and trying to retain a fixed share of a shrinking market, some producers are abandoning reliance on steel volume and instead are concentrating on adding value. This could involve producing more highly valued electrogalvanized or continuous cold-rolled steel products, but more likely should involve a major attempt to capture a large share of the service center business or downstream fab­ rication of steel products for consumers. This is a much more market­ oriented approach than is traditional with steel producers, but is an essential component of adding value. A related approach to adding value would be for producers to sell steel service along with steel, such as pro­ viding engineering expertise in the use of steel, perhaps owning steel­ forming equipment and providing the full range of services and guarantees necessary to minimize the customers' risks and to secure the market. Using these approaches may help deflect the head-on competi­ tion and the effects of price cutting in basic steel while perhaps slowing the inroads of substitute materials. Only a few integrated U.s. steel pro­ ducers are in a position to take this approach-some will abandon steel, and still others are doomed to the trench warfare of day-to-day scratch­ ing for every handhold in the steel market. Steel mini-mills are going through their own trial by ordeal, from which only a few will emerge successfully. Because of the comparatively

202 DONALD F. BARNETT low costs and the simple technology involved, entry into the low-quality end of mini-mill steel production has been comparatively easy. But this ease of entry has resulted in excess capacity in rebar, merchant bar, and light shapes. The more successful producers (such as Chaparral in mini­ beams) have been able to retain cost advantages or have found specific market niches or have pursued downstream fabrication (such as Nucor). In other words, the strategy alternatives to mini-mills are not dissimilar to those for integrated mills, with one exception. Mini-mills have the addi­ tional opportunity to continue to produce the product lines of integrated mills. Mini-mills are producing higher-quality bar, seamless tubes, and heavier structurals and are beginning to enter the flat-rolled business. Over the next ten years mini-mills will increase their capture of the long product markets and begin in flat products by producing low-grade com­ mercial flat products, but through operating improvements gradually im­ prove quality. Their success ultimately depends on the successful implementation of technological improvements such as ladle metallurgy, thin-slab casting, and mini-hot-strip mills, as well as on low-cost scrap. Tests of these developing technological improvements indicate they have real potential, but the prospect for low-cost scrap or scrap substitutes is far less certain.

Implications and Conclusions

The future strategic options and tactical considerations of steel manufac­ turers will depend on markets and the technological environment, in­ duding changes in markets, new technologies, R&D, employment, changes in the policy environment, and survival strategies chosen, whether cost cutting or downstream value adding.

Markets and the Technological Environment. The major changes that have overtaken the American and world steel industries can be said to be due, ultimately, to fundamental changes in markets and in technology, changes that most steel producers recognized too late and responded to too slowly. Such changes have always been with us, but during the 1960s and 1970s the shift in markets to developing countries was especially rapid, and the pressure to add steel production in these areas was espe­ cially strong. The technological changes as they applied to steel­ consuming industries during the same period and the current decreased steel use in many applications have decreased the importance of many steel-using industries and altered the types of steel requirements to more sophisticated highly valued steel products suitable to a new era. The rate of technological change does not seem to be slowing, and although the effects of alternative materials on some steel-consuming industries may 203 THE U.s. STEEL INDUSTRY be waning, the search for competitive materials (engineering plastics or composites, for example) or new electronic rather than mechanical pro­ duction processes seems unabated. The implications for steel demand are continued negative or slow growth and rising demand for more highly valued, application-specific steels. Technical changes have affected not only steel consumption, but steel production as well. Over the long history of steel making there have been many major changes in technology, ranging from the Bessemer con­ verter and open hearth to continuous rolling. For years, however, steel plants were regarded as monuments to unchanging steel production pro­ cesses, and indeed some facilities in operation until very recently were ex­ tremely outdated. This age of glacial monumentalism came to a frenetic end when the Japanese steel industry pushed the search for scale­ induced efficiency to its climax in the 1960s and 1970s, with shorter gen­ erations of larger plants needing larger markets to maintain critical operating volumes. Little recognized at the time when the steel-making giant was concentrating on scale, mini-mills had discovered that the cru­ cial technological changes of electric furnace steel making (melting scrap to make steel) and continuous casting had opened the possibility that small mills could be as efficient as large integrated plants, with far lower capital costs. Since the 1970s the search for technological changes to make possi­ ble lower production costs for higher product quality in smaller-scale fa­ cilities has resulted in technical changes that have revolutionized and will continue to revolutionize steel making. The changes so far include ultra­ high-power furnaces, ladle metallurgy, beam-blank casting, thin-slab casting, mini-hot-strip mills, and continuous cold finishing. Most of these changes have been or are in the process of being implemented, pri­ marily by mini-mills, but also by the leading integrated producers. The technological changes being researched and developed include universal steel making (making steel from iron ore without using coke ovens and a blast furnace), energy-saving electric furnaces, plasma steel making, strip casting (casting a sheet one-tenth of an inch thick to minimize the rolling necessary), and high-reduction rolling. These processes are being worked on by mini-mills and integrated producers and promise to result in con­ tinuous steel making (minimal reheating), tremendous improvements in labor productivity and yield, and much lower operating costs. What re­ mains unknown is whether such processes can be implemented at suffi­ ciently low capital costs to replace existing methods. For the most part, while the total of the technical changes under way or nearing application may prove revolutionary, no single technical change can yet be termed revolutionary. This strongly supports the argument that the route to effi­ ciency in steel making is a series of incremental improvements of modest

204 DONALD F. BARNETT capital outlay rather than the Umassive modernizationH that characterized the 19605 and 19705. The technical and market changes combined have resulted in rapid decreases in employment. Such employment decreases were an inevita­ ble consequence of the high labor costs in the United States and of the need to compete with offshore producers with low labor costs as well as with nonunion local mini-mills. The restructuring of the U.s. industry has resulted in still more layoffs and closures, and this trend promises to continue as capacity is brought in line with demand and as firms find ways to close facilities they are now often forced to keep open to avoid de­ claring bankruptcy. Efforts to keep obsolete facilities operating to avoid layoffs are shortsighted; the major effort should be to speed the process of structural adjustment to reestablish the industry on a sound economic basis so that the remaining employees have a future. Efforts must be made to ease the pain for those laid off and to ensure their earned pen­ sion commitments. At the same time, however, if the industry begins to build on its basic steel-making activities by producing more highly val­ ued products and providing downstream processing and customer serv­ ices, this should help absorb a large number of individuals who would otherwise be unemployed. The industry has a tremendous reservoir of talent, a resource largely wasted in the current rush to survive at any cost.

The Policy Environment. Government policies have not had beneficial long-term effects on the steel industry. For the most part, U.S. govern­ ment policies have treated the U.s. industry like a public utility, interven­ ing when it serves political ends and otherwise ignoring the industry's plight. Over the years policy has ranged from tax changes to price and wage controls to environmental and health regulations, sometimes occa­ sioned by concerns for the public good, at other times by concerns for po­ litical expedience. In addition, the industry and its union have occasion­ ally been less than models of corporate or union citizenship. Further­ more, the industry has been ambivalent about what it wanted of government, often insisting that the government not interfere with the industry except to protect it or bail it out. The policies affecting the domestic steel industry have been not only those of the American government, but those of foreign governments as well. An unfortunate consequence of the rapid development of steel indus­ tries outside the United States was government assistance, including low­ cost loans, subsidies, and the like. This kind of assistance has been pervasive since World War II and intensified in the 1970s as foreign governments sought to help the uneconomical industries they had founded survive the consequences of the excess capacity and low product prices that normally follow from such spendthrift activity. The argument of the U.S. steel indus- 205 THE U.s. STEELINDUSTRY

try that foreign dumping and unfair trade were the major causes for the de­ cline of the U.s. industry has some validity, but market and technological changes, to which the industry was slow to adapt, were far more immediate causes. Nevertheless, since the 1960s the industry has benefited from a se­ ries of trade restrictions aimed at giving it a temporary Hbreathing space" to get itself back into competitive trim. Unfortunately deep breathing is not necessarily the exercise essential for physical well-being. The U.s. govern­ ment has imposed voluntary restraint agreements in an attempt to restrict imports physically and buy time for the industry to restructure. At the same time, the government is considering policies that will assist the industry to close excess capacity more rapidly and weather the storm of unfunded pen­ sion liabilities that such closures will bring. Such policies do little to benefit the more profitable mills, on whose success the future of the American steel industry largely rests. Similarly, such policies encourage neither the rapid implementation of new technology nor the retention of the downstream steel-using industry whose exit from the United States in response to high U.S. production costs (including steel) has been a major contributor to the decline in the demand for U.S. steel. Government policies cannot be counted on to provide long-term beneficial economic conditions for domes­ tic industry, and devoting a large part of industry efforts to persuading gov­ ernment to pursue desired policies may deter firms from taking the necessary internal action to survive. The survival of the American steel in­ dustry is heavily dependent on individual firms' developing and imple­ menting strategies for long-term success.

Survival Strategies and Options. Between 1982 and 1987, the American steel industry endured the most oppressive and volatile economic circum­ stances, and there is no certainty that the turmoil is over even yet. The indus­ try made major strides in cutting capacity, lowering costs, restructuring its production activities so that individual producers are more specialized in those products of specific advantage, and to some degree implementing new low-cost (operating and capital costs), high-quality technologies. Unfortu­ nately, the rate at which these changes have occurred has been less than ideal, and the changes have been spotty, occurring in a select group of the most successful integrated mills and mini-mills. Under depressed economic circumstances, firms in the industry have emphasized cutting costs more rapidly than their foreign and do­ mestic rivals. To a degree they have succeeded, but if everyone cuts costs prices will drop and no one will gain; so this strategy is one of trial by or­ deal. Traditionally the cost-cutting approach was played by Hthe rules" in which all firms sought the best input prices and invested in the best tech­ nology, with the winner having bargained best or chosen most wisely. In recent years, however, some producers no longer able to keep up in this

206 DONALD F. BARNETT pursuit raided the game and sought low costs through Chapter II, break­ ing their contracts and avoiding their financial obligations. So far this ploy has worked, causing resentment among the more efficient but less competitive rival firms. But exit from Chapter 11 may be very costly, fi­ nancially and in terms of lost control to debtors. The experience of com­ petitive Chapter 11 filings may not compensate for lower costs. The alternative strategy, and one fully adopted by only a few firms, is to concentrate effort on improving product qualities, values, and serv­ ices rather than on lowering costs. Of course keeping abreast of costs is important, but more important in the longer term will be success in pro­ viding a product quality, value, or service that to some degree isolates the firm from the extreme market volume and price volatility endemic to basic commodity industries with excess capacity. This strategy can in­ clude upgrading the products by adding coating or painting lines; owning and operating service centers to market one's own and other products (steel as well as competitive materials) and to provide minor fabrication opportunities; engaging in major downstream fabrication activities such as blanking, stamping, and roll forming; and providing engineering and related services to steel customers so that they can concentrate on assem­ bly and marketing their own products. If such downstream steel fabrication and value-adding activities are not undertaken by U.S. steel producers or related processors, steel-using activities may disappear offshore and with them the steel markets on which U.s. steel producers depend. Unfortunately, few U.S. steel firms have either the financial resources or the credit necessary for fully imple­ menting this strategy. Those that have the resources are moving rapidly in this direction; for others the only hope may be joint ventures with more financially secure but less experienced foreign firms. A major practitioner of this strategy is Nucor, the most successful mini-mill operator. Nucor is a major consumer of its own products (over 30 percent), and with each expansion into a new steel venture there has been a downstream venture to use some of the steel produced, adding value in such a way as to pro­ duce a final product with less market volatility and greater long-term growth prospects. It is perhaps unnecessary to add that such downstream ventures will not succeed if they merely become means of selling uncompetitive steel. Each such venture must be sound in and of itself, but complementary to the aggregate firm activities.

Summary

The steel industry in the 1990s will bear little similarity to the industry we have called steel in the past. With declining volumes, fragmenting mar­ kets, growth of value adding, and proliferation of mini-mills, the term 207 THE US. STEEL INDUSTRY

"steel industry" may fade into the lexicon of obsolete terminology. What remain will be more service-oriented shippers of steel products and more specialized, smaller-scale, high-tech producers of steel. Though the in­ dustry that remains will be much smaller, it will be more flexible and adaptable to changing market conditions and better able to compete with offshore suppliers. The traditional integrated approach to steel making may be replaced by specialized process centers shipping intermediate processed materials (such as slabs) to rolling centers, which in turn trans­ fer their product to regional fabricators and distributors. The distinction between mini-mill and integrated steel making is also expected to blur as new technologies make possible the use of ore and scrap, with little pre­ paratory converting directly in the steel furnace. It is hoped that the cur­ rent turmoil in the industry is merely the difficult transition to a new era for steel consumption and production in the United States. Note 1. D. F. Barnett and L. M. Schorsch, Steel: Upheaval in a Basic Industry (Cambridge, Mass.: Ballantyne Press, 1983).

208 5 Textiles and Apparel: A Basic Industry for a Basic Need Richard Steele

Food, clothing, and shelter are man's most basic physical needs. Industri­ alization of the means of meeting these needs began with clothing in the earliest days of the industrial revolution and has proceeded further with clothing than with food or shelter. Therefore it is not surprising that the textile industrial complex-apparel, fabric, and fiber manufacturing-is important in nearly every country. It employs more people in the United States than any other industry, as it does in many countries. In the 1970s about one of every eight American workers was in the textile or apparel industry, but employment in the apparel and textile mill products indus­ tries has been falling for the past decade, as shown in figure 5-1. Textiles and apparel accounted for 7.5 percent of U.s. national in­ come in the 1950s. This figure has now declined to 5.5 percent, with ap­ parel accounting for the greater part of the loss. Massive increases in textile imports, particularly from new exporters in Asia, have raised the question of whether the U.S. textile industry can remain competitive, continue to be profitable, and provide a high level of employment. This question is the concern of this chapter, particularly as it pertains to the textile and apparel sectors and to the contribution technology can make toward maintaining competitiveness or restoring it to its former level. The three sectors of the textile complex-fibers, fabrics, and apparel-are quite different with respect to these factors. The shifting of markets and manufacturing centers and their dis­ placement, when it occurs, are attributed to their relative ability to com­ pete with each other. In the textile complex, competitiveness has been affected by transportation, communication, economics, technology, and other factors. Structural change in an industry or its move from one geo­ graphic area to another is usually driven by a complex of interacting fac­ tors. The threat of imports to the American textile industry is a result of a worldwide change in the structure of textile markets and their suppliers. Improvements in transportation and communication have made these

209 FIGURE 5-1

EMPLOYMENT IN U.S. TEXTILE AND ApPAREL INDUSTRIES, 1961-1984 (thousands of workers)

1,500 nApparel • Textile

1,000

500

Year

SOURCES: u.s. Department of Commerce, Bureau of the Census, Business Statis­ tics 1982, November 1983; and following issues of Survey of Current Business.

shifts possible, but political factors, such as the desire of developing countries to have a national industrial base, and economic factors, such as lower wage rates, have played important roles. The development and adoption of new technology have been a major element, particularly in the past forty years, when there has been not only rapid change in tech­ nology but also especially favorable conditions for its rapid international diffusion. Growing fibers and making fabrics were originally domestic occupa­ tions. Fibers and the textiles made from them were primarily used in the households in which they were made. In the seventeenth and eighteenth centuries increasingly easy communication and transportation in west­ ern Europe provided broader sources of fiber supply and made extended markets possible. During the same period textile manufacturing was in the forefront of the industrial revolution. New technology for such tradi­ tional processes as spinning and weaving developed rapidly, leading, for 210 RICHARD STEELE

the reasons usually given for the specialization of labor, to the geographic concentration of particular sectors of the industry. In England, for exam­ ple, wool manufacture became concentrated in the West Riding of York­ shire, while the cotton industry centered in Lancashire. For many of the years when most of the world was industrially unde­ veloped, the established textile manufacturing centers of western Eu­ rope, particularly those in England, dominated the world textile industry. They imported fiber from developing countries (wool from Australia and South Africa and cotton from the United States and India) and sold fin­ ished goods all over the world. European countries were the originators of new technology, and their laws and other efforts to keep it from spreading were not effective. Other textile centers developed later. In the nineteenth century the northeastern sector of the United States devel­ oped a strong textile industry. Most of it eventually moved to the South­ east, especially to the Carolinas, Georgia, and Alabama. Japan also established a vigorous, export-oriented textile industry. Throughout the nineteenth century, the primary source of new technology was northern Europe, most particularly England. In the twentieth century, a similar industrial concentration began to occur in fiber manufacturing and, about midcentury, to a much lesser de­ gree, in the apparel sector. Concentration in fiber production was due to the introduction of man-made fibers to replace and supplement natural fibers like wool and silk, which were agricultural products. By the middle of the century rayon had matured into a major fiber made by a relatively small number of manufacturers, while polyester and nylon reached simi­ lar status by the 1970s. Not surprisingly, western Europe was initially the major producer of man-made fiber, joined in the 19305 (and eventually largely supplanted) by the United States and, after World War II, by Japan and Asia. The earliest technology for man -made fibers originated in Eng­ land and western Europe, with important contributions coming later from the United States. Industrial manufacture of ready-to-wear clothing began in England about the middle of the nineteeth century. Over the next hundred years it slowly displaced small-scale tailoring and domestic makeup in most de­ veloped countries. Hand tailoring and making clothes at home declined rapidly in the United States after World War II, and some apparel manu­ facturing firms grew rather large, although most are still small. Competitiveness is determined by the desirability of the product, and four groups of qualities affect the desirability of textile products: specifications, cost, availability, and style. Specifications include the physical properties of the product, the degree to which it regularly con­ forms to specified properties (quality), and its end-use performance. Cost means cost at the point of use including delivery charges. Cost compari-

211 TEXTILES AND APPAREL sons must be done at the same point of use. The cost of polyester staple fiber, for example, should be compared with cotton after adding to the cost of raw cotton the costs of cleaning and preparing it for spinning, which are not necessary for polyester. Availability includes all time­ related considerations-time for delivery, for example, which may be re­ lated to available capacity, process flexibility, or distance of transport. It would also include customer service or other post-sale support that facili­ tates use of the product. Style involves the aesthetic aspects of the prod­ uct and is very important with textiles and apparel. Appearance, feel, and comfort are strong determinants of desirability for many textile products. In apparel and household textiles, particularly in high-fashion articles, an appeal to status is frequently involved. Specifications are always among the most important characteristics of fiber, fabric, and apparel. For fibers, cost is probably the other major factor in determining their use. Styling characteristics are very important for most fabrics, as they are in high-fashion clothing. In more ordinary clothing, cost assumes greater importance. These generalizations have many exceptions, but they can be a useful guide when thinking about the role of technology in each sector of the industry. Growth and change in the textile industry over the past 300 years, as outlined above, have paralleled the development of the world economy and, like it, are coupled to population growth. In the long run this coup­ ling cannot be undone. The growth and distribution of the world popula­ tion and their effects on markets, labor supply, and other elements of the textile and fiber industry will continue to determine its ultimate structure. The immediate concern, however, is with a shorter time span, an adjust­ ment period in which changes may not necessarily be consistent with the long-term trend. The next few years of the U.S. textile industry are all that can be realistically considered. The decade that followed World War II brought a demarcation in the kind and rate of change in the technological and structural aspects of the textile industry, which will be taken as a starting point for this discussion.

Technology and Change in a Mature Industry

A full exploration of the changes in the technology of fiber, textile, and apparel production over the past twenty-five years is beyond the scope of this chapter. This chapter outlines the most significant changes in the more important processes of these sectors of the textile complex, specifi­ cally those that have affected the production of the largest volume of products with the greatest added value. In fiber manufacturing the em­ phasis is on synthetic fibers, primarily polyester, rather than on regener­ ated fibers such as rayon. In textile manufacturing, attention is directed 212 RICHARD STEELE toward the spinning and weaving of cotton, synthetic, and blended broadwoven fabrics. The important area of knitting is omitted, even though it has undergone profound technological change. In apparel manufacturing technological changes have been more modest and less selectivity was required. The president of the Textile Institute of Great Britain recently pointed out that in discussing new textile technology it is tempting to con­ centrate on high technology. 1 He says, however, that economically signif­ icant innovations have frequently come as small incremental steps and suggests that the transformed textile industry of tomorrow will be the re­ sult of progressive modifications of operations and realignment of activi­ ties. This has certainly been true in the recent past.

Growing and Making Fibers. The first fibers man learned to spin and weave were probably animal hairs. Textiles of sheep and goat wool were made in ancient times. Later, means of preparing spinnable fibers from woody stems like flax were developed, and cotton cultivation was started in India and South America. All fibers were the products of animal hus­ bandry or agriculture until the beginning of the twentieth century when methods of manufacturing fibers were commercially developed. This new industry developed rapidly, particularly after World War II, and has reached maturity and consolidation. Slightly less than half of world fiber production is now man-made. The agricultural technology for growing cotton has been steadily im­ proved. Yields in the United States have increased from 440 pounds per acre in 1960 to over 600 pounds per acre in 1985.2 The United States has long been a relatively efficient grower of cotton, but the world may be catching up. In 1960 world productivity was 61 percent of that of the United States; in 1985 it was 75 percent. This discussion deals only with man-made fiber in spite of these important changes in agricultural technology. The fiber manufacturing industry has two distinct sectors. They are based on separate technologies and have been dominated, for the most part, by different companies. The older sector uses processes based on natural raw materials, mainly wood pulp or other forms of cellulose, which are dissolved in a suitable solvent and then regenerated in the form of a fiber. Rayon and acetate fibers are the principal products of this sec­ tor, which originated in the late nineteenth century and was fully devel­ oped in the years before World War II. The United States was important at one time as a manufacturer of regenerated fibers but now has a much­ reduced role. The newer sector dates from the development of nylon in the early 1930s by scientists of the Du Pont company. It is based on petrochemical

213 TEXTILES AND APPAREL

raw materials that are made into polymers and then converted into fiber form, usually by melting them and extruding the melt through a fine ori­ fice. Polyester and nylon are the principal products of this sector, with the former becoming dominant. Man-made fibers, whether regenerated or synthetic, are manufac­ tured in the form of very long continuous filaments, like the silk they were originally intended to emulate. They may be used in this form and can be knitted or woven into fabrics such as taffetas, satins, and other fabrics reminiscent of those formerly made of silk. Most textile fabrics, however, have always been made from fibers like cotton and wool, which are only one to several inches long and have to be made into products suitable for knitting or weaving by twisting light bundles of them to­ gether to form a yarn. Such products are called staple, or spun, yarns and have more bulk and texture than continuous filament yarns so that fab­ rics made from them are thicker, warmer, and in many ways more aes­ thetically pleasing. In the late 1920s man-made fiber manufacturers began chopping their artificial silk products into short fibers that could be spun on wool- or cotton-spinning equipment to make staple yarns. By 1970 half of all man-made fiber was in the form of staple, and the propor­ tion is now about 60 percent. The worldwide production of regenerated fiber, which is almost ex­ clusively rayon, has been about 3 million metric tons per year for some years. The U.s. share of this production fell from 12.4 percent in 1978 to 9.3 percent in 1984. Actual U.s. production fell by 30 percent.3 Reduced domestic demand, costly environmental pollution problems, and low world prices have been major factors in this decline. Although the few re­ maining American producers of rayon have announced research progress on new manufacturing methods to reduce their pollution problems, it is not clear whether the new product's properties or costs would make it an effective competitor in the rayon market. 4 All in all, it is likely that the re­ generated fiber industry in the United States will continue to decline at a greater rate than the world industry, which, though it will hold its own for a while, may also eventually decline. In contrast, the synthetic fiber industry has continued to grow in the world, although not in the United States. In 1984 world production was almost 12 million tons. (For comparison, world production of cot­ ton, the principal natural fiber, is about 15 million tons. Production of wool is only about 1.5 million tons.) In the past few years the American synthetic fiber industry has undergone some rationalization, but its share of world production is still about 25 percent as compared with 32 percent in 1978.5 Three synthetic fibers account for 95 percent of this output: polyester, polyamide (nylon), and acrylic. Half of the synthetic fiber output is polyester, 28 percent is polyamide, and the remainder is

214 RICHARD STEELE primarily acrylic. All three fibers are made in significant quantities in this country, with an emphasis on polyester production; in Europe and Japan acrylic fibers, especially, have been more important than in the United States. Three factors are important in the fiber-producing area. The first is the rate of acceptance of man-made fibers, which has been higher in the United States than in any other country and has had an important effect on textile economics and the development of equipment. The second is the development of texturizing, which is a process designed to give fila­ ment yarns the bulk and texture characteristic of staple yarns at a cost competitive with staple yarn spinning. The third is the development of high -speed extrusion over the past ten years, which has changed the eco­ nomics of polyester manufacture. The world's first synthetic fiber plant was built in the United States just before World War II to manufacture nylon. Soon after the war, acrylic and polyester fibers were introduced. The United States led in the com­ mercial development of these fibers, even though the most important, polyester, had been invented in the United Kingdom. Production capac­ ity grew rapidly in the United States, Europe, and Japan, the regions with large, sophisticated domestic markets and financial resources for capital­ intensive investment. Of the world synthetic fiber production of 4.8 mil­ lion tons in 1970,33 percent was made in the United States, 32 percent in Europe, and 19 percent in Japan. By 1983, when production was 11.2 mil­ lion tons, the U.S. share had fallen to 28 percent, the European share to 20 percent, and Japan's to 12 percent. The United States had more nearly maintained its share of this rapidly growing market, while the rest of the world, including the Eastern bloc and developing countries, had rapidly added capacity for manufacturing synthetic fibers. As the synthetic fiber industry expanded, the cost of its products fell, and by the early 1970s the price of polyester staple fiber was competitive with that of cotton. Blended cotton-polyester fabrics with permanent­ press characteristics requiring little or no care after washing were devel­ oped about the same time, and the economics and performance of these products transformed the traditional cotton textile and apparel industry. The United States was a leader in this transition, pioneering and develop­ ing processes and machinery that took advantage of the properties of synthetic fibers for improving manufacturing processes and making more useful products. The fiber industry supported these changes with fiber products that not only made improved end products possible but also met the stringent quality requirements of new high-speed processing equipment such as rotor spinning machines and shuttleless looms, which will be discussed later. Its own productivity improved steadily, which is characteristic of a 215 FIGURE 5-2

PRODUCTIVITY IN THE U.s. FIBER MANUFACTURING INDUSTRY, 1957-1982 Index (1977=100) 125

100

75 Output per production employee

50

25

1965 1970 1975 1980 1982 Year

SOURCE: Textile Organon, vol. 55, no. 3 (Marchi April 1984), p. 55. growing and competitive industry. Figure 5-2 shows the index of fiber manufacturing productivity from 1957 to 1982. Growth over this period was 6.2 percent per year. The drop in output for 1982 is probably due to that year's recession. One of the objectives of the fiber industry has been to produce prod­ ucts that would be easier and more economical to use in downstream tex­ tile processes. Since the 1930s the concept had existed of modifying flat continuous-filament yarns to give them more of the bulk and texture characteristic of spun staple yarns. If such a modification could be inte­ grated into the fiber manufacturing process, the steps of cutting the fila­ ment into staple and then spinning it into a yarn could be eliminated. The first process invented of this sort was for rayon filament yarn and could not be integrated with fiber manufacturing. But, with the development of synthetic fibers, which are deformable when heated (that is, thermoplas­ tic), an integrated process became much more feasible, and during the late 1950s and 1960s many fiber manufacturers engaged in extensive re-

216 RICHARD STEELE search toward this goal. In the meantime, textile industry suppliers devel­ oped machines that could add texture to thermoplastic synthetic fiber yarns such as nylon and polyester. The most successful of these worked by imparting a temporary twist to a section of the running yarn, heating it to stabilize the twisted configuration, and then allowing the temporary twist to relax. The individual filaments in the yarn were transformed from flat, parallel rods into irregularly crimped filaments where the crimps in individual elements were not in phase with each other. This condition imparts bulk and openness to the yarn bundle and makes it more like a spun staple yarn. By 1965, 100 million pounds of textured tex­ tile yarns were being made; 90 percent of this production was nylon, al­ though textured polyester yarns were soon developed and have since been widely accepted. One of the problems of integrating texturizing into the fiber manu­ facturing process was that the speed at which texturizing could be done was significantly less than that of fiber extrusion and take-up. For eco­ nomic reasons fiber extrusion and take-up could not be slowed down. Even though the speed of texturizing machines was increased substan­ tially, it could not catch up with the increasing speeds of fiber making. By 1970, when it seemed unlikely that an efficient integrated process could be developed, the fiber manufacturers (first in the polyester sector) had to give up control of the texturizing process and provide feedstock to cus­ tomers who would texturize it as part of their textile operation. The fiber manufacturers and their customers found that the most economical way to do this was to use a partially drawn product from an intermediate stage of fiber manufacturing. Fiber manufacturing is normally done in two stages, extrusion and drawing; the latter is required to develop strength and other desirable properties. It was discovered that the partially drawn extruded fiber could be drawn further during the first stage of the cus­ tomer's texturizing operation to develop its final properties. In effect, one stage of the fiber manufacturing process was eliminated by combining it with the texturizer's operation to achieve significant economic savings. The result was a fiber product that could be converted by the textile cus­ tomer into a spun-like yarn at a very favorable cost and that has found ex­ tensive application. In recent years production has been about 850 million pounds. In 1984 it was 58 percent nylon and 32 percent polyester, two-thirds of which is used in knitting and one-third in weaving. Much of the textured nylon is used in men's and women's hosiery. The U.s. fiber and textile industry has been a pioneer in these texturing developments, even though American texturing equipment was soon displaced by Euro­ pean equipment, particularly from West Germany. The fiber manufacturing industry is concentrated in a relatively few firms, especially when compared with the textile and apparel industries. 217 TEXTILES AND APPAREL

Because they develop much of their technology internally, the exact state of technological development is difficult to determine. Situations like the development of special products for draw-texturing, as discussed earlier, are easier to follow because many customers are involved in the activity. The increasing dependence of fiber manufacturers on outside suppliers for processes and equipment also opens up the situation somewhat. An example of the continuing advance of fiber manufacturing processes is the increasing speed of fiber extrusion. 6 As the manufacturing process for polyamide and polyester fibers evolved, the two-stage system of extru­ sion and drawing developed. In the first step, the polymeric raw material is melted, forced through small holes, cooled by contact with air to form filaments, and wound up on a package at a speed between 1,000 and 1,500 meters per minute. On a second machine the yarn is stretched and heat-treated at about half the speeds above to produce a product with the desired final properties. From early days it was recognized that combining these steps into a single process would save considerable cost, and in about 1960 one-step spin-draw processes were introduced for nylon with some success. In the development of partially drawn yarn for texturizing, the speed of spin­ ning was doubled, and for a while this development reduced interest in high-speed processes for regular yarn. The principal difficulty with very high speeds is in controlling the moving thread-line and, particularly, in winding a stable and transportable take-up package, preferably one that the customer can use without rewinding. Nevertheless, with the help of machinery suppliers, the engineering and equipment necessary to spin synthetic fibers at approximately 6,000 meters per minute has been de­ veloped and is in use by most U.s. manufacturers. The products, though very similar to those made in the two-step process, are not identical, and there have been problems in maintaining their quality, but the increase in productivity and reduction in cost ensures that the process will continue to be improved. The know-how and experience required to make such so­ phisticated processes operable tend not to be available in younger com­ panies and give a considerable advantage to long-time producers such as those in the United States. Production of man-made fibers has leveled off in the United States as well as in other developed countries, while it has been steadily increas­ ing in the rest of the world (see figure 5-3). As a result of overbuilding in the early 1970s when this leveling occurred, there was surplus capacity of almost 30 percent in Europe, Japan, and the United States. This has slowly been rationalized. Domestic consumption in developed countries seems to have leveled off at around forty pounds per capita, while in most of the world it is less than five pounds per capita. 7 As these areas develop, 218 FIGURE 5-3

WORLD PRODUCTION OF MAN-MADE FIBERS, 1974-1984 Millions of tons 8

Rest of world __ .... -- 6 ------' -- _...... -- _...... ---- ...... United States 4 ...... ///

Western Europe 2 ------~ ------Japan

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Year

SOURCE: Textile Month, May 1985, pp. 24-27.

their man-made fibers are supplied increasingly from local plants. Such plants normally start by producing the most commonly used mass production-oriented products, such as the polyester staple fiber used for blending with cotton, and U.S. manufacturers are facing increasing com­ petition in such products domestically and abroad. Part of their response is to make more sophisticated versions of present fiber products. It will probably also be necessary for them to develop even more specialized products, as the Japanese industry has done. 8 One area that already shows active interest is high-performance fibers.9 These are made from a variety of materials including boron, carbon, and glass, as well as more conventional fiber-forming polymers such as polyethylene and types of nylon. They tend to be expensive products but have properties such as very high strength-to-weight ratios or fire resistance that make them use­ ful or necessary for specialized applications. Some are used in non textile applications, but others are made into fabrics by conventional means. Several U.S. manufacturers have made significant progress on such fi­ bers, notably Du Pont. As ugarden-variety" products are produced in

219 TEXTILES AND APPAREL larger and larger plants around the world, more manufacturers will have to pay attention to specialty products of this sort.

Fibers to Fabrics. Although the number of natural and manufactured fi­ bers used in textiles is fairly large, leading to wide variety in end products, cotton and polyester are predominant with respect to volume. Cotton, wool, and silk are the most used natural fibers, but ten times more cotton is used than wool, and ten times more wool is used than silk. Three­ quarters of man-made fiber production is of synthetic rather than regene­ rated fiber, and about half of the synthetic fiber is polyester. Polyester and cotton account for about 50 percent and 19 percent respectively of world fiber production, while wool and nylon, the second-ranking fibers in each category, account for 5 and 10 percent. The dominance of cotton and polyester is even more marked in the United States. The principal end-use category for both cotton and polyester is woven fabrics, which may be either all cotton or all synthetic, although most are blends of poly­ ester and cotton. The discussion in this chapter of the diffusion of technology in the U.s. textile mill products industry concentrates on the sector that pro­ duces broadwoven fabrics from spun staple yarns, particularly on spin­ ning and weaving. Radically new technologies for spinning staple fibers and for weaving have been developed in recent years, and theirintroduc­ tion will be significant in the continuing competitiveness of the American textile industry.

Making yarn. Most textiles yarns are spun from short fibers in the way that wool and cotton have been spun for thousands of years. Rather different techniques and machinery are used for spinning short fibers like cotton from those used for longer fibers such as wool. (Man-made staple fibers are cut to lengths consistent with either cotton or wool.) The preponderance of spinning in the United States is done on the cot­ ton system, and the following description and discussion are based on this process. Spinning involves opening up compacted fibers, parallelizing them through several processes accompanied by a gradual thinning of the fiber bundle, and twisting the attenuated bundle to bind it together and give it strength. The opening process has usually included three sepa­ rate operations known as opening, blending, and picking. Parallelization and drawing involve first carding, then drawing, and fi­ nally making roving. Roving is a light, almost twistless bundle of paral­ lel fibers that is fed into the spinning frame to be further attenuated and twisted into yarn. Very significant changes in these processes have taken place in recent years.

220 RICHARD STEELE

The multi-stage opening process has been simplified and integrated. The fiber supply from the bale is fed through a single operation directly to carding, the first stage of parallelization. The new technology is called chute-feed carding and produces an hourly output three to four times greater than the older system. In addition to reducing operating labor, the elimination of separate machines also reduces cleaning and maintenance costs. The unenclosed machinery typical of the earlier process was also a primary source of cotton dust in the atmosphere of cotton mills, and the new process makes it possible to meet Occupational Safety and Health Administration (OSHA) standards for lower cotton dust levels. Modern carding machines are much more productive than those of twenty years ago, having about ten times the throughput of older cards. In the years from 1978 to 1983, the number of chute-fed cards in the United States in­ creased from 9,951 to 12,232, while all other types of cards decreased from 20,820 to 7,632.Io These figures suggest that a high proportion of mills have modernized their fiber preparation units, no doubt spurred in part by the pressure of OSHA regulations. The development of mechanical spinning machinery began in the earliest days of the industrial revolution and culminated in the invention of ring spinning at the end of the nineteenth century. This was a major change in the technology of spinning. In older spinning machines, such as the Hmule/ the twisting and winding operations were done sequen­ tially, emulating hand spinning in which twist was inserted into a length of yarn that was then wound onto the take-up package. Ring spinning in­ tegrated these two operations into a continuous process to achieve much higher productivity. By the time of World War II, essentially all yarn spin­ ning was being done on ring-spinning frames. After the war, continuing improvements in ring spinning doubled output speeds by 1975 with increased reliability of operation and better quality products.ll The limits for the speed of ring spinning are deter­ mined by mechanical limits on the rotation of the spindle and the friction inherent in the system. For the past twenty-five years increasing atten­ tion has been paid to overcoming these problems. The most successful approach has been open-end spinning, in which the twisting element is a rotor driven by an air turbine. Commercial development of rotor spin­ ning began in the mid-1960s. The process uncouples twisting and wind­ ing but carries both operations out sequentially and continuously. It has a number of significant advantages. First, the preliminary operation re­ quired to prepare the fiber input in ring spinning can be eliminated or minimized, reducing the complexity of the process. Second, rotational speeds can be much higher, and the product output is four to five times greater than that of a conventional spindle. Third, less labor is used (al-

221 TEXTILES AND APPAREL though it must be more skilled), space requirements are reduced, and less downtime is required for maintenance and cleaning. Open-end spinning can be more easily automated than ring spin­ ning. Automatic removal of full packages is possible, increasing produc­ tivity and eliminating a low-level, unskilled job that is traditionally hard to fill in American mills. Automatic cleaning and piecing together of breaks in the output yarn are also available, again replacing traditional operator tasks and improving quality. The International Textile Machin­ ery Federation has estimated that for industrialized countries the relative productivity of a rotor compared with a ring spindle was 2.5 in the years 1974-1979,3.5 in 1980-1981, and 4.0 in 1982.12 Originally some characteristics of finer yarns produced by open-end spinning were not as desirable as those of ring-spun yarns. They tended to be weaker and to produce fabric with a harsher feel. Like other textile processes, however, open-end spinning has continued to be improved. In rotor spinning the rotational speed of the rotor is essentially con­ stant. As a result, its output goes up very fast as the linear weight of the yarn being produced is increased. In ring spinning, the spindle speed de­ creases as the yarn weight increases, so that production increases only linearly with yarn weight. The result is that rotor spinning has a very high productivity advantage with medium to heavy yarns. The interaction of relative productivity with the quality characteristics mentioned above suggests that ring spinning may not be completely replaced as a means of producing fine-count yarns. 13 Improved ring-spinning machinery con­ tinues to be developed and marketed, so that at the present time ring and rotor spinning coexist, with ring frames being used primarily for finer counts. The cost of installing the most modern ring-spinning equipment in 1981 was $376,000 per workplace, which was five times the inflation­ adjusted cost per workplace thirty years earlier. For rotor spinning the change has been even greater. The cost per workplace rose from $606,000 in 1971 to $2 million in 1983, a threefold increase in only twelve years. 14 As a result the investment in spinning as a percentage of the total invest­ ment in textile manufacturing in the United States has gone up from about 10 percent to about 30 percenP5 From 1961 to 1973 U.S. spinning mills operated about 18.9 million spindles. Since 1973 the number has declined steadily. 16 In 1984 the total was 13.5 million, a reduction of 28.5 percent. The number of spinning mills began to decline in 1969 from 1,500 in the early 1960s to 675 in 1983-1984, a reduction of 56 percent. The average number of spindles in each mill, however, climbed from 12,500 in the 1960s to 20,800 in 1983- 1984. These changes are shown in figure 5-4. The United States has only 45 percent of the spinning mills it had twenty-five years ago, but on the average the mills have 66 percent more spindles.

222 FIGURE 5-4

NUMBER AND SIZE OF U.S. SPINNING MILLS, 1961-1984

2,500

2,000

\ \ \ 1,500 \, ...... __ ...... ,...,/

, ,,/\ 1,000 '---- , --'" A ,, Number of spinning mills "'-...... " ...... 500

o~~~~~~~~~~~~~~~~~~~~~~~~ 1961 1965 1970 1975 1980 1984 Year

SOURCE: Same as source for figure 5-1.

Average spindle productivity increased about 30 percent over the period 1955 to 1985, primarily between 1960 and 1975, as shown in fig­ ure 5-5. This increase coincided very closely with growth in the use of man-made fiber, which increased from about 10 percent in 1960 to 40 percent in the late 1970s. The percentage of active spindles consuming 100 percent cotton also declined in this period from 90 percent in 1961 to 40 percent in 1977, when it leveled out. These changes are illustrated in figure 5-6. As the speed of spinning equipment increased, much more sophisti­ cated control equipment became necessary. Controls needed to be fast, sensitive, and fully automatic. Progress in the development of higher­ speed and more productive spinning processes depended on parallel de­ velopment of controls with these characteristics. Electronic controls, particularly those based on microprocessors, were especially useful. After World War II, when product delivery speed was in the range of 70-80 yards per minute, the proportion of electrical equipment in spin­ ning machinery was about 5 percent. With delivery speeds now of 223 FIGURE 5-5 SPINDLE PRODUCTIVITY IN U.s. MILLS, 1961-1984 Percent 30

25

20

15

10

5

1965 1970 1975 1980 1984 Year

NOTE: Base = 1955-1960 average. SOURCE: Calculated from data available in U.S. Department of Commerce, Bureau of the Census, Current Industrial Reports, M22P.

700-800 yards per minute, the proportion has risen to 25 percent. The past ten years' experience with electronic controls suggests that by the end of the century spinning mills will be characterized by the following: 17

• more integrated machines with fewer processing stages • new electronic controls and sensors for controlling material trans- port, production, and quality • automatic process optimization • robot material handling • ghost shifts with few or no operators • complete hierarchical information systems

Rotor spinning appears to have reached maturity. Early problems of low yarn strength and harshness of hand have largely been overcome.

224 FIGURE 5-6

USE OF MAN-MADE FIBER IN U.s. COTTON-SYSTEM SPINNING, 1955-1984 Percent 100r------,

80

60

40

20

1970 1975 1980 1984 Year

NOTE: Spindles on 100% cotton were not reported separately before 1961. SOURCE: U.s. Department of Commerce, Bureau of the Census, Current Indus­ trial Reports M22P.

The hand and cover factor of the yarn was improved by new rotor design, which made lower twist possible. New rotor design, automatic rotor cleaning, and improved trash removal efficiency in opening and carding have largely eliminated the accumulation of dust in the rotor, which was the principal cause of lower strength. To produce high-quality yarns effi­ ciently on high-speed equipment has also required improved raw materi­ als. In general, for rotor-spinning, fiber producers have designed finer staple fibers with their modulus and frictional properties adjusted to the needs of new processes. IS In spite of the high level of the current state of the art, most rotor-spinning equipment installed in the United States is used to make heavier-weight filling yarns, about 40 to 50 percent of which are made in rotors. 19 This is of course a smaller proportion of total yarn output. Productivity has reached new levels. Rotor speeds of 75,000 revolu- 225 TEXTILES AND APPAREL tions per minute and higher have been achieved, and yarn take-up speed has reached 150 yards per minute or more. Yarn quality is such that a take-up package from spinning, in the form of a knotless cone weighing up to eight pounds, can be directly shipped or used for subsequent proc­ essing without rewinding or other preparation. Labor has been saved by automating start-stop operations (including the splicing of broken yarns), rotor cleaning, full package removal, and product transport. Machine ef­ ficiency is 97-98 percent. Rotor-spun yarns are accepted as standard, for example, by denim manufacturers, by mills using shuttleless looms, and by knitters of high-quality apparepo The results of one mill's conversion to rotor spinning have recently been reported as follows. One hundred ring-spinning frames having 27,648 ring spindles were replaced with twenty open-end machines hav­ ing 4,296 rotors. The new equipment produced 154,000 lbs. of yarn each 144-hour week compared with 116,000 produced by the old equipment. Productivity went up from 41 pounds per employee-hour to 149 pounds per employee-hour. Yarn defects were reduced by a factor of 20, and the evenness of the product was improved.21 The U.S. industry has been a leader in acquiring rotor-spinning equipment, although it has also continued to invest in ring spindles. In­ dustrialized countries, led by the United States, showed a clear trend to­ ward installation of rotors rather than rings, but most developing countries have favored ring spinning. Of the principal exporters, how­ ever, Hong Kong has almost abandoned ring spinning; Taiwan is mov­ ing in the same direction but seems to be maintaining and modernizing its ring-spinning capacity; and Korea is moving rather more slowly to­ ward rings. 22 The United States purchased 29.4 percent of all the rotor-spinning equipment bought by industrialized countries from 1974 to 1982. Italy, West Germany, France, and Japan each took about 11 percent of the out­ put, so that they, with the United States, accounted for 75 percent of this new equipment in developed countries. 23 Nevertheless, the United States has not achieved a particularly high position in the penetration of open­ end spinning, although over half of the new capacity added in 1974- 1982 was based on rotors.24 The highest penetration has been in the East European countries, which by 1981 had 27.4 percent of their capacity in open-end equipment. In second place, the European Community had 9.8 percent. North America, with 4.2 percent, was only slightly ahead of Af­ rica (3.7 percent) and South America (3.6 percent) and well below the world average of 7.7 percent. In spite of the changes in Hong Kong, Tai­ wan, and Korea, there was only 1.7 percent penetration in Asia and Oceania as a whole. (These figures refer to spinning capacity, using the assumption that one rotor produces three times as much as a spindle.)

226 RICHARD STEELE

The number of ringless spindles in the world more than tripled between 1980 and 1986. Even though rotor spinning has been a great improvement over ring spinning, other new spinning systems may have greater advantages. The Japanese have introduced spinning machines that use air jets to form yarns at high speeds. European machinery manufacturers have devel­ oped high-speed machines that form the yarn by friction-twisting the fiber bundle between a pair of belts. Another system produces yarn by wrapping the staple fiber bundle with a continuous-filament fiber. Com­ mercial installations of all three systems have been made, but it remains to be seen whether they will supplant or supplement rotor and ring spin­ ning. In any event it appears likely that there may be continuing radical change in staple fiber spinning processes. 25

Weaving fabric. Weaving fabric, like spinning, is an ancient art devel­ oped in late prehistoric times. Weaving forms a pliable, laminar structure from two sets of yarn elements interlaced at right angles to each other. Primitive looms were frames that held one set of yarn elements (the warp) while the second set (the weft or filling) was interlaced into it yarn by yarn. This was probably done originally with the fingers alone and per­ haps later with a needle-like tool. A shuttle is such a tool with a provision to hold a small supply of yarn so that the tool does not have to be fre­ quently rethreaded. Later, devices were added to manipulate the warp yarns in a way that made passing the shuttle back and forth easier. All the essential elements of the loom were conceived in ancient times and are unchanged today. The industrialization of weaving began somewhat later than spin­ ning; but during the nineteenth century there was continuing develop­ ment of the power loom, culminating in the Northrop automatic loom about 1900. The automatic loom required about ten hours of labor to pro­ duce 100 square yards of fabric, which was twenty-five or thirty times less than the time required by a weaver on a handloom. By the end of World War II the U.S. industry was using only automatic looms, but other countries were somewhat slower to adopt them. Japan, for example, had only 33 percent automatic looms as late as 1970. The automatic loom is a very sophisticated machine. It can be mechanically programmed to pro­ duce twills, basketweaves, and other complex forms of interlacing. It senses when the supply yarn in the shuttle is about to run out and re­ places it. It detects a break in a warp or filling yarn and stops itself. It oper­ ates at such a speed that 70 to 100 filling yarns are inserted each minute. For many years the speed of looms was rated according to the number of filling yarns inserted per minute. Cotton system looms were, more or less, one yard wide, and output was thought of in terms of linear yards. One of 227 TEXTILES AND APPAREL the ways looms have changed, however, is in being built much wider, and a better way of measuring the output of a loom is to indicate the filling in­ sertion rate. An automatic loom one yard wide inserting seventy-five fill­ ing yarns per minute would be said to have a filling insertion rate of seventy-five yards per minute. If the loom were two or three yards wide and operated at the same speed, the filling insertion rate would be 150 or 225 yards per minute. In principle, the automatic loom is a handloom to which a source of power has been applied and to which mechanical or, later, electrical con­ trols have been added. A heavy shuttle (until quite recently always made of wood) carrying a supply of filling yarn was thrown across the warp yarns by hitting it sharply with a vertical, power-driven stick. At the op­ posite edge of the fabric, the shuttle had to be decelerated, stopped, and knocked back in the opposite direction. Between each reversal the posi­ tion of the warp yarn subsets was changed to accomplish the desired in­ terlacing. The energy used by a power loom was largely consumed in accelerating and decelerating the shuttle in a mechanically clumsy and noisy way. The most important aspect of modern weaving machines de­ veloped since World War II is the elimination of the shuttle, making wider and faster looms more feasible, and making possible new approaches to the automation and control of the weaving process. Three approaches to shuttle elimination have met with wide success. One uses a small projec­ tile to carry the end of the filling yarn across the warp. The second uses a long rod, or rapier. The third uses a jet of air or water to transport the yarn. A projectile loom inserts the filling yarn by attaching a small metal clip to the cut end of the supply yarn, which is then projected across the warp by mechanical means or compressed air. At the other side the clip is removed to be recycled to the original position. The mass of the clip is many times smaller than that of a shuttle, and the power required to throw it across the warp (that is, to insert a filling yarn) is much reduced. It can also be thrown across a much wider warp. Loom speed is no longer constrained by the time required to stop and reverse the shuttle at each end of its traverse but by the time required to shift the warp yarns into position for the next filling insertion. The noise made by the shuttle system is also eliminated. Originally the projectile loom was most widely used on relatively heavyweight fabrics such as worsteds and woolens, but it has been adapted to a wide range of fabric weights. The projectile loom is especially efficient in weaving very wide fabric, up to twelve feet in some cases. The rapier loom uses a rod, or wand, to insert the filling yarn. The ra­ pier is inserted across the warp yarns, picks up the end of the filling sup­ ply yarn, and pulls it across as the rapier is withdrawn. More sophisti­ cated arrangements use two rapiers. The first carries the end of the supply

228 RICHARD STEELE yarn to the middle of the fabric and transfers it to the second, which has been inserted from the opposite side. Originally the rapier loom required a great deal of space for the movement of the wand in and out of the warp. This has been improved in various ingenious ways, one of which is to have a single double-ended wand located between two warps, so that as it is withdrawn from one it is inserted into the other and two fabrics are woven side by side. Rapier looms are quite versatile and can be used for weaving a wide range of fabrics, from fine cotton or filament fabrics to denims, pile fabrics, industrial fabrics, and carpets. They are capable of filling insertion rates of 650 to 1,300 yards per minute. In jet looms the filling is inserted by carrying it across the warp with a jet of liquid. Water and air are both used, though air is becoming domi­ nant. The low density of air makes air-jet looms more suitable for light­ weight yarns, but improvements in guiding the air jet have improved its performance for heavier-weight yarns as well. Compressed air is a rela­ tively inefficient way of transferring power, but jet guidance systems have much improved the power efficiency of these looms. Present-day air-jet looms weave fabric 1.5 to 3 yards wide and insert 500 to 700 filling yarns per minute. Filling insertion rates range from 1,100 to 1,800 yards per minute. Models are available to weave complex fabrics such as velvets or terries as well as plain fabrics, including mixed filling yarns. Although each of these three types of looms has a reasonable degree of versatility, their intrinsic capabilities vary enough that it is still neces­ sary to consider production requirements carefully before choosing among them. Their adaptability to a particular kind of fabric or the ease with which they can be changed to accommodate short-run orders may be deciding factors. Rapier looms, for example, seem to be most easily adapted to relatively short production runs; air-jet looms are least adapt­ able. In spite of this differentiation, however, over the past ten years new loom development has concentrated on rapier looms and, to a lesser ex­ tent, on air-jet 100ms. 26 Projectile, water-jet, and other looms have re­ ceived less and less attention. Even though shuttleless looms offer greatly increased productivity over shuttle looms, the latter have continued to be improved and are still manufactured and sold. Although technical limitations make it difficult to substitute rotor spinning for ring spinning in making certain prod­ ucts, this is not usually the case with shuttleless looms (taken together), and the choice of shuttle looms in their stead appears to depend primar­ ily on capital restraints. In recent years new loom installations in devel­ oped countries have been four to one in favor of shuttleless looms, while in developing countries shuttle looms have outsold shuttleless looms 1.5 to 1.

229 FIGURE 5-7 NUMBER OF LOOMS IN U.S. TEXTILE INDUSTRY, 1968-1985 Number of looms 400,000 Shuttle Shuttleless

300,000

200,000

100,000

o ~~--..""""'---....,,;~...... ~ 1968 1970 1972 1974 1976 Year

SOURCE: U.S. Department of Commerce, Bureau of the Census, Current Industri­ al Reports M22P.

The U.s. textile industry purchased over one quarter of the shuttleless looms sold from 1978 to 1982.27 The number of shuttleless looms in the United States grew from 5,634 in 1968 to 60,486 in mid-1985. 28 The total number of looms fell from 380,000 to 168,000, so that the proportion of shuttleless looms was slightly more than one-third in 1985. These data are shown in figure 5-7. Of the shuttleless looms, 42 percent are rapier, 32 per­ cent projectile, 13 percent air jet, and 10 percent water jet,29 The produc­ tion of broadwoven fabrics also declined over this period only by about 16.5 percent, so the effect of the greater productivity of shuttleless looms is very obvious, as shown in figure 5-8. In 1985, 30 percent of woven fabric output in the United States was estimated to be from shuttleless looms, and the proportion is expected to reach 40 percent by 1990.30 Shuttleless looms reduce labor requirements because fewer ma­ chines are needed and because they are more highly automated. One mill, for example, replaced 296 fly-shuttle looms with 100 rapier looms and halved the number of workers required. 31

230 FIGURE 5-8 LOOM PRODUCTIVITY IN U.S. TEXTILE INDUSTRY, 1968-1985 Square yards per loom per year 75,000

60,000

45,000

30,000

15,000

1975 1980 1985 Year

SOURCE: Calculated from data in U.S. Department of Commerce, Bureau of the Census, Current Industrial Reports M22A and MQ22.

Broadwoven fabrics for most apparel and household uses require various dyeing and finishing steps after they come from the weaving mill. If cotton is present, more vigorous cleaning is necessary to remove its natural waxes and gums. Bleaching is frequently needed, especially for cotton or blends with cotton. After a clean, white Ubottom" is at­ tained, the fabric may be dyed, printed, or treated with chemical fin­ ishes such as those required to impart "permanent press" characteristics. All these processes have traditionally involved aqueous systems, and their effluents were often seriously contaminated. Heating large vol­ umes of water and drying the processed fabric made dyeing and finish­ ing very costly in energy. During the 1960s, major development emphasis was on improving the quality and effectiveness of dyes and finishing agents and on speed­ ing up the various processes, especially by carrying them out continu­ ously rather than in batch operations. The growing acceptance of synthetic fibers, particularly blends of polyester and cotton, made it pos-

231 TEXTILES AND APPAREL sible to adapt new techniques to meet basic requirements. As electronic controls and microprocessors became common, the art involved in these traditional operations was increasingly supplanted by automation. This made higher speeds possible, conserved materials, and improved quality. These trends have continued to the present, but since the oil shock of 1974, increasing attention has been paid to energy conservation. Regula­ tions in the United States have also made it necessary to address prob­ lems of environmental pollution and of safety in the workplace. In general, recent improvements have concentrated on three areas: re­ ducing the need to evaporate water from the product, enclosing the operat­ ing equipment, and increasing automation. Reducing the energy needed for evaporation of water can be helped by very high pressure squeeze rolls, by using aqueous foam instead of liquid water to apply dyes or reagents, by using more concentrated treating solutions, or, in some cases, by using or­ ganic solvents. Since organic solvents are much more expensive than water, a recovery system is usually necessary for economy and for avoiding atmospheric pollution. Enclosed operating systems were not unknown earlier, but the problem has been combining enclosures with continuous operation. Enclosed systems save energy, reduce pollution of the workplace, and make it possible to work at higher temperatures and at higher speeds. Screen and roller printing systems have been more fully au­ tomated and electronically controlled. All in all, for economic and regula­ tory reasons, most American dyers and finishers have had to invest in new, improved equipment that has helped their competitiveness substantially, although just how much is difficult to quantify.

Another path to textile products. Another textile-forming process needs to be mentioned in the context of the future of the textile industry. It produces laminar products that are replacements for more traditional textile fabrics and go by the name of nonwovens. The process of produc­ ing nonwovens was introduced just after World War II. In some ways it is a hybrid of textile- and paper-making processes, and both textile and paper companies have become involved in it. The process comprises a means of making a web or sheet of textile fibers and a technique for per­ manently bonding it into a final product. The web can be made on a tex­ tile card or captured on a screen from fibers dispersed in a stream of air or in a volume of water. The web can then be bonded by printing or saturat­ ing it with an adhesive, by melting a proportion of fusible fibers included in the supply mixture, or by other techniques. Thicker webs can be con­ solidated or patterned before (or instead of) bonding by putting them through needling looms that mechanically entangle the fibers. A process integrated with fiber manufacture has also been developed in which fi­ bers from multiple jets are collected on a moving screen and bonded by 232 RICHARD STEELE pressure before they are fully cooled. Such products are usually called spun-bonded fabrics. Nonwoven and spun-bonded fabrics with aesthetic properties desir­ able for clothing and many household uses have not been achieved, but they are widely and increasingly used in sanitary, industrial, and other products where woven or knitted fabrics were once used. Nonwoven products have completely displaced woven interlinings for garments, for example. The outer wrap of sanitary napkins for feminine hygiene, once a woven fabric, is now a nonwoven. Woven jute fabrics used as the pri­ mary and secondary backing for tufted carpets have been displaced by spun-bonded fabric or synthetic woven fabric. Though these products are for the most part unglamorous, at one time they provided substantial business to weaving mills that is now lost. It is reasonable to assume that further segments of their market will be captured by nonwovens or spun­ bonded fabrics as they improve.

Clothing. The apparel industry is extremely fragmented. About 15,000 companies operate 21,000 plants, only about half of which have more than twenty employees.32 The eight largest firms account for less than 20 percent of sales, indicating a very low concentration. For the most part, apparel manufacturers are small firms making highly individualized products by traditional methods that are not particularly susceptible to either large-scale operation or automation. Because of the nature of the processes involved, it is likely to remain one of the least mechanized and least automated of industries. The two basic stages of apparel manufacture are the cutting of the material into parts and their assembly into the final garment. Cutting requires several steps-first making a design, a pattern, and a marker that guides the cutter when many pattern elements are to be cut; spreading the fabric on a cutting table; and finally cutting. Pattern mak­ ing requires not only deciding on the individual pieces necessary to real­ ize the garment design, but also making a graded series of patterns in all the required sizes. Making a marker requires deciding where each indi­ vidual piece will be cut from a length of fabric to meet optimum design­ matching, fabric utilization, and other requirements. Traditionally an artist created the design, and skilled craft workers made the patterns and markers. Computer-aided systems for making patterns and markers were in­ troduced in the 1970s and appear to have been reasonably widely ac­ cepted. Similarly, automatic spreading machines have become available to build the stacks of fabric that are cut with one pass of a reciprocating knife, which itself can be guided by a computer. Many medium to large companies can afford such equipment. One manufacturer of computer- 233 TEXTILES AND APPAREL controlled cutting systems estimated in 1984 that 20 percent of the world's apparel production was cut with its equipment. 33 Most of this equipment at present seems to be in the United States and Europe. The cut pieces of a garment are usually put together by sewing. A major source of the labor intensity of the apparel industry is the necessity that an operator select and pick up the garment pieces to be joined and feed them into a sewing machine, which mayor may not require further guidance during the operation. Actual sewing may require only 15 to 20 percent of the operator's time, so that even though sewing speeds have doubled since 1970, the effect on production has not been great. 34 Recog­ nition of garment pieces and the way they are to be joined and the preci­ sion handling of small, limp pieces of fabric are difficult problems for automation that so far have found only limited solutions. Various sys­ tems and pieces of equipment, however, speed the operator's work and make it more efficient. Among them are sophisticated programmable sewing machines and computer-guided systems for moving parts and finished garments from one operator to the next. The critical problem of apparel manufacturing is that it must pro­ duce a large variety of nonstandard products in small volumes with a quick response time and frequent style changes. For the immediate future the technology it most needs is a management system that will simulta­ neously maximize production, shorten production times, increase opera­ tor utilization, minimize waste, and improve quality. Some of the mechanization described above can be integrated into such a manage­ ment system, and computer-based management information systems can help, but skillful technical management very unlike the traditional system appears to be necessary. In the longer term, other technology may become available. Laser cutting may become efficient for quick cutting of short runs or individual garments. A consortium of fiber, textile, and apparel manufacturers also is supporting a joint research project on a completely automated sewing operation. Completely automated sewing equipment must be able to sep­ arate and pick up garment pieces, recognize and orient them, and feed them into a sewing head. The pieces may need to be fed in complex paths and at different speeds, as is necessary in setting a sleeve. The problem is much complicated by the limpness and thinness of the fabric.

Driving Forces for Technological Change

Knowledge: Research and Development. Research is the normal source of product and process innovation, and many companies and industries have been initiated and supported by their continuing investment in in­ house research and development. This has been true for the fiber manu-

234 RICHARD STEELE facturing sector of the textile complex. Producers of man-made fibers, like manufacturers of other chemical products, have primarily depended on internal research and development for new products and processes, although there has been extensive cross-licensing of technology among companies, particularly internationally. This has not been the case in the fabric or apparel sectors, where suppliers or companies not directly in the textile industry have invented and developed most of the new machines, processes, raw materials, and products. The textile mill products industry and apparel manufacturers have traditionally done very little research and, in general, the U.S. textile industry has been less active in research than that in Europe or Japan. Textile manufacturers have relied on their suppliers of machinery, chemicals, dyestuffs, fibers, and other raw mate­ rials for the new products and technology they require. Similarly, apparel manufacturers have turned to machinery manufacturers and other sup­ pliers for new technology, primarily because of the lack of concentration in both industries and the small number of firms big enough to afford re­ search and development on a significant scale. In the postwar period, as consolidation and growth led to the emer­ gence of some relatively large textile companies, several of them estab­ lished research departments during the 1960s, but with a few exceptions they have not flourished, and most have been reduced in scope or elimi­ nated. Except for the period 1968-1971 there have been fewer than 2,000 persons engaged in industrial textile research in the United States, and the whole industry annually spends no more on research than a typical large chemical company does. Data for employment and research ex­ penditures for textiles and apparel are shown in figures 5-9 and 5-10. Research and development expense for the textile and apparel industries has been low compared with other industries. In 1981, for example, re­ search and development costs were 0.4 percent of net sales, compared with 3.2 percent for all manufacturing.35 Another measure of the industry's low involvement in research is the fact that in the 1984 volume of the Textile Research Journal, a leading international journal published in the United States, only three of the 128 papers published had authors from the primary textile industry. For 1970, the figure was two out of 141. The principal explanation would ap­ pear to be the textile industry's strong production orientation and its long pursuit of a relatively undifferentiated product strategy. Such a strategy leads to lower than usual returns and makes less money and other re­ sources available for research. While research in the primary textile in­ dustry may not be as extensive or as productive as in other industries, the technical departments that were established have probably had a signifi­ cant role in introducing and adapting innovations from other sources. (Milliken & Co., a large privately held company, has a relatively large

235 FIGURE 5-9

R&D PERSONNEL IN U.S. TEXTILE AND ApPAREL COMPANIES, 1963-1982 Numb~e~r ______~ 3,000

2,000

1,000

Year

SOURCES: U.S. Department of Commerce, Business Statistics 1982, November 1983; and later issues of Survey of Current Business.

research organization and is not included in the data above. Its emphasis has appeared to be principally on product differentiation.) Suppliers to the textile industry of machinery, dyestuffs, chemicals, and other supplies have frequently supported significant research in rele­ vant fields. This seems to have been adversely affected by the restruc­ turing of chemical and other firms, and less research support from this area may be available in the future. An indication of the reduced output is the steady drop in the number of textile papers cited in Chemical Abstracts over the past eight years. 36 Productivity growth has been assumed to be related to innovation. Martin Baily recently reported some initial results from a study of this re­ lationship in the textile and chemical industries. 37 Textile productivity grew atan average of 2.73 percentperyearfrom 1965 to 1973 andat 3.56 percent from 1973 to 1979. Chemical productivity growth fell from 3.10 percent per year in the first period to 1.91 percent in the second. Bailey

236 FIGURE 5-10

R&D EXPENDITURES IN U.S. TEXTILE AND ApPAREL COMPANIES, 1957-1983 Millions of dollars 150

125

100

75

50

25

1965 1970 1975 1980 1983 Year

SOURCES: Same as sources for figure 5-9. found that this decline in the chemical industry corresponded to a similar decline in the number of product and productivity-related process inno­ vations reported per year. In the textile industry, in contrast, no such de­ cline in equipment innovations was observed. The count of innovations was made by evaluating advertisements and reports in technical periodi­ cals from these industries, using technical criteria to determine when a new product or process represented an advance. As Baily points out, this evaluation should be a measure of the flow of innovative technology into the industry. This study raises many interesting questions that may be an­ swered when the work is completed. There were, for example, 135 and 141 equipment innovations in the textile industry for the two periods, much higher than the 7.3 and 4.2 for productivity-related process inno­ vations in the chemical industry. The latter figures (if they are correct) are most surprising in view of the complexity and diversity of the chemical industry. It would be of great interest to analyze the source of the innova­ tions in the textile industry to determine how many derived from its own

237 TEXTILES AND APPAREL rather slenderly supported research and development and how many originated in the work of machinery and raw material suppliers. The pe­ riod studied, 1965 to 1979, includes the years when there was a large in­ crease in spinning productivity in U.5. mills (see fig. 5-5), but ends before the greatest effects of the moves to chute-fed cards and shuttleless looms should be felt. Finally, it would be useful to analyze how the hundreds of innovations counted were related to changes of major impact such as chute feeding of cards, rotor spinning, and shuttleless looms. It is likely that they represent the small incremental steps in innovation described by John McPhee. 38 The number of innovations counted by Baily is large; in view of the meager support for textile research and development in the United States, most of the innovations must have arisen outside the industry or in other countries. Further, the textile industry appears to have been more successful in increasing productivity than the chemical industry, which invests heavily in research. This suggests that internal research and de­ velopment has not been a major contributor to productivity improvement and may not be an essential element for the textile industry. In new prod­ uct development this may not be true.

Money: Capital Investment. An alternative to developing new tech­ nology is buying it from engineering firms, machinery manufacturers, or other suppliers, as apparel, textile, and, increasingly, fiber manufac­ turing companies have done. For the past twenty years there has been a very active international market in new technology for manufacturing textiles and for machinery incorporating such technology. In recent years the same has become true for the apparel and fiber-making indus­ tries. Transfer across national boundaries has been rapid and easy, and the advantage that local purchasers of such machinery or technology had over foreigners has considerably diminished. This has been very important to the United States because its textile machinery industry, which for a while was a world leader, has severely contracted. Although U.S. manufacturers continue to be major suppliers to the U.S. industry, for the most part they have not been a factor in supplying machines in­ corporating the most advanced technology such as that involved in rotor-spinning and shuttleless weaving, and most of these have been imported. Western Europe has supplied almost 90 percent of the machinery imported by fiber and textile manufacturers since 1970, with most of the remainder coming from Japan (see table 5-1).39 (From 1970 to 1977 tex­ tile and fiber manufacturing machinery were classified together in cus­ toms data.)

238 RICHARD STEELE

TABLE 5-1 SUPPLIERS OF FIBER AND TEXTILE MACHINERY TO U.S. MANUFACTURERS, 1970-1984 (percent)

1970-1977 1978-1984 Fiber and Country Textile Fiber Textile

West Germany 38.8 47.7 20.2 Switzerland 17.2 18.1 39.6 Italy 6.4 6.1 9.0 France 8.3 6.2 2.0 United Kingdom 12.1 8.4 2.1 Japan 6.6 8.5 16.8 Total 89.4 95.0 89.7

SOURCE: U.S. Department of Commerce, Bureau of the Census, U.s. General Im­ ports FT150, Schedule A, 1970-1984.

In recent years each sector has imported machinery worth $200 to $300 million, which constitutes a substantial portion of the amount the industry spends on machinery and equipment each year (see figure 5-11). In 1980, for example, the textile mill products industry spent $275 million on new buildings and $1,214 million on machinery and equip­ ment. Eighteen percent of the latter was spent on imported machinery. For 1981 the figure was 19 percent. Investment by the American textile industry appears to lag behind that of industry as a whole.40 Figure 5-12 shows that while investment over the past twenty-five years has risen to three times the 1959 level in constant dollars for all industry, the textile industry has barely doubled its expenditures. Since 1947 all manufacturing has invested annually 8 to 12 percent of its fixed capital stock, the figure rising and falling with the business cycle. In 1947 and 1948 the textile industry invested at a compa­ rable level-10 percent-but investment has fallen to less than half of this rate. For the past ten years, when investment in expensive new tech­ nology was required, the rate has been 3.5 to 4.5 percent. These data are shown in figure 5-13. The lower rate of textile industry reinvestment is of particular importance when it is recognized that the ratio of capital to labor (capital stock per hour) rose from $8.62 in 1970 to $13.78 in 1983 in constant dollars.41 Iflow wage rates in other countries are to be countered by new technology, the cost of doing it is rising dramatically. For 1985 capital expenditures were estimated to be $2.1 billion. Some mills seem to

239 FIGURE 5-11

U.s. IMPORTS OF TEXTILE AND FIBER MANUFACTURING MACHINERY, 1970-1984 Millions of dollars 700

Textile and fiber manufacturing 600 Textile only

500

400

300

200

100

1970 1972 1974 1976 1980 1982 1984 Year

SOURCE: U.S. Department of Commerce, Bureau of the Census, U.S. General Imports FT150, Schedule A. believe that they have achieved a satisfactory level of modernization, al­ though some continue to hold up spending until the textile trade issue is more settled. 42 The textile industry has been required to make capital expenditures to comply with government regulations concerned with the environment and with occupational safety and health. Effluent problems from dyeing and finishing plants, noise in weave sheds, and contamination of the workspace atmosphere with cotton dust are typical of the problems en­ countered. It is reported that for all industry 3.5 to 4.0 percent of capital expenditure in the 1979-1983 period has been for pollution abatement. 43 For the textile mill products industry the figures are as follows: 1978,4.40 percent; 1979,2.95 percent; 1980,3.98 percent; 1981,2.78 percent; 1982, 1.40 percent; and 1983, 1.12 percent.

240 FIGURE 5-12

U.s. PLANT AND EQUIPMENT INVESTMENT, 1960-1984 Ratio (1959 = 1.0) 12 , All manufacturing (current $) : ,.. : I " I 9 II ' ...... I I I I Textile (current $) / 6 y' /' All manufacturing (constant $) ,," ,,,,,.... ,, /' ...... '" v .. ,.... I , ", ~" ...... 3 ;' ~ ",,:" ...... ~_!~~ '--:····:~v~ ...... ---... _.>t:::...... _----_ Textile (constant $)

Year

SOURCE: Calculated from data in U.S. Department of Commerce, Bureau of the Census, Survey of Current Business, various years.

Although this burden did not fall evenly on all parts of the textile in­ dustry and undoubtedly caused hardship in some cases, it does not seem likely that these requirements caused a serious diversion of available cap­ ital. In the chemical industry, fully 7 to 9.5 percent of capital spending has gone into pollution abatement.

Organization: Corporate Structure. In response to the pressures of the present trade and economic situation, the U.S. textile industry is going through a period of major corporate restructuring. Some companies are realigning their product markets. J. P. Stevens, for example, is divesting it­ self of its apparel fabric business. Another major textile manufacturer, West Point Pepperell, has bought a major apparel firm, Cluett Peabody. Major firms such as Cannon and Lowenstein have been absorbed into others. Many older and less profitable plants have been closed, some­ times as part of such restructuring and in others cases independently. The question arises whether such changes as these will affect the

241 FIGURE 5-13

U.s. INVESTMENT AS A PERCENTAGE OF FIXED CAPITAL STOCK, 1947-1981 Percent 15

Year

SOURCE: Same as source for figure 5-12.

extent or rate of technological change. It is probably too early to say. To the extent that the restructured industry continues to emphasize an undifferentiated product strategy and to pursue mass production of stan­ dard products, it is questionable whether it will have the markets and re­ sources to continue to invest heavily in new technology. Realignments such as that of Stevens and that implied in the West Point acquisition sug­ gest that new market strategies may be pursued, in which case continued upgrading of facilities may be required, especially to make them adapta­ ble to a greater variety of specialized products. In no case has there been a clear indication of specific reliance on new technology or research to de­ velop such technology. There has also been considerable realignment in the fiber industry over the past ten years. The number of companies has been reduced and several manufacturing facilities, particularly those making products for declining markets, have been closed. The remaining companies appear to be rela tively strong and committed to the fiber business, but their present

242 RICHARD STEELE domestic business is unlikely to grow, and their exports are becoming smaller. Nevertheless, they will have to continue to invest in new technol­ ogy to maintain economic viability and to provide manufacturing capa­ bility for the specialized products on which their profitability will increasingly depend.

Politics: Public Policy. The degree to which public policy has affected the diffusion of new technology in the U.s. textile industry is difficult to determine. The strength and competitiveness of industry are obviously very much affected by government action. Laws and regulations control trade, labor relations, product safety, environmental protection, and many other vital factors. Overall policies-trade policy, for example­ can be very important. In addition, specific support programs like that embarked upon by the United States in the late 1970s can expand the ex­ port of apparel and textile products.44 The United States, unlike some other countries such as Japan or Korea, has not provided direct support for modernizing and restructuring its textile industry to become more competitive, although the investment tax credits and accelerated depreciation rates available to all industry have helped to some extent. (In industries with below-average rates of re­ turn, internally generated funds are important, and a study of the period 1960-1964 indicated that textile investment appeared to increase when tax laws permitted accelerated depreciation.)45 Government research, or government-sponsored research, has at times been fairly extensive, but it has concentrated for the most part on natural fiber raw materials or end products rather than on manufacturing technology. State and local gov­ ernments, particularly in the Southeast, have provided resources for training the more highly skilled workers (electronics technicians, for ex­ ample) that much new textile technology requires, but this provides little driving force for technological change. The most important action of the U.S. government in this respect has been its support of free trade as envi­ sioned by the General Agreement on Tariffs and Trade. Throughout the nineteenth century and well into the twentieth cen­ tury, the United States pursued a strong protectionist policy for its textile and other industries, as is typical for developing countries. A strong tex­ tile industry grew up behind the tariff wall of the past century, first in New England and later in the Southeast. Even in the early days it seems to have had access to the best current technology, even if it had to be ob­ tained clandestinely when English law forbade its export. Under these conditions it was eventually able to compete with the dominant English industry for export business like the China trade. American trade liberali­ zation began in the mid-1930s at a time when the textile industry was en­ tering a period of strength based on leadership in man-made fibers, end

243 TEXTILES AND APPAREL

products made from them, and the technology for their processing. As this phase matured and as developing nations in Asia achieved major ex­ port capabilities in textiles and apparel, the American industry met major difficulties and today is strongly urging a return to more protectionist policies. A full discussion of trade policy is not appropriate here, but two fac­ tors are important in the present context. Both are related to the heavy pressure continued liberal import policies will put on the U.s. textile and apparel industry to change. First, since the latest technology is freely available across international boundaries, exporting countries will have more and more of it as their capital resources grow. American mills will have to invest in new equipment to keep ahead. Second, the pressure of this competition will make it necessary for the industry to continue re­ thinking its basic undifferentiated product strategy and move toward more specialized products, as the textile industries of West Germany and Japan have done with considerable success. Both of these possibilities imply that changes in corporate strategy and management style will be prerequisite, and they probably have to occur before the benefits of the continuing adoption of new technology can be realized. In any event, however, employment in textiles and apparel is likely to continue to de­ cline since a major thrust of the new technology is to reduce labor inten­ sity. It is therefore essential to address effectively the political and social problems of worker displacement.

Economic Effects of Technological Change

New technology can and does lead to textile products with improved per­ formance and better quality, but the factor of most immediate concern is usually cost. The new textile exporters that have penetrated the U.s. mar­ ket are low-wage countries-in some cases very low compared with the United States-and their principal advantage is believed to be this wage differential. Comparing wage and other costs among countries is very dif­ ficult, even when data are available. 46 The best that can be done is to exam­ ine some of the available figures to get an indication of the possible effects of the introduction of new technology on cost competitiveness. The analysis of costs is complicated by the problem of the dollar ex­ change rate. A large part of the present textile trade imbalance has been the value of the dollar, whose effective exchange rate index is some 50 percent higher than it was in 1979-1980. Although the favorable ex­ change rate may have facilitated American purchases of new machinery and technology abroad, this advantage was more than offset by the wid­ ening cost gap with our new competitors. Unless a new international monetary control system is established, the exchange rate will continue

244 RICHARD STEELE

TABLE 5-2 EXPENDITURES IN THE SPINNING INDUSTRY, 1983 (percent)

United Brazil Germany India States

Interest 40.6 10.0 21.1 14.8 Depreciation 21.1 24.2 21.3 22.5 Auxiliary materials 5.6 3.7 6.9 4.6 Energy 4.1 13.7 22.1 11.1 Labor 15.3 33.6 8.9 29.6 Waste 13.3 14.8 19.7 17.4

SOURCE: H. Locher, Textile InnovatiOtl, Invention, and Investment (Manchester, England: Textile Institute, 1985), not paged. to be a very problematic factor in comparing costs and making invest­ ment decisions. Differences in wage scales are most important in labor-intensive op­ erations, and spinning has always been particularly labor intensive. In hand spinning over 100 worker hours were required to produce one kilo­ gram of yarn. This labor intensity was rapidly reduced by the develop­ ment of spinning machines during the industrial revolution; and when ring spinning was introduced about 1900, it required less than one hour of labor per kilogram. Productivity was significantly improved during the first half of this century, and by the 1960s automatic ring-spinning frames required less than one-tenth of an hour of labor per kilogram of product. Open-end rotor-spinning equipment halved this and has con­ tinued to be improved.47 Labor, however, is not the only significant element in spinning costs. Data on the relative cost elements for spinning are presented in table 5-2 for two developed countries and two developing countries. The big differences among the countries are in interest (a fourfold variation), energy (fivefold), and labor (more than threefold). The data show that even though spinning is labor intensive, other factors are im­ portant and nowhere does labor amount to more than about one-third of the total cost. The introduction of rotor-spinning technology into the U.s. industry should also help to reduce the cost of waste and perhaps, energy. It has been assumed that the distribution of staple fiber spinning be­ tween high-wage and low-wage countries would depend on the usual parameters that control cost and quality. Thus, P. R. Lord calculates that if fixed, variable, and handling costs are taken into account, high-wage

245 TEXTILES AND APPAREL

TABLE 5-3 EXPENDITURES IN THE WEAVING INDUSTRY, 1983 (percent)

United Brazil Germany India States

Interest 47.8 11.5 27.1 17.6 Depreciation 22.5 24.5 25.8 25.1 Auxiliary materials 8.6 9.4 19.3 13.4 Energy 4.3 10.9 19.1 8.7 Labor 16.8 43.6 8.6 35.2

SOURCE: Same as source for table 5-2. countries would have an advantage in making the coarsest and finest yarns.48 The advantage with coarse yarns comes from automation; for fine yarns it arises out of presumed ability to operate nearer the intrinsic limits of the process. In reaching this conclusion, he assumed that auto­ matic product removal, good fiber, and high technology would be used in the high-wage country, while manual product removal, more variable fiber, and older technology would be used in the low-wage country. Such assumptions are increasingly suspect. Low-wage countries do not always lack the capital to invest in high technology or to obtain adequate sup­ plies of high-quality fiber, and both technology and high-quality raw ma­ terials are readily available in international markets. Modern shuttleless weaving machines require less than one hour of labor per 100 yards of fabric, which is perhaps half of that required with the best fly-shuttle looms. Even though weaving is less labor intensive than spinning, labor costs are still significant. Table 5-3 displays some comparative international cost data for weaving. The figures are very similar to those for spinning, as might be ex­ pected, except for the fact that waste is negligible in weaving costs. In both cases the data suggest that new technology should be most desirable in countries where labor, energy, and waste costs seem to be high and that its adoption could be retarded by high interest costs. An important factor in the economics of new technology is the de­ gree of its utilization. Textile mills are operated around the world on vary­ ing schedules. One group of countries, which includes the United States, West Germany, France, the United Kingdom, Greece, and Portugal, oper­ ates mills at a level of about 63 percent, that is, approximately 5,500 hours per year. A second group including Japan, Turkey, Indonesia, and many South American countries averages 6,500 hours per year (74 percent).

246 RICHARD STEELE

Korea, Taiwan, Hong Kong, Thailand, India, and Pakistan work mills for 8,500 hours, which is a surprising 97 percent of those available in a year. Werner Textile Consultants, which gathered these data, concluded that '"there is no question that new plants with high technology and high in­ vestment being built in the high-labor-cost countries will have to plan to run at least 8,000 hours/year in order to justify the investment."49 Such a schedule would cut U.s. capital costs in output terms by 30 percent, but whether such an intensive operation would be acceptable to managers and operators in this country is unknown. In this respect the '"new textile exporters" seem to be willing to work harder than the United States has been accustomed to. In its effects on the U.S. economy, the introduction of modern tech­ nology is a two-edged sword. It reduces the advantage of low-wage countries significantly. Labor costs for modern plants in the primary textile industry can be as low as 8 to 20 percent of the sales value of the final product, which is in the range of other manufacturing industries. 50 At such levels, energy, capital, and transportation costs become more important in total economics, so that the competitive edge of the United States can be improved. This reduction in labor cost, however, is achieved through machines that are more productive in terms of labor. Rotor spinning requires half the labor input of ring spinning for the same output; shuttleless looms can also halve the labor needed. In a market that is relatively mature, such modernization means a signifi­ cant loss of jobs. The shift of the U.S. textile industry toward shuttleless looms as shown in figure 5-7 represents a reduction in the labor force employed in weaving of more than 50 percent, based on the reasonable assumption that the manning requirement for the new looms is half that of the old. The remaining jobs tend to require more skilled labor and in the long run will be more desirable and useful to the economy. This move away from labor intensity also makes the primary textile industry less attractive to countries seeking to maximize job creation as they de­ velop. Modern primary textile plants have capital costs of more than $15,000 per employee, which will also tend to reduce the attractiveness of this industry to the developing countries. S1 With man-made fibers, cost comparisons are perhaps even more problematic. In fibers the biggest cost factor is the price of petrochemical feedstock, which is very much affected by political considerations in this country and elsewhere. During the growth period of polyester manufac­ turing, while output was increasing rapidly and productivity was being improved, the price of the product came down rapidly. Price data for polyester staple and cotton are shown in figure 5-14. The ruinous levels of the early 1970s were the result of overcapacity and a vigorous effort to accelerate the acceptance of polyester by making its price more or less

247 FIGURE 5-14

U.S. POLYESTER AND COTTON PRICES, 1960-1985 Cents per pound 140 , 120 , ' ...... ~"""\ \ \ 100 \ \ \ \ 80 "\ Polyester \ \ \ , 60 , ,, '" ...... 40 ......

20 Cotton

Year

SOURCE: U.s. Department of Agriculture, Economic Research Service, Cotton and Wool: Outlook and Situation Yearbook (Washington, D.C., August 1985), p. 20.

equal to that of cotton. For the past ten years the price of cotton has slowly risen, and polyester has followed it. The data suggest that through in­ creased scale, new technology, or other factors, polyester manufacturers are managing to keep costs and prices in a favorable ratio. Nevertheless, as in the case of the primary textile industry, the new technology that in­ creased productivity also resulted in a loss of jobs. From 1970 to 1980, while the output index rose by 64 percent, employment of production workers fell by 13 percent. During this period U.S. petrochemical feed­ stocks were very favorably priced, and the U.s. industry built large-scale raw material and fiber plants that were very cost competitive. These ad­ vantages have been whittled away, and it now seems probable that the fiber industry will have to rely on product innovation and specialization for its continuing competitiveness, as mentioned above. Lower priced, garden-variety products will tend to be made abroad while domestic pro­ ducers concentrate on innovative and specialty products, avoiding direct

248 RICHARD STEELE competition on cost as much as possible. In the past new technology for such product innovation has been most often provided by in-house re­ search, on which increased dependence should be expected. In one sense, something similar may happen in the apparel indus­ try. Low-priced products will probably be mostly made abroad, either in offshore facilities established under section 807 of the Tariff Act or by foreign firms, while higher-priced garments can be made domestically and compete with imports. 52 The profitability of such product lines could provide the resources to take maximum advantage of new manu­ facturing technology.

What Next?

Textiles and clothing serve the basic human need for protection of the body from the elements. From prehistoric days men have spent a signifi­ cant part of their daily effort on providing them. When such tasks began to be industrialized, textiles were in the forefront of the change, and they continue to be an important sector in the economies of most countries. In spite of successive waves of new technology that have transformed the textile industry, its output continues to conform substantially to fiber and fabric products that have long been traditional. There seems to be no indi­ cation that this is likely to change in the near future. The continuing ad­ vance of technology in this field will continue to be directed toward growing or making fibers more or less in their present form and toward spinning them into yarns that can be knit or woven into fabrics with the aesthetics and performance people are now accustomed to. This continu­ ity does not preclude the possibilities of innovation in the area of style or fashion, which is a major force. Even though making fabric and clothing was originally a domestic occupation, centers of specialization in various types became established very early. This concentration was accelerated by the industrial revolu­ tion. During the nineteenth and twentieth centuries, as the world devel­ oped and as economic and population centers shifted, the principal textile manufacturing centers moved and became more dispersed. First the major centers moved from England and Western Europe to the United States and Japan, and they are now moving to a number of emerg­ ing and developing countries, primarily in Asia. Increasing availability of rapid communication and transportation accelerated the change. Such movements have always been disruptive of older centers, particularly be­ cause the very concentration of the older centers on textiles left them with few resources to replace the investment and employment lost as their competitiveness declined. The U.s. textile and apparel industry is going through such a disruptive phase. To combat the problem, tariffs and

249 TEXTILES AND APPAREL other protection from foreign competition can be and have been sought. Some protection has been afforded by the Multi-Fibre Arrangement, which modifies some of the basic policies of the General Agreement on Tariffs and Trade, but it has not prevented loss of foreign and domestic markets. The Multi-Fibre Arrangement is supposedly "temporary" (al­ though it has just been renewed) and can only slow the ultimate adjust­ ment that the U.S. industry must make to the new world situation. The alternative to protection is to regain competitiveness by chang­ ing the nature of the industry. There are at least two approaches, both of which involve the introduction of new technology and, perhaps, depend upon it. One is to defend the present industry position by addressing the comparative advantage of the newcomer. This can be done directly, for example, by introducing labor-saving machinery to counteract the low wages of another country. Or it can be done by upgrading the quality of the end product so that it is more competitive in the marketplace. The sec­ ond approach encompasses the elements of the first but adds to it a stra­ tegic change in market relationships, such as abandoning high-volume, low-margin products for more specialized products that sell at higher prices. The latter implies having a particular skill in identifying markets or leading them into new products and in doing this on a continuing inno­ vative basis. The manufacture of yarns and woven fabrics has been the most im­ portant segment of the U.S. industry, which has been particularly effi­ cient at producing long-run, high-volume end products. New, more efficient, labor-saving spinning and weaving processes have become available in the past twenty years. The new machinery is relatively ex­ pensive, but it slashes labor and space costs and produces high-quality products with less waste. It would appear to offer what is required for the first approach mentioned above. The two major developments that have been discussed, rotor spin­ ning and shuttleless weaving, became commercially available in the mid- 1960s. The United States has been a major purchaser of equipment in both areas. In the case of rotor spinning, however, only 4.2 percent of its spindles were rotors in 1981, far behind the penetration of this technol­ ogy in Eastern Europe and considerably behind Western Europe. The penetration of shuttleless looms is 36 percent, considerably higher, and the United States is a leader in this conversion. It is somewhat surprising that the more labor intensive of these processes has the lower penetra­ tion. The rate of penetration of both rotors and shuttleless looms seems to be slower than usual. Available data are said to suggest that, on the aver­ age, eight years pass before half the major firms in an industry begin using a major innovation. 53 This figure may not be comparable, however, since textile operations can be modernized more or less piecemeal, while

250 RICHARD STEELE a major new steel-making or chemical process may require building a new plant. This relatively slow penetration of such major innovations leads to the conclusion that there is not a broad commitment in the U.S. textile in­ dustry to support this approach, although there may be some firms that are adopting it. The relatively low level of capital spending for textiles and the lack of support for research and development are consistent with this assumption. Without a growing market, the labor saving achieved with new equipment results in a substantial loss of jobs, which is an emotional and politically difficult problem. It is not unreasonable, though, to expect the companies that survive to continue converting to the new technology. Further conversion will depend on the availability of substantial capital, which will require returns rather higher than have been achieved in the past. The latter suggests that a strategic repositioning of the industry may also be required. The U.s. fabric industry has been structured in the past to concen­ trate on high-volume production. The lower labor and other costs achieved with new technology alone cannot make it competitive with the emerging textile manufacturing centers of Asia, since the new technology will be available there too. It does seem possible that the lower costs could make the U.s. industry competitive if it adopted a specialized, market­ oriented strategy such as some other national textile industries have moved toward.54 The West German textile industry is a preeminent ex­ ample of success with such a strategy. The future of the fiber and apparel sectors of the textile complex is in some ways similar to that of the primary textile industry. Both will also have to give up significant parts of their markets for low-end, relatively inexpensive products and depend on more specialized markets. The pos­ sible contribution of new technology varies. Apparel even more than tex­ tiles has been very labor intensive, which makes it very vulnerable. Contrary to the expectations for textiles, technology that will signifi­ cantly reduce the apparel industry's dependence on labor does not seem likely in the near future, although some advances have taken place. Both industries can expect continuing small innovations, but in the case of ap­ parel no major new inventions or conceptions seem to be available to at­ tack the major problem of automating the assembling of the pieces of a garment and fastening them together. So it is likely that cheaper, com­ modity garments will not be economical to make in the United States and will be increasingly made abroad, perhaps under section 807. Intermedi­ ate and more expensive garments, particularly those with a high style content and innovative fashion, can continue to be made in the United States if the latest technology is combined with a management system that makes most efficient use of it. 251 TEXTILES AND APPAREL

The U.s. man-made fiber industry, like the chemical industry of which it is also a part, has been better than the rest of the textile complex in developing and adopting new technology. This was particularly true in the synthetic fiber industry while it was young and rapidly growing. The required investment in new plants and the commitment to research and development typical of the chemical industry spurred the rapid accept­ ance of new technology. The industry has now matured, however, and, as in other developed countries, it has not grown in recent years even though capacity, particularly for polyester, is being added to the rest of the world at a very significant rate. It will have to continue to refine its processes and to develop specialized products adapted to new textile pro­ cesses and to making improved consumer end products. In the longer range, new technology for making high-performance fibers may provide its most profitable opportunity. In summary, the availability of new technology and its acceptance by the various sectors of the textile industry will be a necessary but not suffi­ cient factor in maintaining future competitiveness. The fiber manufac­ turing sector was relatively quick to install new technology during its period of fast growth, but the rest of the world may be catching up with this. Without growing domestic and export markets, the fiber industry will have to adopt a new strategy where new technology will playa dif­ ferent role than in the past, probably being oriented more toward new products than new processes. In the primary textile industry, technology is available that can greatly enhance its competitive position. It is costly, since it replaces labor with capital, and is also freely available to the in­ dustry of other countries. So in this sector also it would appear that strate­ gic changes will be necessary before the advantages of this technology can be realized. Finally, in apparel, although the introduction of mecha­ nization and other technology has reduced labor intensity, major changes in assembling and sewing have not been achieved, so that the industry is still particularly vulnerable to apparel makers in low-wage countries.

Notes

1. John R. McPhee, "The President's Opening Address," Textile Horizons, July 1985,pp. 20-23, 34. 2. U.s. Department of Agriculture, Economic Research Service, Cotton and Wool: Outlook and Situation Yearbook (Washington, D.C., August 1985), pp. 7, 20. 3. "World Man-made Fiber Survey," Textile Organon, vol. 56, no. 6 (June 1985), pp. 107-14. 4. "New Processes: Rayon from Solvents," Textile Asia, February 1985, p. 144. 5. "World Man-made Fiber Survey." 6. Andrzej Ziabicki and Hiromichi Kawai, eds., High-Speed Fiber Spinning: 252 RICHARD STEELE

Science and Engineering Aspects (New York: John Wiley and Sons, 1985), espe­ ciall y parts I and IV. 7. Food and Agriculture Organization of the United Nations, World Apparel Fibre Consumption Survey 1983 (Rome: FAO, 1983), p. x. 8. Barbara Odrich, "Japan Survives on Specialties," Textile Horizons, June 1986. 9. "High-Performance Fibres," Textile Horizons, September 1985, pp. 32-33. 10. U.s. Department of Commerce, Bureau of the Census, 1982 Census of Manufactures: Textile Machinery in Place (Washington, D.C., May 1985), pp. 3-4,3-7,3-8. 11. Organization for Economic Cooperation and Development, Textile and Clothing Industries: Structural Problems and Policies in GECD Countries (Paris: OECD, 1983), pp. 20, 22. 12. Herwig M. Strolz, "Textile Machinery Investments-The Global Perspec­ tive/ Textile Month, March 1984, pp. 34-37, 42. 13. H. Stalder, "Will Rotor-Spinning Supplement or Replace the Conventional Process?" New Ways to Produce Textiles (Manchester, England: Textile Institute, 1972), pp. 157-74. 14. Strolz, "Textile Machinery Investments," p. 37. 15. Vincent Cable, World Textile Trade and Production: EIU Special Report No. 63 (London: Economist Intelligence Unit, 1979), p. 25. 16. U.S. Department of Commerce, Bureau of the Census, Business Statis­ tics 1982 (Washington, D.C., November 1983), and later issues of Survey of Current Business. 17. M. Zund, "The Challenge of Microelectronics," Textile Month, June 1985, pp.29-33. 18. Franklin S. Looney, Jr., "Engineering Polyester Fibres for Modern Spinning Systems," Textile Month, October 1984, pp. 27-29. 19. U.S. Department of Labor, Bureau of Labor Statistics, The Impact of Tech­ nology on Labor in Four Industries (Washington, D.C., May 1985), p. 2. 20. McAllister Isaacs III, "Rotor Spinning: Speeds Are Up, Labor Costs Down," Textile World, May 1983, p. 50. 21. Textile World, May 1985, pp. 49-52. 22. Strolz, "Textile Machinery Investments," p. 37. 23. Ibid., p. 36. 24. Udo Hartmann, "Wird die Ringspinnmaschine ersetzt-Wann?" Melliand Textilberichte, vol. 65, no. 5 (1984), p. 300. 25. L. J. Gibson, "More Automation As Pace Quickens in Spinning Race," Tex- tile Month, January 1984, pp. 15-23,36. 26. "Air-Jet versus Rapier," Textile Horizons, March 1986, pp. 52-54. 27. Strolz, "Textile Machinery Investments," p. 36. 28. U.S. Department of Commerce, Current Industrial Reports. 29. U.s. Department of Commerce, 1982 Census of Manufactures. 30. U.S. Department of Labor, The Impact of Technology on Labor in Four Indus­ tries, p. 2. 31. Textile World, February 1985, p. 76. 32. U.S. Department of Commerce, Bureau of the Census, 1985 U.S. Industrial 253 TEXTILES AND APPAREL

Outlook (Washington, D.C., January 1985), p. 45-1. 33. H. Joseph Gerber, "Investing in Technology Today Means Strength Tomor- row," Apparel World, February 1985, pp. 50, 53, 68-73. 34. OECD, Textile and Clothing Industries, p. 22. 35. U.S. Department of Labor, The Impact of Technology, p. 5. 36. Chemical & Engineering News, July 28,1986, p. 38. 37. Martin N. Baily, "What Has Happened to Productivity Growth?" Science, vol. 234 (1986), pp. 443-51. 38. McPhee, NThe President's Opening Address," p. 21. 39. U.S. Department of Commerce, Bureau of the Census, US General Imports FT-150, Schedule A, 1970-1984. 40. U.S. Department of Commerce, Historical Statistics of the United States; and U.S. Department of Commerce, Business Statistics 1982. 41. U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States 1985 (Washington, D.C., 1985), p. 526 (data from the Confer­ ence Board). 42. Chris Burritt, Daily News Record, December 2, 1985, section 2, p. 4; and William E. Schmidt, New York Times, June 23,1985. 43. U.s. Department of Commerce, Bureau of the Census, Current Industrial Reports: Pollution Abatement Costs and Expenditures MA-200(83)-1 and earlier is­ sues (Washington, D.C., 1983). 44. Brian Toyne et al., The Global Textile Industry (London: George Allen & Unwin, 1984), pp. 112ff. 45. Marilyn Winn and Rachel Dardis, Textile Research Journal, vol. 40, pp. 816-32. 46. Fibers, Textiles, and Apparel Industry Panel, National Academy of Engi­ neering, W. Denney Freeston, Jr., chairman, Jeffrey S. Arpan, rapporteur, The Competitive Status of the U.S. Fibers, Textiles, and Apparel Complex (Washington, D.C.: National Academy Press, 1983), pp. 37-39. 47. Hans W. Krause, Textil-Praxis, no. 4 (1970), pp. 195-200. 48. Peter R. Lord, The Economics, Science, and Technology of Yarn Production (Manchester, England: Textile Institute, 1981), pp. 582ff. 49. "What Price Labour?" Textile Month, August 1984, p. 13. 50. "Spinning and Weaving Labour Costs Winter 1985/86," Textile Horizons, May 1986, p. 12. 51. Ibid. 52. James Greene and David Bauer, Foreign Investment and Employment: An Ex­ amination of Investments to Make 58 Products Overseas (New York: Conference Board, 1982), p. 15. 53. B. R. Williams, ed., Science and Technology in Economic Growth (New York: John Wiley and Sons, 1973), p. 201. 54. Toyne et aI., The Global Textile Industry, pp. 145ff.

254 6 Advanced Ceramics: Restoring U.S. Competitiveness through Technology Diffusion Candice Stevens

Advanced ceramics are part of a new generation of high-technology ma­ terials that may lead to basic industrial realignments. In the past, techno­ logical progress has been crucially linked to advances in materials science. Several ages of man have been based on the materials used in the industrial processes of the time-the Stone Age, the Bronze Age, and the Iron Age. The introduction of new materials has reinvigorated existing industries, imparted greater productivity to industrial processes, and per­ mitted the creation of entirely new products and technologies. Because materials are the basic input to industries of all types, from heavy manu­ facturing firms to high-technology ventures, they can have a widespread impact on economic structure. Advanced ceramics are sometimes grouped with other new engi­ neering materials-composites, reinforced plastics and polymers, and graphite fibers-as the basis for a new manufacturing era. In time, these materials may replace metals, wood, and other conventional substances in many applications. Advanced ceramics are now being integrated into such diverse products as computer chips, human bone replacements, automobile engines, and protective tiles for the space shuttle. Because ceramics technology can penetrate diverse industries, offering quality, cost, and productivity improvements, it is significant to future indus­ trial competitiveness. Research on advanced ceramics began in the 1930s, but only in the 1970s were they developed to the point that they could be characterized as high-technology materials. Transformations rendered in conventional ceramic materials through improved processing techniques resulted in substances with superior engineering properties. Because of their electri­ cal insulating and conducting capabilities, advanced ceramics are used in a variety of electronic components. Their resistance to heat, wear, and 255 ADVANCED CERAMICS corrosion has made them ideal for structural applications in machine tools, industrial machinery or wear parts, and heat engines. Magnetic, optical, and other properties have led to the development of a diverse range of other types of ceramic products. In general, advanced ceramics have properties that allow them to be used in demanding environments far beyond the capabilities of metals, plastics, or conventional ceramics. For most of these applications, however, advanced ceramics technol­ ogy is still in the early stages, and markets remain largely undeveloped. Commercially, the advanced ceramics industry exhibits characteristics similar to those of other new product or service industries: strong techno­ logical uncertainty, high initial costs, many embryonic companies and spinoffs, strategic and marketing uncertainty, and poorly informed buy­ ers. Advanced ceramics, like biotechnology, fiber optics, and robotics, constitute a technology with a high but uncertain potential for causing economic change. Ultimately, however, their potential for enhancing product performance and productivity can add to the competitiveness of diverse manufacturing industries. Their superior electrical and structural properties may contribute to the emergence of entirely new products and technologies, such as high-speed computers and advanced engines. And as ceramic applications grow, new markets and opportunities are pro­ vided for suppliers of ceramic raw materials, manufacturing equipment, and specialized parts and components. At present, the development of advanced ceramics is being driven by competition among the United States, Japan, and Western Europe to un­ cover the technical secrets of these materials and find commercial appli­ cations. But the barriers to the full development and widespread diffusion of this technology are substantial-in research, in industry, and in the marketplace. The technical limitations of the materials, primarily their inherent brittleness, have yet to be overcome, and the institutional and attitudinal barriers to using ceramics in industrial products are signif­ icant. The strategies used to promote the diffusion of advanced ceramics technology may be the key to realizing its full competitive advantages for u.s. industry.

Advanced Ceramics Technology

Conventional Ceramics. One of the primary difficulties in gaining ac­ ceptance for ceramics as an engineering technology is their public and professional image. Ceramics have long been appreciated for their aes­ thetic qualities and have traditionally been used for pottery, glass, and ta­ bleware. Ceramics, also recognized for their ability to remain inert under exacting chemical and environmental conditions, are used extensively as refractories and industrial abrasives.

256 CANDICE STEVENS

Ceramics in their conventional form are one of the oldest of human manufactured products. Unlike early artifacts of wood, bone, and stone, ceramics were the first products exhibiting forms and characteristics en­ tirely different from the raw materials used to make them. Ancient man discovered that heating wet clay would make it hard and that the clay could be molded into useful shapes before baking. In addition, ceramic vessels and containers could withstand temperatures that defeated most metals. As a result, conventional ceramics are traditionally used for com­ mon household cooking receptacles as well as for industrial furnaces and crucibles. The elementary technology of applying heat to inorganic materials is also the basis for the advanced ceramics industry. Conventional ce­ ramics and advanced ceramics share the same general definition: they are inorganic, nonmetallic materials processed or consolidated at high temperatures. The raw materials used to make conventional and ad­ vanced ceramics are essentially the same-naturally occurring com­ pounds of oxygen, silicon, aluminum, and other substances found in the earth's crust. The difference is in the processes used for preparing the ceramic raw materials, combining them, molding them, and firing them. Advanced ceramics processing yields finished products with a hardness and strength and thermal and electrical properties that far sur­ pass their earlier counterparts. In essence, the advanced ceramics busi­ ness takes common starting materials and converts them to high-value­ added components through sophisticated processing and manufactur­ ing systems. It is the further development and perfection of these systems that hold the key to unlocking the potential of advanced ceram­ ics in most industrial applications.

Production Processes for Advanced Ceramics. Neither the potential advantages nor the limitations of advanced ceramics technology can be assessed without an understanding of ceramic processing and fabrica­ tion methods and the current state of research. It is generally believed that technical advances cannot be made until basic ceramic production processes are further perfected. The properties and performance of ad­ vanced ceramics, unlike those of most metal products, depend largely on the manufacturing process used to make the materials and parts. As more control is exercised over the fabrication process to achieve desired characteristics, advanced ceramics can be used in more difficult and specialized applications. Materials scientists have turned the potter's art-transforming soft clay into hard material by firing it-into an advanced technology by varying the components of the production process. Four processing components constitute the focus of much ceramics research: powder

257 ADVANCED CERAMICS

TABLE 6-1 COMMON PROCESSING OPERATIONS FOR ADVANCED CERAMICS

Processing Step Method Examples

Powder preparation Synthesis Silicon carbide Sizing Silicon nitride Granulating Zirconia Blending Solution Glass ceramics chemistry

Forming Cold pressing Cutting tools Slip casting Engine parts Extrusion Tubing, honeycomb Injection Turbocharger rotors molding Tape casting Capacitors Melting/ Glass ceramics casting

Densification Sintering Alumina Reaction Silicon nitride bonding Hot pressing Silicon nitride, silicon carbide Hot isostatic Silicon nitride, silicon pressing carbide

Finishing Mechanical Diamond grinding Chemical Etching Radiation Lasers, electron beams Electric Electric discharge

SOURCE: Office of Technology Assessment, HNew Structural Materials Technolo­ gies: Opportunities for the Use of Advanced Ceramics and Composites," Techni­ cal Memorandum (September 1986). preparation, forming, firing, and finishing. Through alterations to these components-the quality of the starting powders, the molding of the parts, the hot-pressing procedures, and any final processing and machin­ ing-ceramic materials are continually being improved to meet new per­ formance demands. Common processing operations for advanced ce­ ramics are outlined in table 6-l. A major advance in ceramics technology was the discovery of the

258 CANDICE STEVENS importance of the quality of the starting materials, the inorganic com­ pounds that are the first input to the ceramics production process. Be­ yond the chemical composition of the raw materials and any additives that may be used, the texture of the starting powders is an important de­ terminant of final performance. The purity of the powders, the size and fineness of the particles, and the evenness of particle distribution are key to the structural and electronic properties of the ceramic product. The more uniform the original particle sizes, the less possibility of failure in an engine part or electronic capacitor. A primary research goal is the prepa­ ration of the finest possible starting powders and the elimination of pow­ der impurities. These powders, increasingly made by advanced chemical synthe­ sis and mixing technologies, are next formed or molded into the size and shape desired for the ceramic product. The processing variables in the forming step help determine the density of the component, the ex­ tent of shrinkage during firing, and the location of pores and flaws. Forming procedures are thus important to final product strength and performance. The most basic and least costly forming method is com­ pression molding or cold pressing, where the powders are compacted under extreme pressure at room temperature. Simple shapes can be readily made this way. For more complex shapes, injection molding, slip casting, extrusion, or other types of cold forming methods are used. In injection molding, which is one of the most promising form­ ing procedures, the ceramic powders are mixed with a polymeric binder and molded into a form of the desired shape. The polymer binder is then burned out or otherwise removed before the firing stage. In slip casting, a mixture of ceramic powders and water is poured into a wax envelope of the desired shape, the water is drawn out, the envelope is dissolved, and the ceramic form is dried before firing. The alternative to cold forming is hot forming, which combines the molding and firing stages in one step and reduces the amount of sintering additives needed. In hot pressing and hot isostatic pressing, heat and pres­ sure are applied simultaneously to fabricate very dense and hard ceramics. Hot forming methods are usually expensive, however, and the finished parts require extensive machining to meet product specifications. The principal step in the ceramic production process is sintering or fir­ ing, which is separate from molding operations in cold forming and com­ bined with these operations in hot forming. Ceramics are unique in that they increase greatly in volume upon solidification. Through heat treat­ ment, loosely bonded and molded ceramic powders are converted into dense ceramic components and parts. The molded ceramic part or Ugreen­ ware" is placed in a batch or continuous furnace and fired under carefully controlled conditions of time, temperature, and atmosphere. Advances in 259 ADVANCED CERAMICS firing methods have allowed the development of different internal ceramic structures and a wide variety of behavior and properties. Newer techniques for processing ceramic powders include reaction bonding and near-net shaping. In reaction bonding, the ceramic powders are densified or bonded through a complex series of chemical reactions. Near-net shaping involves presintering of the powders to allow initial consolidation and then reaction bonding the materials to produce a part that has approximately the same dimensions as the presintered piece. Be­ cause they reduce the machining and finishing required to a minimum, improved near-net shaping techniques would greatly reduce the costs of producing ceramic parts. Finishing techniques, or the machining of ceramic parts after densi­ fication, are also important to the integrity of the final product. Special tools are used to prevent surface deformations that could later result in shattering or catastrophic failure. Diamond grinding is commonly used for hard ceramics, while chemical etching and lasers, electron beams, and electric charges are also used in specialized finishing operations. Re­ search is now being conducted on optimal grinding conditions, different types of grinding wheels, and various grinding speeds in order to achieve high-quality finish machining of ceramic products.!

Ceramic Materials and Forms. While conventional ceramics are based on sand and clay, advanced ceramics are composed of a variety of much more sophisticated compounds. There are dozens of basic starting com­ positions for ceramics, which are supplemented by additives to achieve specified characteristics such as greater strength, density, and machin­ ability. In general, ceramic raw materials can be classified into three cate­ gories: the nonoxides, the oxides, and the silicates.

The nonoxides. The nonoxide grouping includes those ceramic com­ pounds that are thought to hold the most promise for the structural appli­ cations of ceramics-the carbides, nitrides, and carbonates. The best known of these are silicon carbide, silicon nitride, and the sialons. Silicon carbide, otherwise called carborundum, was discovered in 1891 by E. G. Acheson, who founded the Carborundum Company. In its traditional form, silicon carbide, produced commercially by the Acheson Process, is used as an industrial abrasive and refractory. Processing techniques de­ veloped in the 1960s resulted in improved silicon carbide and silicon ni­ tride compositions with enhanced strength and heat resistance. The sialons are a derivative of silicon nitride, resulting from the alloying of sil­ icon nitride with aluminum oxide. First produced in the mid-1970s, the sialons are noted for their superior fracture toughness.

260 CANDICE STEVENS

The oxides. The best known of the oxide ceramics are alumina, zir­ conia, and barium titanate, which are used primarily in electronic appli­ cations. Alumina or aluminum oxide, which occurs naturally as the mineral corundum, is produced in large quantities from bauxite ore. Compounds made of almost pure aluminum oxide, known as Hwhite ce­ ramics," have been widely used in electronic products for the past forty or fifty years. A newer form of aluminum oxide ceramics known as Hblack ceramics" or cermets have gained interest for their structural properties, including fracture toughness. Cermets are a compound of roughly 70 percent aluminum oxide and 30 percent titanium carbide, which yields a type of ceramic-metal composite. Research continues on the use of these alumina ceramics in cutting tools, wear parts, and other mechanical products requiring high-strength materials. Zirconia or zirconium dioxide also gained early recognition as an electronic ceramic but now is the subject of a second research effort on its suitability for structural applications. Zirconia has long been used as an electronic conductor, valued for its ability to transmit electric current. A new transformation-toughening process has yielded a product known as partially stabilized zirconia, shown to have the superior heat-insulating and strength properties needed in heat engines. Ceramic titanates are an­ other type of oxide ceramic used in both electronic capacitors and piezo­ electronic components. Barium titanate has been the predominant ceramic capacitor material since the 1940s. The silicates. Another family of ceramic materials being considered for engineering applications is the silicates, sometimes called glass ce­ ramics. The silicates are actually the basis for many conventional ce­ ramic wares. Those of interest for high-technology uses include aluminum silicate, lithium aluminosilicate, magnesium aluminosilicate, and borosilicate. The silicates have superior insulating characteristics but limited strength in high-temperature environments. Lithium alumino silicate, while not very strong, has a low thermal expansion co­ efficient and excellent thermal shock resistance. Silicate ceramics are now being tested in the fabrication of ceramic composites for both struc­ tural and electronic applications. As research has progressed, different forms or structures of ad­ vanced ceramic materials have been developed. Advanced ceramics are produced in three basic forms: monolithic ceramics, ceramic composites, and ceramic coatings. Monolithic ceramics, which are those having a sin­ gle crystalline phase and cast in a single piece, have predominated in most applications and have been the traditional focus of ceramics research. The development of ceramic composites is still in the preliminary

261 ADVANCED CERAMICS

stages, but this ceramic form is now believed to hold the greatest potential for many mechanical as well as electrical-electronic applications. Ce­ ramic composites generally consist of a solid matrix reinforced by rods or fibers woven through the base material. There are several variations of composites depending on the materials used for the foundation and those used for the weaving. All-ceramic composites are made of ceramic fibers, usually silicon carbide or aluminum silicate, embedded in a ce­ ramic matrix. When polymeric, metallic, or glass matrices are strength­ ened by ceramics, these combinations yield ceramic-plastic composites, ceramic-metal composites, and ceramic-glass composites. Alternatively, glass, metallic, and plastic fibers can be embedded in a ceramic matrix. In recent tests of tensile strength and thermal shock resistance, ceramic composites have demonstrated significant advances beyond the per­ formance of monolithic ceramic forms. 2 Ceramic coatings are the most well-developed ceramics technology, used primarily for improving the performance of structural products. Thin coatings of ceramic materials such as aluminum oxide and zirconia are applied to metal surfaces to prevent chemical corrosion and promote increased hardness at high temperatures. Ceramic coatings are sprayed on mechanical parts to prolong the life of surfaces subjected to heavy wear. Many of the parts now appearing in prototype advanced engines are metal with coatings of ceramic to serve as barriers to heat flow and to reduce friction between moving components. There has been substantial success in applying ceramic coatings to conventional gas turbine and die­ sel engine parts. Research is being conducted on vapor deposition, chem­ ical deposition, plasma spraying, flame spraying, and other techniques for easier application of ceramic coatings to complex metal shapes as well as electronic components. 3

Industrial Applications of Advanced Ceramics

Although attempts have been made to estimate the size of current and fu­ ture markets for advanced ceramics, these projections are speculative and often reflect wishful thinking on the part of researchers and engineers. The major industrial applications for advanced ceramics and the required performance characteristics are summarized in table 6-2. There are sev­ eral different ways of classifying advanced ceramics based on combina­ tions of their intended uses and most noteworthy properties. In general, advanced ceramics are referred to as either electronic or structural, de­ pending on their broad systems application. Structural ceramics are clas­ sified as either heat resistant or wear resistant, based on their use in high-temperature or mechanical products. Other categories can be added for the optical, magnetic, and biological functions of ceramics. In this

262 CANDICE STEVENS

TABLE 6-2 MAJOR INDUSTRIAL ApPLICATIONS FOR ADVANCED CERAMICS

Category Products Properties

Electronic components Integrated circuit Electric conduction packaging Insulation Substrates Resistance Capacitors Semiconduction Sensors Piezoelectricity Structural components Mechanical Cutting tools Wear resistance Wear parts Corrosion resistance Bearings Hardness Seals High strength Valves Low thermal expansion Nozzles Liners Fasteners Thermal Engine parts Heat resistance Spark plugs Light weight Cylinders High strength Pistons Corrosion resistance Turbochargers Oxidation resistance Rotors Stators Combustors Heat exchangers Recuperators Nuclear reactor parts Other components Optical Fiber-optic Light gathering devices Translucency Laser diodes Optical conduction Data processing Magnetic Permanent magnets Magnetism Memory units Permeability Low-loss tendencies BiolOgical Artificial bones Inertness Artificial teeth Bioactivity High strength

SOURCE: Author.

263 ADVANCED CERAMICS chapter, advanced ceramics are classified and discussed according to their primary market sectors: electronic components, cutting tools, wear parts, heat engines, and other miscellaneous applications. Except for electronic components, advanced ceramics have pene­ trated a very small share of their recognized end-use markets worldwide. Ceramics are now the basis of 20 percent or more of the integrated circuit packaging, substrates, capacitors, and similar electronic devices pro­ duced internationally. Other uses of ceramics are far more limited. The production of ceramic cutting tools accounts for about 2 to 4 percent of world cutting tool shipments. Wear parts made of advanced ceramics are produced for specialized uses and have only made small inroads in the in­ dustrial parts market. Heat engine components fabricated of ceramics are now produced mostly in prototype. Other types of ceramic products are marketed only on a limited commercial basis. Estimates of world shipments of advanced ceramic materials and products in the mid-1980s range from $5 billion to $15 billion. The U.s. Department of Commerce estimates that U.s. shipments of products in­ corporating advanced ceramics were between $3.9 billion and $5.1 bil­ lion in 1986.4 More than 80 percent of this trade is in electronic ceramics. The remainder is accounted for by ceramic materials and the structural ceramics business, which has a few established commercial products. Al­ though the United States constitutes the world's largest market for ad­ vanced ceramics, Japan is believed to be the world's largest producer of ceramic raw materials and of electronic and structural ceramic compo­ nents. Average figures for current markets for advanced ceramics in the United States, Japan, and Europe are given in table 6-3. Projections of future markets for ceramic products are even more spec­ ulative. Estimates of world shipments of advanced ceramic materials and products in the year 2000 go as high as $50 billion. More conservative esti­ mates place the value of ceramics shipments at the end of the century in the range of $20 billion to $25 billion. Table 6-4 gives forecasts by various sources of future ceramics shipments, which illustrate the uncertainty sur­ rounding advanced ceramics production and markets. There is no doubt that production of advanced ceramic components will increase over the next decade, but the rate of that increase depends on a variety of factors-most important, the timing of technical breakthroughs in ceramics research. The coming drama in ceramics technology revolves around whether structural ceramics can be developed to the point that they will achieve the successes of electronic ceramics. There are projections of rapid growth in output of structural ceramics, some as high as 20 percent per year. If substantial technical improvements are made in heat- and wear-

264 CANDICE STEVENS

TABLE 6-3 ESTIMATED WORLD MARKETS FOR ADVANCED CERAMICS, 1987-1988 (millions of dollars)

United Category States Japan Europe Total

Electronic ceramics 4,900 (88) 4,060 (83) 560 (70) 9,520 (84) Capacitors 1,600 1,470 200 3,270 Integrated circuit packaging 1,410 1,070 160 2,640 Ferrites 670 830 80 1,580 Piezoelectrics 610 500 75 1,185 Other 610 190 45 845 Structural ceramics 700 (12) 840 (17) 240 (30) 1,780 (16) Wear parts 280 490 90 860 Cutting tools 330 170 110 610 Other 90 180 40 310 Total 5,600 (100) 4,900 (100) 800 (100) 11,300 (100)

NOTE: Includes all advanced ceramics powders and parts. Figures in parentheses are percentages. SOURCES: Adapted from U.S. Industrial Outlook (1987); "High-Performance Fine Ceramics in Japan," Science and Technology in Japan (October 1983); and IAL, Ad- vanced Engineering Materials in Europe (1986).

resistant products, they could eventually displace electronic ceramics in the overall market picture. A great deal of potential for further advances in electronic ceramics exists, however, so that electrical-electronic compo­ nents may continue as the dominant application of advanced ceramics. Newer products such as optical ceramics, superconductors, or currently unforeseen applications may also be the basis for large ceramics sales. The diffusion of ceramics technology could take many different direc­ tions and exhibit diverse patterns. Generalizations about the potential in­ dustrial importance of advanced ceramics are not possible until an assessment is made of end-use applications, technical and economic bar­ riers to market penetration, and the institutional forces influencing the diffusion of this technology. Electronic Components. The electronic components industry was the first consumer of advanced ceramic materials and is by far the largest market for ceramic products. At present, 80 percent or more of world 265 ADVANCED CERAMICS

TABLE 6-4 PROJECTIONS OF ADVANCED CERAMICS SHIPMENTS THROUGH THE YEAR 2000 (millions of u.s. dollars, current prices)

Source 1980s 1990s 2000

U.s. Department of Commerce United States 5,000 10,000 20,000 Charles River Associates United States 3,000 5,000 10,000 MIT! Japan 2,700 12,200 21,700 National Academy of Sciences Japan 3,000 6,000 n.a. MIT Ceramics Center United States 2,000 7,000 n.a. Japan 2,000 9,000 n.a. World 4,100 17,000 n.a. American Ceramic Society Bulletin World 5,000 12,000 30,000 High Technology magazine World 4,000 20,000 n.a. n.a. = not available. SOURCES: U.S. Department of Commerce, U.S. Industrial Outlook (1986); Charles River Associates, Inc., Technological and Economic Assessment of Advanced Ce­ ramic Materials (August 1984); MIT! forecasts from Shinroku Saito, "Present and Future World Markets for High-Technology Ceramics" (1985); National Acad­ emy of Sciences, High-Technology Ceramics in Japan (1984); MIT Ceramics Center estimates from John B. Wachtman, "Ceramic Fever-Advanced Ceramics in Japan" Ceramic Industry (December 1984); American Ceramic Society Bulletin (May 1983); and "Ceramics Vendors Position for Growth," High Technology (De­ cember 1984). ceramics sales go to manufacturers of electronic components, the basic constituents of computers, digital switches, industrial controls, home ap­ pliances, and other types of electronic equipment. Ceramic materials are well-suited to electronic applications because of their wide range of elec­ trical properties. Depending on the material, ceramics can be electrically resistive or electrically conductive; they can act as insulators or semicon­ ductors; and they can block, store, or transmit electric currents. Most electronic ceramics are used in the production of packaging for integrated circuits, capacitor dielectrics, and various sensing devices. The largest potential market for electronic ceramics is in integrated circuit packaging, where advanced ceramics may provide the basis for new generations of high-speed computers. The function of the packaging 266 CANDICE STEVENS materials is to interconnect semiconductor chips on a circuit board and also to protect the circuits from dirt, air, and moisture. Packaging technol­ ogy for integrated circuits must advance in pace with semiconductor technology, which keeps increasing in speed and miniaturization of func­ tions. As electronic systems increase in complexity and density, the pack­ aging becomes more important in determining performance, reliability, and cost. Current research is centered on very large scale integrated (VLSI) circuits, which incorporate many thousands of functions on a sin­ gle semiconductor chip. As in most applications, ceramics compete with other types of ma­ terials for larger shares of the packaging market. In this case, the alter­ native materials are plastics. Plastic packaging, which is far less expensive than ceramic packaging, is now used for about 70 percent of integrated circuits, primarily in consumer electronic systems, such as televisions, radios, and computers. Ceramic packaging, while more costly, has superior performance characteristics and is used in many demanding and specialty applications. The primary customer for ce­ ramic packaging has been the military, which has stringent require­ ments for electronic components in aircraft, missile, and telecommu­ nication systems. Advanced ceramics have gradually become the preferred packaging material for high-speed circuits but are at a disadvantage because of their price. When new integrated circuits are introduced, they are usually of­ fered in ceramic packages because these add extra reliability while con­ tributing little to the generally high cost of the system. As the price of the circuits falls with volume production, however, manufacturers generally switch to cheaper plastic packages. Future use of ceramics relative to plas­ tics in packaging will depend on their contribution to lower costs of inte­ grated circuits as well as to higher speed and smaller size. Multilayer ceramic packages, which consist of three to six layers of metalized ceramics forming high-density wiring structures, are the fastest-growing type of packaging for integrated circuits. They have in­ creased their market share by about 35 percent since 1980. Demand will continue to grow with the production ofVLSI systems and super comput­ ers, but Japanese producers have almost entirely cornered the multilayer market. The Japanese firm Kyocera, which has a facility in San Diego, and its parent company in Japan now supply 70 to 75 percent of the world market for ceramic packaging. Although the basic technology originated in the United States, the Japanese filled the gap when U.S. producers did not respond to the needs of semiconductor manufacturers for new and innovative types of integrated circuit packaging in the early 1970s. 5 As a result, many U.s. suppliers turned to making single-layer ceramic pack­ ages, all but ceasing research on multilayer techniques. In the United

267 ADVANCED CERAMICS

States, research is now conducted primarily by large integrated firms that produce packaging for use in their own products and electronic systems. Advanced ceramic materials have penetrated the market for elec­ tronic components most significantly in the production of capacitors, the passive components used in circuits to store electric energy and regulate the flow of current. They are fabricated of electrically charged conduct­ ing plates separated by thin layers of dielectric, which acts as an insulat­ ing material and stores the electric charge. Capacitors are differentiated by the materials used in the dielectric, which include ceramics, alumi­ num, tantalum, and film. Ceramic capacitors now account for 50 to 60 percent of world capacitor sales. Ceramics are competitive with other capacitor materials in cost as well as in performance. Multilayer ceramic capacitors, based on the same technology as multilayer packaging, are one of the most successful capac­ itor technologies. Within the past few years, they have evolved from a premium-priced product in highest demand for military and industrial applications into general-purpose components. Inexpensive and small, multilayer ceramic capacitors are widely used in consumer products as well as in computers, telecommunication systems, and instruments. Fu­ ture markets for ceramic capacitors depend on further improvements in their volumetric efficiency and compatibility with high-speed circuits. There are several domestic manufacturers of ceramic capacitors, most of whom are specialty producers. Japanese producers supply about 8 to 10 percent of u.s. consumption of ceramic capacitors and are making inroads into the multilayer ceramic capacitor market. U.s. companies may face significant competition from Japan in multilayer chip capaci­ tors, which can be automatically inserted onto the surface of circuit boards, thereby reducing series resistance and allowing higher­ frequency responses. The Japanese are already developing uniform chip dimensions and packaging standards that will allow for more widespread use of multilayer chip capacitors.6 Advanced ceramic materials are gaining popularity in the produc­ tion of sensing devices. Their function in sensors depends largely on their semiconducting properties, that is, their ability to pass electric cur­ rents in response to certain stimuli. Further developments in sensing materials and technologies may enhance the use of robotics in industrial processes. Workplace automation requires inexpensive and reliable methods for collecting data and monitoring conditions, the primary purpose of sensors. Potentially, ceramic sensors can improve productiv­ ity and lower costs in industrial process control applications as well as in many consumer products. Ceramic sensors can be used to monitor a wide range of conditions: 268 CANDICE STEVENS mechanical, electrical, magnetic, thermal, and chemical. They are used in devices for current control (resistors), heat sensing (thermistors), and voltage regulation (varistors). One fast-growing application of ceramic sensors is in detection devices for oxygen, humidity, and gas. Another type of ceramic sensors are piezoelectric; they respond to pressure and can convert mechanical energy into electrical charges or electrical energy into mechanical functions. Beepers in paging devices, photoflash mecha­ nisms, and ultrasonic devices are often actuated by piezoelectric sensors, which now account for the major share of ceramic sensor sales. Despite the price and performance benefits of ceramic sensors, however, prob­ lems with nonselectivity and instability in ceramic monitoring systems have yet to be fully overcome. Companies in both the United States and Japan, as well as several in Europe, are actively developing ceramic sensors for industrial and home uses. Ford Motor Company is testing advanced automotive oxy­ gen sensors based on titania and zirconia. Japan, which has made rapid advances in automated manufacturing processes, is refining comple­ mentary ceramic sensing devices in an extensive microelectronics re­ search program. The Japanese are also marketing several household ceramic sensor products. A Japanese government requirement that gas leak monitors be installed in every home has stimulated domestic sales of low-cost ceramic gas sensors.? In the case of sensors and many other low-volume electronic applications, Japan has been the first to commer­ cialize ceramic products.

Cutting Tools. One of the earliest markets for structural ceramics, as op­ posed to electronic ceramics, was in the production of cutting tools. Ce­ ramic materials have slowly but steadily gained acceptance as cutting inserts used in machine tools to shape metal workpieces. The choice of cutting tool can increase the productivity of the machine tool by permit­ ting faster and more efficient metal shaving and removal. Advances in cutting tool technology, particularly the development of new insert mate­ rials, have helped decrease average machining times over the past cen­ tury. Among the most important tool material breakthroughs are carbon steel inserts in 1900, high-speed steel in 1915, cemented tungsten carbide in 1930,metal-coatedcarbidesin 1970, and advanced ceramics in 1975. Actually, aluminum oxide ceramics have been used as cutting tool substrates since the 1950s. But these tools had only limited applications and could not compete with the high-speed steel and carbide inserts in attaining faster machining rates. In the 1970s, silicon nitride and sialon ceramic materials, which were being tested in heat engines, were first used to make cutting tools. The resulting inserts proved superior to the traditional aluminum oxide tools in their hardness, strength, and heat re-

269 ADVANCED CERAMICS sistance, which allow them to operate at extremely high speeds. At the same time, the Japanese developed cermet cutting tool materials com­ posed of aluminum oxide and titanium carbide. The cermet tools also have greater strength and fracture toughness than the traditional alu­ mina cutting tools. A new era in ceramic cutting tools was thus launched. The hot­ hardness of the new ceramics made them ideal for the hot and stressful environments of high-speed machining. The automotive and aerospace industries, which employ large, powerful machine tools operating at very rapid cutting rates, were the first to use advanced ceramic tools. Ceramic inserts are used to best advantage in cutting extremely hard and difficult­ to-machine materials, such as the hardened steels, cast iron, and super­ alloys used in automobiles and aircraft. In some specialized operations, ceramic tools have allowed a more than 200 percent improvement in ma­ chining productivity. Technical deficiencies, however, have limited the penetration of ad­ vanced ceramics in the market for cutting tools. In many modern machin­ ing applications, ceramics simply do not present the best solution. They cannot be used on certain materials, such as stainless steels and titanium and aluminum alloys, because of chemical interactions between the ce­ ramic tools and the work materials. They cannot be used for interrupted or deep cutting, which imposes extreme stress on cutting edges and may fracture the ceramic tool. They cannot be used at lower cutting speeds be­ cause of their low thermal shock resistance. They cannot be used in older machine tools, which lack rigidity and cannot attain sufficiently high ma­ chining speeds. In addition, ceramic cutting tools are more expensive to produce than other types of inserts. Although ceramic tools compete with car­ bide tools in most applications, they are at a cost disadvantage because of the small volume of production and their more complex fabrication methods. While typical tungsten carbide cutting tools may cost $4 or $5, silicon nitride inserts are now being sold in the $18 to $20 range.s Ce­ ramic tools have thus been used primarily for machining high-value­ added products where they offer superior performance and add little to total product cost. As a result, ceramic cutting tools make up only about 2 to 3 percent of metal cutting tool shipments in the United States. The U.s. cutting tool market is dominated by high-speed steel and carbide inserts. Japan and West Germany are both believed to use a higher proportion of ceramic cutting tools because of the newer and more advanced machine tools in their industrial plants, the larger size of their automobile industries in re­ lation to their economies, and their historical difficulties in importing tungsten for making tungsten carbide tools.

270 CANDICE STEVENS

Many U.S. companies are now engaged in the development and commercialization of ceramic cutting tools, which are continually being improved. Ford Motor Company is developing a new tool insert called 5-8, a spinoff of its research program on the ceramic gas turbine engine. GTE Walmut is marketing a sialon cutting tool under the name Quantum 5000 for machining cast iron at high speeds. The Greenleaf Corporation is manufacturing "Sialox" tools based on silicon nitride and new "WG- 300# tools based on silicon carbide ceramic-ceramic composites. These efforts may enable the United States to challenge Japan, which controls about half the U.S. advanced ceramic tools market. A Japanese firm­ Kyocera-is now the largest manufacturer of ceramic cutting tools in the United States.

Wear Parts. Because of their hardness and superior wear resistance, ad­ vanced ceramics are being used in a variety of industrial machinery parts. Again, however, the diffusion of ceramics in this end use has been slow because of their technical limitations and high cost. Demand for ceramic wear parts has been mostly from industries requiring highly specialized equipment for demanding jobs, such as chemical production, mining and mineral processing, and oil and gas drilling. In these industries, ceramic parts can offer a range of performance improvements. Cemented tungsten carbide and specialty steels are now the materi­ als of choice for wear-resistant applications, which require the ability to withstand abrasion and corrosion. These products include ball and roller bearings, valves and pipe fittings, industrial fasteners, and pumping equipment such as seals, liners, and nozzles. Although aluminum oxide compositions were the first ceramics used for fabricating wear parts, they lacked sufficient fracture toughness for most applications. More recently, research on silicon carbide and silicon nitride in heat engines showed these materials suitable for the production of industrial wear compo­ nents. In many cases, these are less demanding uses than the high­ temperature engine parts and provide an opportunity to test fabrication methods and markets. Pump seals are now the largest wear application of advanced ceram­ ics. Pump seals for chemical processing and handling, oil and gas recov­ ery, and sand slurries must have high thermal conductivity to dissipate heat, good thermal shock resistance, and close surface flatness. Both sili­ con carbide and silicon nitride seals have been able to meet these per­ formance criteria. The primary disadvantage has been price, but im­ proved manufacturing techniques and larger volume production may help reduce ceramic seal costs. As a measure of industry acceptance, the American Petroleum Institute recently included silicon carbide as a seal material in its revision of pump standards.9

271 ADVANCED CERAMICS

The increased fatigue life, speed capabilities, and lubrication loss tol­ erances of ceramics have made them attractive for ball and roller bear­ ings. Large-scale manufacture of ceramic bearings, however, is not economically feasible until further refinements are made in production methods. Batch-to-batch reproducibility and reliability are the greatest concerns. In addition, new bearing designs are needed that take advan­ tage of the desirable properties of ceramics and guard against their tech­ nical faults. Until ceramic bearings are produced in volume, their high price will limit their use to specialized operations that can absorb the high initial costs. Ceramic bearings now cost as much as $100, while similar steel bearings are priced at $1 to $3.50. 10 Currently about ten companies in the United States produce wear parts fabricated from advanced ceramics. General Electric Company has established Silicon Carbide Products Operation in Houston, Texas, for producing wear components. The Norton Company formed a spe­ cial division for researching and manufacturing silicon nitride wear products. The Japanese producer Kyocera and a few French and Ger­ man firms also make several ceramic industrial machinery parts. Re­ search on ceramic wear parts is moving toward the refinement of the production process as opposed to earlier efforts that centered on the properties of ceramic materials.

Heat Engines. No other industry has as much to gain from the develop­ ment of advanced ceramic materials as the manufacturers of automobiles and other vehicles. Heat engines are, in fact, the main application lying at the end of most research and development programs on structural ceram­ ics. An international race to fit ceramic components into engines began in the early 1970s. The U.S. government has devoted the largest share of funding for ceramics research to the development of prototype ceramic engines. In Japan, ceramic engine projects have been spurred by a best­ selling Japanese novel (American Counterattack: Plall Z, 1985, by Katsuaki Sasa) in which American Z cars with ceramic engines flood world mar­ kets and end Japanese dominance in automobile sales. Volkswagen and Daimler-Benz have joined with the West German government in devel­ oping their version of the ceramic engine. Rolls Royce is leading a group of British firms in research on ceramic parts for gas turbine engines. Be­ cause the market value for ceramics in engines is expected to be large, other European governments are starting to finance ceramic vehicular engine projects. Although the heat engine may be the most far-reaching potential use of advanced ceramics, it is also the most tentative and, in some ways, the most distant. A few ceramic components are now being sold for use in gasoline and diesel engines, but references to ceramic engines are usually

272 CANDICE STEVENS to new engine designs based almost totally on ceramics, such as the ce­ ramic gas turbine and the ceramic adiabatic diesel engines. Although ce­ ramic parts and ceramic coatings may improve the functioning of standard vehicular engines, their real contribution will be in making pos­ sible entirely new types of heat engines. Engineers have long been interested in the use of advanced ceramics in engines because of their ability to permit increased working tempera­ tures. Engine fuel efficiency, which is greatly increased by higher operat­ ing temperatures, has been a national and international goal in the design of heat engines since the petroleum price shocks of the 1970s, if not ear­ lier. The transportation sector still accounts for over 60 percent of the pe­ troleum consumed in the United States each year. The United States imports about a third of its petroleum needs, while Japan is almost en­ tirely dependent on imported fuel. If ceramic engines can be developed, they will be the basis for new fuel-efficient automobiles and will have im­ portant implications for the international balance of trade. Because they maintain their strength and shape at high tempera­ tures, ceramic components can operate in engines without cooling. Metal alloys now used in engines begin to oxidize, corrode, soften, and weld themselves together at just a few hundred degrees Fahrenheit. Complicated and costly cooling systems must be used to maintain en­ gine temperatures at an acceptable level to prevent failure of the mate­ rial parts. But in bleeding off heat, these cooling systems also reduce energy production. In ceramic engines, more of the heat produced by combustion is available to drive the engine, resulting in significant gains in fuel economy. Anticipated energy applications for ceramics involve temperatures ranging from 400 degrees Fahrenheit to greater than 1,900 degrees Fahrenheit. Fuel efficiency is only one of the potential advantages of ceramic en­ gines. The elimination of complex engine cooling systems would reduce maintenance costs and enhance overall engine performance. Radiators, fan belts, fan water pumps, and other parts of the cooling and exhaust systems would no longer be needed, reducing the weight of the engine and eliminating the source of many technical problems. Because pollu­ tants would not be released in the hot exhaust gases, toxic emissions from automobiles would be reduced. The life span of ceramic components is longer because they can withstand oxidation, corrosion, and erosion, cut­ ting down on replacement needs. Ceramics weigh about 60 percent less than conventional metal components, a weight savings that would fur­ ther enhance engine performance. Ceramic engines should also have low acquisition and operating costs once they are fully commercialized. Ceramics will most likely enter the highway vehicle market incrementally. Before they can be used as the primary engine compo-

273 ADVANCED CERAMICS sitional material, ceramics must be tested in lower-level and less­ demanding standard heat engine parts. Conventional piston engines are one focus of research on replacing metallic mechanical components with ceramic ones. Pistons, piston rings, cylinder liners and heads, valve lift­ ers, and precombustion chambers are all candidates for replacement with ceramic materials. Major changes in engine design and technology are not needed with these substitutions, and experience can be gained in the mass production of automotive ceramic components. In only one application thus far, however, have manufacturers shown enough confidence in ceramics to predict full-scale production in the near future-the production of turbocharger rotors. Turbochargers pump hot air into engines for greater speed and fuel economy. Tradition­ ally used in racing cars, turbochargers are now being added to many con­ sumer models. The primary incentive for using ceramics to make turbochargers-and some other standard engine components-is not their high-temperature capabilities. It is rather their lower weight and im­ proved wear capability, which can offer minor improvements in the per­ formance of standard engines. In the case of turbochargers, ceramics are desirable because they are lighter than the nickel-based alloys now being used. They reduce the inertia of the turbochargers and improve the re­ sponsiveness of the automobile engine. At least three U.S. companies are now testing ceramic turbocharger rotors made from silicon carbide and silicon nitride. The Japanese have started limited marketing of ceramic turbochargers as well as ceramic pis­ ton rings and glow plugs. Two Japanese firms have produced demonstra­ tion models of small piston engines with most parts made of silicon nitride ceramics, including the pistons, cylinder, crankshaft, and connect­ ing rod. It has not yet been shown, however, that these components can be scaled up to quantity production in a reliable and affordable manner. In any case, ceramic reciprocating engines are not candidates for mass production as they do not offer significant gains in fuel economy or per­ formance over conventional metal engine designs. Some new types of engines for automobiles and other vehicles may not be possible without the development of ceramic hot-engine compo­ nents. It is in these newer engine designs that structural ceramic materials can be used to their fullest potential. Two types of ceramic engines have been proposed as potential substitutes for conventional auto engines­ the adiabatic diesel and the ceramic gas turbine, although both have sig­ nificant technical and market barriers to overcome. Other types of gas turbine engines have not been successfully demonstrated for vehicle use, and diesel engines have only a 6 percent market share in the United States and about 10 percent in Europe. Reciprocating engines remain the tech- 274 CANDICE STEVENS nology of choice for vehicles, although gas turbine and diesel prototypes are now being built and run with ceramic hot-zone components. Ceramic adiabatic diesel and gas turbine engines are the most fuel­ efficient machines known because they can operate at extremely high temperatures. The adiabatic diesel engine is based on a thermodynamic process where no heat is added or lost during operation; the engine's thermal energy is instead converted to power through the use of turbo­ machinery. The engine combines a ceramic combustion chamber, which operates at high temperatures and minimizes heat transfer, with a turbo­ compound system, which recovers the energy of the exhaust gases and transfers them to the crankshaft. Similarly, the use of ceramic compo­ nents in gas turbine engines allows them to operate essentially un cooled at turbine inlet temperatures well above those achievable with tQday's metallic turbine materials. In both engines, the elimination of the cooling system and the reduction of lost energy contribute to improved fuel econ­ omy, reduced weight and inertia, and better engine performance and reli­ ability. Fuel efficiency improvements of 30 to 50 percent are predicted over current technology. The ceramic adiabatic diesel and gas turbine engines are the focus of research programs sponsored by the U.S. government. Since 1976, the army has supported a program by the Cummins Engine Company to de­ velop a ceramic adiabatic diesel engine. This engine may be first commer­ cialized in heavy-duty trucks and military vehicles where it can save on fuel and lubricants. The research program has proceeded in stages, start­ ing with the development of ceramic components for a conventional die­ sel engine. Uncooled diesel engines with both metal and ceramic components have been successfully demonstrated in the United States and Japan. Cummins has made test runs of an uncooled diesel-powered truck using ceramic parts and ceramic coatings on metal parts; the truck completed 6,000 miles of successful tests, including two round trips be­ tween Detroit and Washington, D.C. The Department of Defense Advanced Research Projects Agency (DARPA) was the first to initiate a full-scale research program on the de­ sign of vehicular gas turbine engines incorporating ceramics in the early 1970s. Subsequently, the Department of Energy sponsored parallel proj­ ects by the General Motors Company and a Ford Motor Company and Garret Corporation team to develop ceramic gas turbines. More than 100 ceramic components have been developed and tested in these proof-of­ concept engine programs, including rotors, stators, and combustors made of silicon carbide and silicon nitride. Although demonstration en­ gines have shown increases in performance and fuel efficiency compared with baseline metallic gas turbines, they have not achieved sustained op­ eration owing to the susceptibility of engine parts to stress fractures.

275 ADVANCED CERAMICS

A much longer term use of advanced ceramics is in aircraft gas tur­ bine engines. It is not entirely clear, however, that ceramics are technically or economically superior to the superalloys now used in jet engines. This is one of the most challenging and difficult applications for advanced materials because of the high performance demands and the high risks involved. Nevertheless, the potential for improved fuel economy and air­ craft performance has prompted both the air force and the National Aer­ onautics and Space Administration (NASA) to fund research programs on advanced ceramics. NASA has even predicted the eventual introduc­ tion of monolithic ceramics in turbine blades in some types of jet en­ gines.!! A great deal of research remains to be done, however, before ceramics will be acceptable for passenger aircraft. The ceramic heat engine is the ultimate goal of most advanced ce­ ramics research. The ceramic engines demonstrated thus far, though, have been one-of-a-kind constructions that could not seriously compete with conventional vehicular engines. Far more research is needed on both the ceramic materials and the engine designs before any attempt at wide­ spread commercialization of engine components. Because different en­ gine parts require different properties, such as wear resistance, insula­ tion, or thermal shock resistance, it is likely that a range of ceramic materials and forms will be used for various engine functions. Ceramic materials may make it possible to build a lightweight, heat-tolerant en­ gine that is more durable than conventional metal engines and as much as 50 percent more fuel efficient. But it may be another ten to twenty years before a significant number of ceramic components are incorpo­ rated into heat engines.!2

Other Applications for Advanced Ceramics. Other potential applica­ tions for advanced ceramics are numerous and diverse. They include, but are by no means limited to, optical devices, magnetic components, and biomedical implants. In the long run, the market potential of ceramics in some of these end uses may be as substantial as that of ceramic electronic components or heat engine parts.

Optical devices. Optical components are believed by some to repre­ sent the largest potential market for advanced ceramics after integrated circuit packaging. The optical properties of ceramics make them valuable in a variety of signal-processing operations, including radar interpreta­ tion, lasers, optical sensing, and data processing. Ceramic optical or pho­ tonic switches may greatly improve the efficiency of fiber-optic commu­ nications systems.13 The telecommunications industry and the military should be large consumers of ceramic photonic and other optical devices, based on market projections for u.s. sales of fiber optics and related 276 CANDICE STEVENS switching systems. Bell Laboratories of AT&T leads research efforts in the United States. Japanese telecommunications firms are also in the fore­ front of ceramic optics development, recently introducing the first com­ mercial integrated optic product, a ceramic spectrum analyzer. 14 Magnetic components. Ceramic materials with magnetic properties are used in a variety of applications, including permanent magnets, memory units, and circuit elements in radios, televisions, and microwave devices. Magnetic functions are based on ferrite ceramics, composed of iron oxide combined with one or more metals such as manganese, nickel, and zinc. The hexagonal ferrites, especially lead ferrites, are frequently used for permanent magnets in household appliances, automobiles, and loudspeakers because of their high magnetization. Cubic ferrites, includ­ ing spinel or garnet, have been used primarily in digital computers for data storage and retrieval. Magnesium-zinc and nickel-zinc spinel fer­ rites are important in transformer and inductor applications in communi­ cations systems and high-speed tape and disc recording heads. Biomedical implants. Other ceramics are biocompatible and can be used as substitutes for teeth and bones and in artificial heart valves. Inert ceramics, fabricated mostly of alumina, have been shown to extend the performance of dental, heart, and orthopedic implants. Bioactive glass ceramics, based on various silicate compounds, have exhibited tissue ingrowth properties and adhesive characteristics needed in some surgical applications. The range of biomedical uses is expected to be broadened through high-strength composites, which are now being studied by the National Institutes of Health. The Japanese firms Asahi Glass and Kyocera are the largest manufacturers of dental implants and artificial joints made of ceramics. Kyocera's alumina implants are marketed under the brand name Bioceram.

Advanced Ceramics and Industrial Adjustment

Future economic growth in mature industrial countries like the United States will depend on scaling down some industries, revitalizing others, and creating entirely new industrial sectors. Advanced ceramics are one of the emerging technologies that can contribute to this restructuring process. Because they can be used in a wide variety of products and in­ dustries, ceramics can affect a broad cross section of the economy. They offer the potential for regenerating some industrial processes as well as for radical technological change. Ceramics and other advanced materials are thought to be one of the important technical innovations on which fu­ ture cycles of economic growth will be based. There are three basic ways in which the diffusion of advanced ce- 277 ADVANCED CERAMICS ramics technology offers new opportunities for industrial growth. The use of ceramics technology will crea te new markets for ceramic raw mate­ rials, parts, and processing equipment. Diverse manufacturing industries can realize productivity increases and performance gains through the use of advanced ceramic parts and products. And ceramic materials may one day be the basis for technical product breakthroughs with far-reaching economic effects.

New Market Opportunities. A worldwide industry is slowly building based on the supply of ceramic raw materials, parts, and manufacturing equipment. In opening up market opportunities, the diffusion of ceram­ ics technology can help solve problems of saturation and decline in tradi­ tional sectors of industry as well as provide the basis for new venture firms. Many materials producers that were facing problems in their other markets are now branching out to produce ceramic powders and prod­ ucts. Traditional producers of commodity ceramics, as well as many met­ als and chemicals firms, are initiating product lines in advanced ceramics. And a number of smaller entrepreneurial firms have emerged in response to predictions of multibillion-dollar markets by the end of the century. The conventional ceramics industry is typical of a depressed indus­ try finding new life through an advanced technology. In the United States, shipments of conventional ceramics have the prospect of very slow, long-term growth at best. But many producers of commodity cer­ amics-abrasives, refractories, and clay products-are now being trans­ formed by their ability to become suppliers of high-technology ceramic powders and parts. The advent of advanced ceramics has given them the opportunity to prosper with a technology they can master by the adapta­ tion of their present skills. Coors, Carborundum, and Norton Company are examples of traditional U.S. "'whiteware" producers that are shifting their research and production resources to take advantage of the new op­ portunities offered by advanced ceramics. These firms have drawn on their expertise in abrasives, glass, and other ceramic wares to develop methods of producing higher-value-added products. In Japan, the traditional ceramics industry is one of the oldest eco­ nomic sectors. By the 1970s, all but a few of the 2,000 ceramic firms were struggling in the face of saturated markets. Many have now switched to producing advanced ceramic powders and parts, a field that is dominated by a few large firms but that also includes several dozen smaller manu­ facturers. Narumi China, Asahi Glass, and Toshiba Ceramics are all Japa­ nese commodity ceramics producers that have started advanced ceramics divisions in response to market demands for electronic and structural ce­ ramic products. While total output of the Japanese ceramics industry

278 CANDICE STEVENS grew at a rate of about 2.3 percent in the 1970s, production of advanced ceramics grew at an annual rate of 13.5 percent. IS In addition to the traditional ceramics industry, a whole array of ce­ ment and chemical companies, metal refiners, and synthetic fiber pro­ ducers are becoming suppliers of advanced ceramics. They include firms that now face limited sales in their traditional business segments or fear that their products may eventually be displaced by advanced ceramics. In the United States, Kennametal, Alcoa, and other metals producers have entered the ceramics field partly because of the threat of ceramics as a substitute for metals. U.S. chemical companies including Dow and Du Pont are manufacturers of electronic ceramics, and textile firms such as Celanese are producing ceramic fibers. In Japan, the chemicals firm Showa Denko is a leading producer of high-purity alumina and silicon carbide powders for both electronic and wear components. Japanese metal companies such as Nippon Steel and Mitsubishi Metal are also part of the country's growing ceramics sector. Demand for equipment needed to produce ceramics, including molding, sintering, and testing devices, is also increasing, creating new markets for suppliers of peripheral products. Ceramic parts will eventu­ ally be injection molded, slip cast, and fired with the same kinds of high­ volume machines now used in the plastics and metals industry. Production-sized sintering furnaces for making ceramic parts will replace the smaller laboratory-sized furnaces used to produce prototype batches of ceramic components. Nippon Kagaku Togyo in Japan is an example of an equipment firm that now specializes in the production of tools for ce­ ramics manufacture, including heat-equalization tubes for diffusion fur­ naces, alumina balls for ceramic powder pulverization, and tools for shaping and cutting ceramic wear parts.16 In the United States, furnace producers such as GCA Vacuum Industries and Centorr Associates are predicting markets for large vacuum furnaces for volume sintering of ce­ ramics and also for automated materials-handling equipment to load and unload hot parts.17 In addition to revitalizing existing industries, new technologies like advanced ceramics can be a basis for the emergence of new firms and in­ dustrial ventures. Small start-up firms can produce ceramic powders and products such as cutting tools and wear parts that are often manufactured in small lots. The required investments in equipment and technology are somewhat less than in many other types of industries, such as electronics and biotechnology. And because markets for ceramic products have not yet matured, market barriers to entry are not substantial. Entrepreneurial firms with enough venture capital can get in on the ground floor of the advanced ceramics industry. A number of companies specializing in the production of ceramic

279 ADVANCED CERAMICS

powders and parts have started up in the United States, Japan, and other countries since 1980. Ceradyne, a U.s. company based in California, is a small ceramics supplier specializing in military applications such as bul­ letproof ceramic armor and ceramic missile nose cones. In Great Britain, Lucas Cookson Syalon has been built on the company's ownership of the original patents for silicon nitride and sialon technology. Nilcra Ceramics is an Australian joint venture firm planning to produce partially stabi­ lized zirconia for both domestic use and export. Although Australia ac­ counts for 66 percent of the world's zirconia production, it now has limited processing facilities and seeks to take advantage of this natural re­ source through converting it to advanced ceramics powders.18 The Japanese advanced ceramics industry is being driven by a host of newcomers, many supported by the government tax incentive system for the creation of "technopolises." Favorable tax treatment is given for a period of three to five years to high-technology businesses locating in designated technopolis areas. The intent is to create new industrial and cultural centers based on nonpolluting-technology-based firms. The Kokubu-Hayato region of Kagoshima has been targeted as an advanced ceramics production center, and several other technopolis-candidate re­ gions are being considered for advanced materials industriesY In gen­ eral, ceramics ventures are far easier to initiate in Japan where the cost of capital is less and the government provides soft loans to start-up firms through the state-owned Japan Development Bank.

Productivity and Performance Improvements. The diffusion of ad­ vanced ceramics can help regenerate another segment of industry­ those production-intensive firms where the use of ceramics can lead to product improvements, manufacturing efficiencies, and cost reductions. Although they may always account for a minor fraction of employment and output in the economy, advanced ceramics can provide other ex­ ternalities in the industrialization process. A number of manufacturing industries can realize important productivity and performance gains by incorporating advanced ceramics into their products and processes, with consequent competitive advantages in domestic and foreign markets. To date, producers of electronic and electrical equipment have taken the most advantage of the superior performance characteristics of ad­ vanced ceramics to expand their sales and gain market shares. Most major integrated electrical and communications equipment manufactur­ ers around the world use electronic components based on advanced ce­ ramics. Ceramic capacitor dielectrics and integrated circuit packaging have enhanced the capabilities and improved the performance of a vari­ ety of electronic products, from transistor radios to large-scale comput­ ers. Similarly, robotics, automation, and control systems, among other

280 CANDICE STEVENS end-use markets, stand to gain from high-performance ceramic sensors. Continued advances in ceramics technology will yield technical and eco­ nomic benefits to producers of electronic and optical systems for both home and industry. Ceramic electronic components have already provided important competitive advantages to Japan. Kyocera, Murata, and TDK Electronics were originally small producers of ceramic capacitors in the early days of transistor radio development. They have since become world leaders in electronic products with global manufacturing and sales organizations. These and other Japanese firms, such as Nippon Telephone and Tele­ graph and Nippon Electric Company, are leading research on ceramic electronic and optical components in recognition of these components' potentially large contributions to the performance of final products and systems. AT&T and Westinghouse are among the U.S. producers of elec­ tronic and telecommunications equipment attempting to develop new ceramics components to expand and enhance systems capacity. The economic advantages of using structural ceramic products are only now being understood. Machining, chemical, mining, and metal processing industries offer natural settings for ceramic parts because of the ability of ceramic materials to resist high temperatures, thermal shocks, and corrosive substances. It has been demonstrated that ceramic cutting tools can increase the productivity of machine tools by allowing faster operating speeds, increased power, and reductions in down time. Ceramic cutting inserts are already widely used in automotive and aero­ space machining shops, which require the most demanding tolerances. Other types of industries can increase the productivity of their oper­ ations by building on the high-temperature, wear-resistant, and corrosion-resistant properties of advanced ceramics. Ceramic parts and equipment, such as furnace linings, rollers, and skids, are being tested for use in ferrous and nonferrous metal smelting and refining plants. In Japan, Nippon Steel is developing hot steel handling equipment made of ceramics, whose genuine performance advantages outweigh immediate problems with cost and reliability. Ceramic pumping equipment has been shown to be more durable than similar metallic equipment for oil and gas drilling operations and sand and gravel slurries. Pump seals and liners, valve trims, and burner tips and nozzles fabricated of ceramics can im­ prove the efficiency of coal liquefaction and gasification operations. Be­ cause of their low thermal expansion coefficients and other properties, advanced ceramics are used for tubes, insulators, catalyst carriers, and other equipment in chemical and petrochemical plants. Advanced ceramic products can lead to energy savings in many in­ dustries. In the 1970s, there was an emphasis on the energy-saving po­ tential of ceramics because of the rising cost of energy, the reduced

281 ADVANCED CERAMICS availability of high-grade fuels, and increasing competitive pressure in high-temperature industrial processes. This led to the development and expanded use of energy conservation devices such as heat exchangers and recuperators, and ceramic products were shown to perform better in these applications than many metals. Ceramic heat exchangers promote the efficient operation of many types of industrial furnaces and save on fuel costs. Ceramics are also being considered for use in nuclear reactors as cladding, control, and blanket materials. These industries may eventually realize significant cost advantages from the use of advanced ceramics products. Most electronic and struc­ tural ceramic components are still not cost competitive with other materi­ als. At present, they compete on the basis of their performance advantages. Technical advances, however, should lower the costs of pro­ ducing ceramic parts, which are based on the least expensive of raw ma­ terials. Ceramic electronic components, cutting tools, and wear and heat parts may ultimately be cheaper as well as more productive than other technologies. One study, for example, estimated that the higher machin­ ing speeds allowed by the use of ceramic cutting tools could result in ma­ chining cost savings of greater than $30 per tool. If they do, in fact, achieve a 20 percent market share by the year 2000 and are priced equiva­ lent to carbide inserts, ceramic cutting tools could yield U.s. machining cost savings of $530 million per year. 20 The potential productivity increases with advanced ceramics are particularly important to the United States, which has already lost exten­ sive market shares to the Japanese in those industries where ceramics may best be applied-electronics, precision and electrical machinery, chemicals, and steel and other metal products. Japan's productivity growth far exceeds that of the United States in each of these key indus­ tries. The U.S. bilateral trade deficit with Japan in electronics alone was about $15 billion in 1986, and it is predicted that the electronics trade gap will soon surpass the bilateral trade deficit in automobiles. Advanced ce­ ramics can provide some productivity and performance advantages to help stem the growing trade deficit, as well as important product changes that could potentially reverse it.

Technical Product Breakthroughs. The longest-range but most far­ reaching industrial contribution of advanced ceramics may be in provid­ ing the basis for entirely new technologies and products. The practical application of ceramics can have an ultimate impact on the economy that extends far beyond their sales value or their contributions to productivity. Some believe that advanced ceramics will one day provide the founda­ tion for major advances in electronic, biological, power-generation, and transportation systems. And it is these new technology-based industries

282 CANDICE STEVENS founded on ceramics that have the most significant implications for in­ dustrial competitiveness and economic growth. Progress in advanced ceramics technology will allow advances in complementary technologies, most notably high-speed computers and vehicular engines. The United States and Japan compete most vigorously in these two product areas, where technologically unique products can often command premium prices in world markets. Ceramic materials have high strategic and economic value in new computer and engine ap­ plications because the function of the product depends critically on the ceramic components. These industries, which can potentially use ceram­ ics to revolutionize their products, also provide the impetus for innova­ tion in ceramics technology. Manufacturers of electronic systems and motor vehicle companies have been in the forefront of advanced ceram­ ics development. Major electronic companies in Japan and the United States have placed technical advances in ceramics as a priority in the development of advanced computer technology. Ceramic materials may allow the de­ velopment of multifunction chips, where all electronic functions are placed on single devices, and of densely packed high-speed computer systems. Ceramic circuit boards are now used in military missile sys­ tems because of their heat-dissipation capabilities and light weight. Eventually, circuit boards themselves may be displaced by multilayer, multifunction leadless chips fabricated of advanced ceramics or some other advanced material. The Japanese firms Fujitsu, Hitachi, Toshiba, Mitsubishi, and NEC are competing with the U.S. firms IBM, General Electric, Honeywell, Texas Instruments, and GTE in the search for the materials key to VLSI technology. Many believe that ceramic optical and photonic devices may ulti­ mately have the most revolutionary significance for national competi­ tiveness. Optical ceramics may change patterns of activity in many industries by increasing the information-carrying speed of fiber-optic communication systems. In the United States, ceramic optics technol­ ogy is expected to get a boost from the Strategic Defense Initiative or "Star Wars" program, which has a materials research component seek­ ing to develop more powerful lasers, new nonlinear optical systems, and new materials to protect against intense electromagnetic and laser radi­ ation. AT&T and its Japanese counterpart NTT are at the forefront of private sector research on optical ceramics. Recently, the Japanese ce­ ramics firm Kyocera joined with other firms in starting Daini-Denden, the first private telecommunications company established in Japan to compete with NTT. This business venture is based on the prediction that advanced ceramics will be the basis for breakthroughs in optical com­ munications systems. 283 ADVANCED CERAMICS

It is the new vehicular engine designs based on advanced ceramics, however, that are expected to have the greatest impact on both civilian and military markets. Enormous economic gains can be realized by the first country to develop and market ceramic engines. Substantial losses may be sustained by the country without that technology readily avail­ able. One study predicts that a successful U.S. ceramic engine program could add $280 billion to the GNP over a twenty-year period, largely as a result of favorable trade and employment effects.21 Another study forecasts fuel cost savings of $1.5 billion per year and maintenance cost savings of $300 million per year in the United States as a result of the use of ceramics in motor vehicle engines. 22 If ceramic engines do become a reality, they can change the economics of civilian transportation modes from cars to air travel and offer new means of industrial and household power production. Because automobiles are the largest potential market for ceramic en­ gines, many car manufacturers throughout the world are engaged in re­ search on ceramic engine parts. These include Ford Motor Company and General Motors in the United States; Toyota, Nissan, and Isuzu in Japan; Volkswagen and Daimler-Benz in Germany; Volvo and Saab in Sweden; Rolls Royce in England; and Fiat in Italy. Of these, Ford and Toyota are be­ lieved to have made the largest investment in the design and testing of ce­ ramic components.

Technoeconomic Barriers to Diffusion

Ceramic materials can eventually offer new markets, productivity im­ provements, and substantial commercial advantages to a variety of in­ dustries. Research on advanced ceramics, particularly on structural ceramics, however, is still in its initial stages. Despite their potential for yielding mechanical and electrical properties superior to most other ma­ terials, advanced ceramics will not be widely commercialized until cer­ tain deficiencies are overcome. At present, these barriers to the industrial diffusion of advanced ceramics technology are related to reliability, re­ producibility, and cost.

Reliability. The most serious disadvantage of advanced ceramic materi­ als is their unreliability, which has become the focus of basic ceramics re­ search. Despite the superior high-heat strength and wear properties of advanced ceramics, their inherent brittleness and susceptibility to frac­ ture make them unreliable in the long run. While ceramics can withstand great compressive loads, their resistance to tensile fracture is well below that of metals. There is thus a tendency toward catastrophic failure of ce­ ramic products, which makes them suspect in many wear part and heat

284 CANDICE STEVENS engine applications. Similarly, the use of ceramic materials in electronic components has been limited by the instability of their electrical proper­ ties and their tendency to fail after extended periods of use. Advanced ce­ ramic products will not achieve further market penetration until their reliability in service is improved. The preparation and handling of ceramic powders in their pre fired state are believed to be the key to improving the reliability of advanced ceramic components. Basic research on both structural and electronic ceramics centers on experimentation with powder composi­ tions and formulations and new ways of packing and molding the powders before sintering. There are two prerequisites to producing a reliable ceramic product: pure ceramic starting powders and defect­ free green bodies or preliminary shapes. Producing powders with uni­ form particle size, shape, and distribution and forming these powders without introducing additional flaws have been difficult goals to ac­ complish. Improvements in sintering and finishing techniques will also add to long-term reliability. Limitations on high-heat strength and electrical properties are be­ lieved to be directly related to agglomerations in the ceramic starting powders. Clusters of particles tend to adhere to one another, later pro­ ducing voids and cracks in the ceramic body. One approach to solving reliability problems is the production of ultra fine, spherically shaped powders that are free of agglomerates. New powder processing tech­ niques such as sol-gel technology, colloid chemistry, polymer technol­ ogy, and gas phase reactions are being used in the attempt to produce uniform powders. In sol-gel processing, a semisolid ceramic gel is made by heating a solvent that includes the organic chemical derivatives of a ceramic's key elements. Because one can vary the chemistry of the indi­ vidual steps, sol-gel techniques impart greater ability to control powder particle size and distribution. Essential to materials science are what are termed "nondestructive evaluationH (NOE) techniques, or methods of detecting critical flaws in material components. The development of NOE techniques would allow researchers to determine where flaws are introduced in the production process so that the reliability of ceramic products could be improved. Sci­ entists now know that ceramic failure starts at a small crack or void, which then propagates catastrophically throughout the part or compo­ nent. These flaws can be spotted in advance through the use of NOE techniques, which include X-rays, ultrasonics, and computerized stress analysis. Photoacoustic methods using laser beams and acoustic signals are now being used to detect flaws in experimental heat engine parts.23 The failure probabilities of the ceramic component can be calculated through these tests, providing a powerful research tool as well as a means 285 ADVANCED CERAMICS of quality control. Current NDE techniques, however, are somewhat lim­ ited in their ability to detect small flaws in ceramics parts, to measure and test complex shapes, and to complete such analyses at sufficient speed. In addition to advances in fabrication and testing, innovative design techniques could help improve the reliability of ceramic products. Ce­ ramics cannot simply be substituted for metals, plastics, and other mate­ rials in most applications. The redesign of entire systems is often necessary to benefit fully from their properties as well as to minimize their faults. Heat engine and wear part components incorporating ceram­ ics must be designed to reduce stress concentrations. In these applica­ tions, components must be shaped to take advantage of the strength and heat resistance of ceramics, while minimizing the problems arising from their lack of ductility. While the brittleness of ceramics is not a problem in electronic components, these parts must be fashioned to accommodate the thermal expansion coefficients of ceramics and their interface with attached metal or plastic components. Greater use of computer-aided de­ sign techniques may facilitate the incorporation of ceramics into engi­ neering and electronic systems.

Reproducibility. A second and related barrier to the diffusion of ceramic materials is the inability to reproduce ceramic parts in large quantities. The transfer of ceramics technology from the laboratory to the assembly line is being slowed by the lack of efficient and reproducible manufactur­ ing methods. Even such tested products as ceramic bearings, ceramic tur­ bochargers, and ceramic sensors have had limited marketability because the necessary manufacturing technology is lacking. Mass production of ceramic products is characterized by problems of poor yield and uneven properties. Although in part this results from the immature state of form­ ing and sintering technologies, it also stems from an inadequate under­ standing of how to control ceramic powder impurities. The lack of large-scale injection molding equipment has been cited as one constraint in the commercialization of ceramic turbochargers. It is one thing to make a demonstration ceramic engine from components that have been carefully selected and proof tested and quite another to make parts numbering in the millions with high reliability and high yields. Jap­ anese firms can now produce injection-molded silicon nitride turbo­ chargers in lots of 100 to 500 per month, but economic quantities would more likely approach 100,000 per month.24 Similarly, one problem in mass production of ceramic bearings has been limitations on sintering capabilities and the lack of batch-to-batch reproducibility.25 Current manufacturing methods usually allow only three to four sintering cycles per day in furnaces of limited size. And even ceramics produced in the same kiln can have strength differentials as 286 CANDICE STEVENS high as 30 to 40 percent. In contrast, current smelting and refining meth­ ods yield large batches of metal products with precisely controlled prop­ erties. For a variety of basic science and production engineering reasons, ceramic production processes cannot yet be scaled up to commercial manufacturing levels with adequate product reliability. It is forecast that the ceramics factories of the future will be much like today's Silicon Valley operations. Powder preparation, forming, and fir­ ing procedures will be automated to ensure reliability and repro­ ducibility. Computers will guide the design of parts and components. Sensors, robotics, and numerical controls will be used to monitor closed­ loop ceramics production lines. Facilities may even emulate the sanitary "clean rooms" now used for fabricating semiconductor chips. This con­ cept is far from the factories now used to produce conventional ceramic whiteware products. As yet, however, neither the appropriate scale nor the automation of the manufacturing equipment for advanced ceramics has been achieved.

Cost. These related technical limitations in basic ceramics science and manufacturing processes lead to the high cost of most ceramic products. Because they lack reliability and reproducibility, components fabricated of advanced ceramics are currently more expensive than their material competitors. The diffusion of ceramics in their designated markets will proceed in stages as performance properties are demonstrated, manufac­ turing technologies are developed, and unit prices decrease. Various ce­ ramic products are now at different stages in their market evolution. Engine ceramics are still overcoming performance barriers, wear parts are conlronting their manufacturing limitations, and electronic components are attempting to become cost competitive. In general, ceramic prices are high because of the cost of fabrication, not because of raw materials' costs. The silicon, nitrogen, and other earth elements used to make ceramics are widely available and cheap in con­ trast to metals and plastics. At this stage, however, all of the subsequent processing steps involve large investments-from powder synthesis through molding and firing to machining and finishing. Machining, which is difficult because of the hardness of ceramics, and postprocess inspection, which is essential because of their uneven properties and the lack of NDE techniques, account for a large share of final product price. As much as 75 percent of the production cost of ceramic components is said to result from a high rejection rate caused by the poor reproducibility of the basic processing steps. And currently the low volume of production prevents any economies of scale in manufacturing. One attempt has been made to estimate how lower prices could help trigger more rapid market expansion of structural ceramic products. Pro- 287 ADVANCED CERAMICS ducers of heat and wear parts now purchase silicon nitride and silicon carbide powders at a cost ranging from $ 7 to $18 per pound, and they produce finished parts costing over $40 per pound. If final costs could be reduced to less than $40 per pound, applica tions such as ceramic bearings and turbochargers would be more cost competitive. If costs could be re­ duced to the $15 to $20 range, ceramics would be more economical for cutting tools and specialized wear parts. And a reduction in final price to under $15 per pound would lead to greater use of ceramics in heat en­ gines. 26 In general, as processing techniques are perfected, applications better established, and larger quantities produced, ceramic prices will de­ crease, and the inherent cost advantage of these materials should be realized.

Promoting Diffusion of Advanced Ceramics: A Comparison of the United States and Japan

Although the United States and Japan are definitely in the lead, a num­ ber of countries are participating in the international race to develop and commercialize advanced ceramics. Great Britain, which led the world in ceramics engineering until the 1970s, is trying to regain its po­ sition by again investing in basic research on ceramic materials. West Germany has an industry-government research program on advanced ceramics for vehicular engine applications. France recently announced the start of a development effort in ceramic powders with a focus on electronic applications. A multi country program on ceramic powder production and processing techniques was initiated in 1982 under the sponsorship of the European Economic Community. Canada, Sweden, and Australia are also exploring various aspects of ceramics technology and product development. Nevertheless, these countries are believed to lag far behind the Japa­ nese and the Americans in the development of ceramics technology. They are just beginning their efforts to develop world-class commercial programs in ceramics, while Japan and the United States have been neck and neck at the front for about the past five years. Handicappers are now leaning toward Japan as the frontrunner in the ceramics derby. While ad­ vanced ceramics technology was invented by the British and improved by the Americans, the Japanese appear to be better at promoting the diffu­ sion of advanced ceramics among a wide range of industries and at bring­ ing ceramic products to market. The use of advanced ceramics is now limited by negative technical, institutional, and attitudinal factors. Processing and production tech­ niques have yet to be perfected to yield ceramic products that are both cost effective and cost competitive. Industry, government, and university

288 CANDICE STEVENS research efforts need to be coordinated to promote opportunities for technology transfer. Resistance to using ceramic products is still strong on the part of design engineers as well as industry and the public. More widespread use of ceramics technology depends largely on overcoming these barriers through appropriate research, industrial cooperation, and innovative marketing. Japan may be the first to realize competitive advantages through the application of advanced ceramics simply because its institutions and eco­ nomic structure are better suited to the diffusion of new technologies. In the United States, the adoption of technical innovations by potential in­ dustrial users proceeds at a slower pace. If it is to surpass the Japanese in advanced ceramics, the United States needs new approaches to tackling the full range of activities from technological development through mar­ ket exploitation. In this fast-paced technological era, the international competitiveness of nations is based increasingly on their capabilities for the identification, stimulation, and diffusion into use of new technologies like advanced ceramics.

Research Strategies. There is a continuing debate regarding the proper orientation for ceramics research. Some advocate an emphasis on basic research to increase understanding of the behavior of ceramic materials and of the effect of varying powder compositions and structures on ce­ ramic properties. Others advocate greater attention to applied research on product development, testing, scale-up, and manufacturing tech­ niques. Another orientation is one that focuses on the design of end-use systems incorporating ceramics. The United States and Japan have taken different approaches in their ceramics research programs. In ceramics technology, as in many other emerging technologies, a systems approach to research may be essential to developing useful final products. A typical conceptualization of the research and development process places basic research at one end of the spectrum and the final product at the other. In between are the sequential stages of applied re­ search, engineering design, and product development, A more realistic picture of this Hinnovation pipeline," however, has a series of feedback and feed-forward loops that link basic science with product design and development. In actuality, the processes of technology development sel­ dom follow a linear progression but rather depend on interaction among research, engineering, design, and manufacturing.27 This type of integrated approach to research and development may be particularly apt in the case of advanced ceramics technology. The vari­ ous stages of science, development, design, and production are linked so that technological advances at anyone point may be dependent on re­ search in other areas. Focusing on one research problem to the exclusion

289 ADVANCED CERAMICS of the others may not produce timely technological outcomes. Thus ad­ vances in powder synthesis techniques, NDE tests and materials stan­ dards, component design approaches, and mass production techniques are equally important to producing reliable, reproducible, and economi­ cal ceramic products. In general, research and development must be combined with the processes of production to produce the confluence of technical capabili­ ties needed to bring products to market. In ceramics and other materials sciences, development programs benefit from association with product design and testing. The feedback links in the innovation model indicate that reducing the probabilities of brittle fracture in ceramics may depend as much on obtaining design data as on materials characterization. Fail­ ures in testing and problems in production processes help define research avenues. Similarly, improvements in the reliability of ceramic products will arise from understanding deficiencies discovered in service. For these reasons, success in innovation depends not only on having the feed-forward links in place but also on ensuring that the feedback links work effectively. In stressing the latter, Japan is unique in its approach to innovation. The patterns of development of ceramics technology in the United States and Japan reflect their overall approaches to research and develop­ ment. In the United States, military needs have dominated research and development expenditures, leading to a weakness in the development and diffusion of commercial technologies. Japan, on the other hand, em­ phasizes industrial applications in its research programs. As a result, the United States lags in the product development and production phases of research, while Japan is weakest in basic science. Although the U.S. technology effort is impressive, it tends toward ei­ ther basic scientific research or applied research and development for military needs. The country's research and development expenditures now total $100 billion annually, which exceeds the combined research budgets of its major international competitors. About half this amount is funded by the federal government, however; industry research efforts account for far less of the total in the United States than in most foreign countries. Moreover, 70 percent of the federal research and development budget is devoted to defense. While there are some civilian spinoffs, a rel­ atively small proportion of the expenditures on defense technologies have significant applications in industry. Total research and development spending in the United States is thus skewed heavily to defense and to those industries most related to defense development. Approximately $60 million is now budgeted annually for structural ceramics research in the United States. Sources of funding other than the Department of Defense and the Department of Energy are NASA, the 290 CANDICE STEVENS

Department of Commerce (National Bureau of Standards), the Depart­ ment of the Interior (Bureau of Mines), and the National Science Foundation. The United States is believed to have one of the strongest science bases for ceramics technology. Diverse research programs in government laboratories, as well as in industry and university centers, have concen­ trated on understanding the underlying science of ceramic materials for both structural and electronic applications. These programs continue to receive substantial government funding. DARPA recently initiated a multimillion-dollar program to develop silicon carbide fiber technology for the fabrication of composites. The Department of Energy is funding a program at the Illinois Institute of Technology to characterize a wide range of silicon carbide and silicon nitride materials. A high-temperature materials laboratory has been established at Oak Ridge to conduct ge­ neric ceramics research on powder development, materials characteriza­ tion, and statistics of brittle fracture in support of the advanced heat engine programs. The National Bureau of Standards has several pro­ grams on the standardization of ceramic materials. Other government centers, including Argonne National Laboratory, Sandia National Labo­ ratory, the Naval Research Laboratory, and the Army Materials Research Center, are engaged in basic ceramics studies applicable to a broad range of end uses. The U.S. government, however, has devoted the largest share of re­ search funding to demonstration products-most notably, the ceramic adiabatic diesel and gas turbine engines. While these projects often pro­ vide useful ceramic design information, they neglect important questions of market potential and profitability. In the case of the military's engine development program, the transfer of technology to large-scale commer­ cial use is questionable because of the differences in service life require­ ments and design specifications for military and civilian heat engines. 28 It has also been charged that the development of one-time, proof-of­ concept products such as the Department of Energy's advanced gas tur­ bine engine may not be useful to industry and may not be economically reproducible. 29 In conjunction with these demonstration programs, U.s. government research should address the design of spinoff ceramic prod­ ucts and the development of manufacturing processes and fabrication technologies for large-scale reproduction. Enhancing industrial competitiveness has not been a high priority in allocating U.s. research and development expenditures. There is a need for new mechanisms for developing commercial as opposed to military technologies and for diffusing them to industry. To this end, repeated calls have been made in the United States for the setting of national re­ search goals and timetables; the establishment of a network of national 291 ADVANCED CERAMICS

research centers for commercial technology development; the strength­ ening of cooperative industry-government-university research on pre­ competitive technologies; the development of new methods for transfer­ ring technology from government to industry; and increased incentives for industrial investment in long-term, high-risk development projects. Many of these proposals have been adapted from the Japanese expe­ rience, where product-oriented applied research is the rule rather than the exception. It is estimated that Japan spends $23 billion annually on research and development, which is less than a quarter of the U.S. re­ search investment. A larger percentage, though, is funded by industry­ approximately 75 percent. Moreover, the research funded directly by the government is almost entirely oriented toward the civilian economy. It is partly the commercially directed research approach of the Japanese that has allowed them to pull ahead in key industrial sectors, one of which is advanced ceramics. 30 The Japanese research and development model has long empha­ sized applied research and product development, often at the expense of basic science. Japan has traditionally allocated 60 percent of its re­ search expenditures to the development of new products and processes, 25 percent to other applied research, and only 15 percent to basic re­ search. The low priority of basic research is also reflected in the educa­ tional system, which produces a far greater number of engineers than of scientists-the reverse of the United States. In advanced ceramics as well as in other technologies, the Japanese have purchased the science base from the West and refined this to produce marketable products. Japan's industrial strategy has been based on the adoption and adaption of foreign technology coupled with efficient and quality-oriented mass production techniques. Typically, Japan was a latecomer to the ceramics field, initiating its research effort in 1978 as part of the "Moonlight" project, which focused on technologies important to energy conservation. In 1981, the Ministry of International Trade and Industry (MITI) selected advanced ceramics as one of twelve Hbasic technologies for future industries" that would receive priority funding over a ten-year period. This stemmed from a survey of Japanese industrial leaders who ranked advanced ceramics among the top five technological innovations of the decade (along with micro­ electronics, biotechnology, fiber optics, and robotics). Targeting of ad­ vanced ceramics is indicative of the close cooperation of Japanese industry and government in setting research priorities. Ceramics research in Japan has been largely conducted by industry for industry, with seed money and overall coordination provided by the government. It has been directed toward the mechanisms at work in ce­ ramics processes, their relation to specific products and designs, and the

292 CANDICE STEVENS

development of processing and mass production techniques. Ceramics research in Japan is cited as an example of its "experience-looping" and Hdesign-Iooping" approaches, where engineers and designers gain in­ sight into technology problems by working on assembly lines, studying consumer research results, and continually redesigning components. Projects have addressed the development of ceramic batteries, the optimization of sintering techniques, the operation of large-scale hot isostatic presses, and the design of mechanical parts for specified indus­ tries. Japanese efforts to develop high-speed, high-volume molding and firing processes have been backed by large company investments in ce­ ramics processing equipment.31 Like the United States, Japan has en­ gaged in the development of prototype automobile engines as part of its structural ceramics program, but these are solely private sector projects. They are undertaken partly for ceramics design experience and partly for the public relations value of displaying full-scale ceramic engines. Nissan exhibited a prototype ceramic gas turbine engine for cars at the 1983 To­ kyo Auto Show. Both Toyota and Isuzu have tested ceramic diesel engines in passenger cars and pickup trucks. And NGK Spark Plug has put to­ gether and exhibited for visitors its version of the all-ceramic piston en­ gine for automobiles. A more recent trend in Japan has been a new emphasis on basic re­ search. The government has proclaimed that continued neglect of funda­ mental science may endanger future economic growth, and it has initiated projects to rectify this shortcoming. In 1983-1985, over forty new government and industry laboratories were established to conduct basic scientific research, including the materials science fundamental to ceramics.32 National laboratories such as the Government Industrial Re­ search Institute, the Mechanical Engineering Laboratory, the National Research Institute for Metals, and the National Institute for Research on Inorganic Materials are doing studies of the characterization of ceramic powders, synthesis technology, and the fabrication of ceramic fibers. MITI's efforts are increasingly directed toward ensuring that a founda­ tion of knowledge is built in support of higher-level ceramic processes. Most observers believe that the Japanese do not as yet have a techni­ cal edge over the United States in the field of advanced ceramics. A study team sent to Japan by the National Academy of Sciences concluded that the Japanese have not made any major breakthroughs in ceramics tech­ nology. Indications are, however, that the Japanese are now investing far more than other countries in ceramics research and development (see table 6-5). In addition, the Japanese are investing in all stages of the re­ search and development spectrum and ensuring that the necessary links are in place. Japan is strongest where the United States is weakest-at the middle stage of translating basic research into commercially successful

293 ADVANCED CERAMICS

TABLE 6-5 RESEARCH AND DEVELOPMENT EXPENDITURES ON STRUCTURAL CERAMICS, 1985 (thousands of U.S. dollars)

Country Expenditures

Japan 300,000 United States 100,000 West Germany 5,000 France 5,000 United Kingdom 3,000 Sweden 500

Total 413,500

SOURCE: IAL, Advanced Engineering Materials in Europe (1986). products or processes. The Japanese ceramics advantage may lie in their approach to research and innovation, which is more conducive to the diffusion of new technologies from the laboratory to industry produc­ tion lines. Institutional Strategies. Another area of Japanese strength conducive to the diffusion of advanced ceramics technology is the cooperation evi­ denced among diverse industrial sectors. Although this is largely the re­ sult of government efforts to promote coordinated research, it also reflects traditional industry practices. U.S. industry, with its orientation toward domestic competition, has more difficulty transferring ceramics technology from one market sector to another. Commercial diffusion, or the rate at which ceramic components and systems displace traditional components and systems, may be influenced by the patterns of commu­ nication of prospective users. Many technical and commercial advantages can be realized by in­ creased links between industries and firms. Advanced ceramics technol­ ogy comprises several processes using different raw materials to produce a variety of products with applications in many types of industries. Al­ though the development of ceramics technology is at different stages in these industries, many opportunities exist for overlap and spillover be­ tween market sectors. Basic research on ceramic powders and processes affects all end-use applications, whether electronic or structural. Applied research in one area, such as cutting tools, has implications for research and development on other products, such as mechanical or engine parts. Experience gained in mass production of one type of ceramic product,

294 CANDICE STEVENS such as ball bearings, can give insight into manufacturing most other types of structural components. And early market positions in various product lines can facilitate entry into other electronic and structural ce­ ramic markets. Recognizing the value of production experience and early market position, MITI encouraged the creation of an industrial infrastructure to support Japan's advanced ceramics research program. The Japan Fine Ceramics Association was established in 1982 to survey the industry and promote information exchange on advanced ceramics. It exists as a coun­ terpart to the Ceramic Society of Japan, the older industry group for con­ ventional ceramics. The Fine Ceramics Association now has more than 170 industry members drawn from diverse sectors, including firms whose primary products are chemicals, metals and minerals, automo­ biles, machinery, and electrical appliances. Of the 150 charter members, only 35 were originally involved in the production of ceramics. The asso­ ciation provides a communication link between suppliers of ceramic raw materials, manufacturers of production equipment, parts producers, and companies that produce finished products and systems. One objective of the Fine Ceramics Association is to systematize the industry by promoting uniform testing methods and establishing com­ mon standards of composition and performance. In both Japan and the United States, the lack of a materials data base for standard setting has been a major constraint on the use and diffusion of advanced ceramics. A Fine Ceramics Center is soon to be established in Japan, funded jointly by the government and industry and responsible for formulating standards and tests for advanced ceramics. Cooperative industry research is another means of promoting inter­ action among diverse industry groups, an approach favored by the Japa­ nese. In addition to facilitating the diffusion of ceramics technology across industry sectors, cooperative research can reduce duplication, make efficient use of scientific and technical personnel, and allow econo­ mies of scale. Japan, like many European countries, has long permitted companies to collaborate on research projects as a means of developing a competitive edge in specific technologies. Japan has traditionally viewed the international marketplace-not just the domestic economy-as the standard against which market shares should be measured. Antitrust reg­ ulations are not strictly enforced, particularly for emerging industries and technologies, and market collusion is not considered the detriment it is in the United States. In ceramics as well as in other technical fields, MITI coordinates the research activities of companies and universities to prevent duplication and to ensure that research results are rapidly disseminated. For example,

295 ADVANCED CERAMICS

the Engineering Research Association for High-Performance Ceramics was set up by MITI in 1981 to monitor and coordinate private sector re­ search under the Basic Technologies for Future Industries program. Se­ lected industry and government participants were brought together to address specific technical problems related to the development and com­ mercialization of advanced ceramics. Japan also provides grants or soft loans to groups of companies that agree to cooperate in developing new technologies. These projects bring the diverse skills of many firms to bear on particular technological prob­ lems. In some cases, firms even share markets for high-technology prod­ ucts to realize greater economies of scale and gain learning curve efficiencies. In 1984, the government allocated $48 million for financing joint industry research projects on advanced ceramics and other"sunrise" or new, promising technologies. The promotion of industry interaction and coordination may be es­ pecially significant in facilitating technical spillover from the realm of electronic ceramics to that of structural ceramics. Through its extensive industry network, Japan can transfer technology from electronic ceram­ ics to gain understanding of the underlying science of structural ceramics and mass production methods. There are also intermediate areas of tech­ nical overlap; for example, joining processes involving ceramic materials have primarily evolved from technology developed over the past four decades for electronic devices. Japan has already earned large market shares in electronic ceramic applications and is well positioned to take ad­ vantage of any commercial spillover possibilities. The U.s. Department of Commerce cited Japanese domination of the electronic components business as a major reason for predictions of declining U.S. competitive­ ness in engineering ceramics. 33 Japanese firms also appear to be more aggressive in integrating hori­ zontally and branching out into new lines of research and production. In general, Japan's producers of structural ceramics include more major pro­ ducers of electronic ceramics than in the United States. Kyocera, the world's leading producer of electronic ceramics, also produces ceramic cutting tools, mechanical parts, optical and biomedical devices, and a va­ riety of other ceramics products. For the most part, U.S. companies tend to specialize in a particular ceramics market sector. There is no U.S. coun­ terpart to Kyocera, an international firm that competes on the basis of a broad range of ceramic products. The specialization and fragmentation of industry in the United States may be one of the most serious barriers to diffusion of ceramics technology. Unlike Japan, the United States, until recently, has had no advanced ceramics industry association, few cooperative research pro­ grams, and little interaction and integration of the various sectors in the 296 CANDICE STEVENS ceramics industry. In the past, the domestic ceramics community has lacked the concentration and coordination of other materials communi­ ties, both domestic and foreign, with which it must compete. Whatever the possibilities for spillover across ceramic application areas are, the channels for technology transfer in the United States have been few. Only recently have there been signs that such institutional barriers to dif­ fusion may be diminishing. Until 1985, there was no industrial association or organization in the United States charged with coordination, advocacy, or standards devel­ opment in relation to advanced ceramics. In that year, however, the United States Advanced Ceramics Association (USACA), modeled after the Japan Fine Ceramics Association, was formed. Charter members bring together a diverse group of firms, including Coors Ceramics, Alcoa, Norton Company, Sohio Engineered Materials, Garrett Corporation, Martin Marietta, and Corning Glass Works. The group's stated goals are to promote commercialization of advanced ceramics, to gather and dis­ seminate technical information, and to initiate data collection and stan­ dards development. There are also proposals for cooperative research on advanced ce­ ramics, which has previously been undertaken only in a limited manner and largely under government contracts. In the United States, research and development are typically carried out in an isolated way, partly be­ cause of competitive instincts and partly because of antitrust regulations. This isolation delays transfer of research findings between institutions, whether government, academic, or industrial. It also limits spillover of technical advances from one firm to another in similar or unrelated busi­ nesses and retards technology transfer across application areas. The ex­ cess of competition exhibited at every level of U.S. industrial research has long been criticized as duplicative and detrimental to U.s. international competitiveness.34 Electronic ceramics technology in the United States, for example, is dominated by large firms like IBM, which manufactures components for internal consumption, conducts research in an insular way, and does not apply its technical skills to developing other types of ceramic products. The enactment of the National Cooperative Research Act of 1984 was intended to remove antitrust concerns as an impediment to joint in­ dustry research projects in the United States. Collaborative industry re­ search is still subject to review but is now analyzed under a "rule of reason," which assesses the value of such projects to national competi­ tiveness. Most cooperative undertakings are expected to be near the basic research end of the spectrum or in the early product development stage. It is hoped that such projects will fill the gap in the U.s. innovation system, which slows the transfer of basic science into commercial products. In the

297 ADVANCED CERAMICS electronics field, the Microelectronics Computer and Technology Corpo­ ration, the Semiconductor Research Corporation, and the Software Productivity Consortia are all registered joint research ventures intended to enhance the international competitiveness of the U.S. computer industry. Although no cooperative research projects have been initiated on advanced ceramics, there are proposals for joint industry research on ce­ ramics powder processing, electronic sensors, and ceramic wear parts.35 Another proposal is for an automated pilot manufacturing facility to ad­ dress the mass production requirements of advanced ceramics. The need for a focused research approach to ceramics has been stressed in a recent National Academy of Sciences assessment of ceramics, which recom­ mends the establishment of an institutional infrastructure to guide inno­ vation efforts. This infrastructure would include cooperative ceramic science and engineering programs at selected universities, a summer in­ stitute program to bring together leading ceramics researchers, and an interdisciplinary research center on ceramics to N carry out both basic and applications research on a practical scale."36 Ceramics research consortia have been formed at a few U.s. univer­ sities, notably Rutgers University, Pennsylvania State University, Cornell University, the Massachusetts Institute of Technology (MIT), and the University of California at Berkeley. These consortia, which are financed by contributions from private firms supplemented by federal and state funds, provide an infrastructure for linking materials suppliers, manu­ facturers, government research establishments, and universities. At the Rutgers Center for Ceramics Research, multiple sponsors share in a pool of basic research concentrating on optical ceramics, structural ceramics, and ceramic films and coatings. In addition to twenty-seven U.s. spon­ sors, the Rutgers center has three foreign sponsors-Rolls Royce of Great Britain, Rhone-Poulenc of France, and Solvay of Germany. The MIT pro­ gram, which is sponsored by thirty companies and the federal govern­ ment, is focusing on ceramic powder synthesis and preparation and fabrication of greenware for structural and electronic ceramics. The Pennsylvania State University program is known for its Center for Die­ lectric Studies, which leads research in several ceramic electronic applications. U.S. companies are now starting to look for spillover between elec­ tronic and structural ceramic applications. Norton Company, a leading producer of structural ceramic parts, hired its first electronic ceramics en­ gineer in 1985. Similarly, IBM has hired its first structural ceramics engi­ neer. Coors, Corning Glass, and General Electric are examples of U.S. firms that are now building product lines in both electronic and structural ceramics. In addition, there have been several mergers and acquisitions of

298 CANDICE STEVENS smaller entrepreneurial firms in the ceramics field as larger companies seek to gain a foothold in various ceramics markets. In part, the diffusion of ceramics technology will depend on the degree to which specialized firms enter new segments of the ceramics industry to capitalize on their technical and marketing expertise. By any measure, overall interest in advanced ceramics in the United States appears to be growing. One Japanese advantage in ceramics tech­ nology has been the apparent national commitment to the development of advanced ceramics, strongly supported by government and publicized by industry. The wealth of activities in the advanced ceramics field in Japan over the past five years led to diagnoses of "ceramic fever" sweep­ ing the country. Although U.S. activities are still far from feverish, one observer has noted a "healthy glow" in the U.S. advanced ceramics community. 37 There are many small signs of the emergence of an institutional basis for the development of advanced ceramics technology in the United States. Attendance and the number of papers presented at the annual meeting of the American Ceramics Society (ACS), the traditional U.S. ce­ ramics association, increased 40 percent in recent years. The 1986 ACS conference was an international meeting for the first time. A number of national conferences, sponsored by the National Science Foundation, the National Bureau of Standards, Charles River Associates, and Sandia Na­ tional Laboratory, have focused exclusively on advanced ceramics. A program for the transfer of ceramics and other technologies was initiated at Oak Ridge National Laboratory as part of an effort to increase interac­ tion between government laboratories and industry. Government agen­ cies are also indicating increased interest in the commercial aspects of advanced ceramics, with three major economic studies funded by the u.s. Department of Commerce in recent years. Advanced ceramics are also now included as an industry in the U.S. Industrial Outlook.

Commercialization Strategies. Attitudinal barriers must be added to technical and institutional barriers as a third obstacle to the market diffu­ sion of advanced ceramics technology. There is natural resistance to the use of advanced ceramics by engineers and designers as well as by indus­ try managers and consumers. Ceramics, generally known for their brittleness, are not usually thought of as engineering materials. In the United States, manufacturers have been slow to use advanced ceramics and reluctant to initiate research and product development. The public, too, must be educated about ceramic materials to foster acceptance of ce­ ramics and demand for end-use products. Innovative marketing and commercialization strategies are an essential part of managing the diffu­ sion of ceramics technology.

299 ADVANCED CERAMICS

Market diffusion of advanced ceramics, like other new technologies, will be paced by the timing of technical improvements and cost reduc­ tions and the steepness of the production learning curve. The driving fac­ tor in the use of ceramic products is increased performance. Ceramics are typically used in small amounts in specialized products where their high cost can be absorbed. Electronic ceramics, now used in many consumer products, first gained acceptance in components for demanding military applications. Ceramic cutting tools and wear parts, used primarily for specialized industrial and military equipment, represent early applica­ tions for advanced structural ceramics. Once technical breakthroughs are made, however, ceramics technology and markets will change rapidly as one round of advances builds on preceding rounds and unit prices de­ crease. If losses are sustained in one round of innovation, it will be diffi­ cult to join the technical competition as a late entrant. The same is true for market development. The timing of commercial introduction of ceramic products can have a substantial impact on subsequent market penetration. Unlike Japan, the United States has been slow to incorporate advanced ceramics into prod­ ucts and systems and late to introduce them to industry and consumers. The Japanese have been the first to initiate sales of commercial products in almost every ceramics market area. This has allowed them to accelerate commercial acceptance of advanced ceramics, establish a market position both at home and abroad, and gain important production experience. Japan has been our most formidable competitor in the successful commercialization of advanced technology. The country's economic suc­ cess has been based partly on a strategy of rapidly penetrating narrow segments of expanding markets. In this, Japanese firms show a unique willingness to plunge in and produce a new technology on the basis of its ultimate promise, long before it is proved to be cost effective. The Japa­ nese are generally willing to introduce products at a lower level of confi­ dence than U.s. industry simply to gain a market advantage. Subse­ quently, the Japanese adapt designs to user needs, modify their products, and systematically penetrate other areas of the designated market. 38 This pattern of early commercial introduction of technologies has been witnessed in the automobile, machine tool, and consumer electronic industries. Japan is now poised to exploit thin markets for new technolo­ gies such as fifth-generation computers, biotechnology, and advanced ceramics and other new engineering materials. The strategic marketing approach of the Japanese has already been successful in the case of elec­ tronic ceramics. Japanese firms found a market niche in the development of ceramic integrated circuit packaging to serve the needs of U.s. semi­ conductor manufacturers. From that basis, they further developed ce­ ramic packaging technology, initiated related product lines, and became

300 CANDICE STEVENS the dominant world suppliers of electronic ceramics. Optical ceramics, too, will first be used in small, high-cost markets. The Japanese have re­ cently commercialized the first ceramic integrated optic device, although the technology is not yet fully developed. The structural ceramics market has also been targeted by the Japa­ nese, who are using a range of marketing and pricing techniques to gain an initial footing in this potentially lucrative business. In order to develop acceptance of advanced ceramics by the public, Japanese firms have been the first to offer off-the-shelf ceramic consumer products. They have pio­ neered items such as ceramic sushi knives, scissors, fishing hooks, and pen tips. These low-technology ceramic products are usually manufac­ tured with high-technology systems, including injection molding, slip casting, and other processes. Because Japanese consumers tend to be technology-oriented purchasers, the newness of ceramics technology can often be used as a selling point in marketing these products. The Japanese are slowly introducing ceramic parts into automobile engines as well as many industrial processes. Ceramic glow plugs and hot plugs to preheat fuel in diesel engines are being marketed on a limited basis. Ceramic turbochargers and piston rings have been introduced in Japanese automobile models. In most cases, these engine parts are incor­ porated into sporty, expensive cars that have a price premium and can ab­ sorb the high cost of the ceramics. A wide range of Japanese manufactur­ ing industries are said to be using ceramic cutting tools, wear parts, and other components. The development of home markets for advanced ce­ ramics is strategically important in achieving production volumes to allow economies of scale in manufacturing. Japanese firms have formed special joint ventures with the aim of commercializing ceramics and other new technologies. Toshiba, a Japa­ nese pioneer in silicon nitride technology, and Koyo Seiko, a well-known bearings manufacturer, together introduced a line of silicon nitride roller bearings in 1985. Intended for gas turbine engines and other types of ma­ chinery, the ceramic bearings are much lighter and more heat resistant than the commonly used steel bearings. In order to win a skeptical audi­ ence over to the new ceramic bearings, the firms combined Koyo Seiko's excellent reputation among its customers with Toshiba's advanced mate­ rials processing technology. The silicon nitride bearings were thus given an added measure of credibility. 39 In foreign markets, pricing strategies are integral to the overall Japa­ nese marketing approach. Japanese producers often undercut their com­ petitors by lowering product prices in the early stages of commercializa­ tion. At present, both Japanese and u.s. firms are producing ceramic powders and components for the experimental heat engine programs funded by the U.S. government. The Japanese firms Kyocera and NGK

301 ADVANCED CERAMICS

Insulator have been charging far less for these products, however, and have become important suppliers of ceramic raw materials and heat en­ gine parts to the Cummins Engine Company program. The United States, although often the first to design state-of-the-art products, has a lesser ability to operationalize or commercialize new ideas and technologies. The government does not consciously nurture future industries through concentrated research and appropriate education and training. Industry does not practice targeting strategies and pricing tactics for introducing new products to the market. In general, there is an under­ emphasis on the need to Hmanage" the diffusion of new technologies, a process that involves developing strategies for the commercialization of technical innovations as well as targeting market niches that can be ad­ dressed early and successfully. In the United States, more than in Japan, it has been difficult to get engineers to design with ceramic parts. Standard engineering education provides little formal training in the use of advanced materials, so that the ceramic alternative is not generally known. U.S. universities, more­ over, turn out comparatively few graduates in advanced materials fields. Only fifteen to twenty-five doctorates are awarded annually in high­ technology ceramics by US. universities. 40 Attitudinal barriers to using ceramics may first have to be confronted in engineering schools, where curriculum revisions would make engineers more familiar with advanced materials processing and design approaches. Industry in the United States has tended to downplay the rapid time frames for market growth in advanced ceramics anticipated by the Japa­ nese. This attitude has made firms much slower to take development projects to the commercial stage. Nor are ceramic manufacturers in this country oriented to growth through new product development or to the Japanese practice of accepting short-term losses in fostering long-term markets. The consequent lack of production experience in the United States has often meant insufficient data for designing with advanced ce­ ramics and little knowledge of proper design approaches. Yet the U.S. ce­ ramics industry has lagged in the establishment of standards and specifications for using ceramics, which may be one impetus to more widespread commercialization. As yet, there are only a few industrial users of structural ceramics in the United States. The lack of awareness of ceramics on the part of poten­ tial user industries has slowed commercial diffusion of many wear­ resistant and heat-resistant ceramic products. Despite the productivity gains offered by ceramic tool inserts, the American Cutting Tool Manu­ facturers Association has directed very little effort to marketing and re­ searching ceramic cutting tools. Knowledge of ceramic tools in U.S. manufacturing plants is limited, and, in some cases, the tools have been 302 CANDICE STEVENS misapplied with discouraging results.41 Ceramic turbochargers, soon to be introduced by the Automotive Products Division of AiResearch, will be the first ceramic engine component sold commercially by a U.S. firm. Because these products may be the precursors of structural ceramics in more demanding applications, it is important to gain any advantages to be derived from early market experience. The one high-temperature ceramic product now sold by U.s. indus­ try is the result of a government-sponsored project for the development of ceramic recuperators. Under a Department of Energy contract, GTE Sylvania developed small, single-burner recuperators for unrecuperated furnaces. These recover hot waste energy from the furnace's exhaust sys­ tem and transfer it to the incoming combustion air, leading to fuel savings and greater energy efficiency. The ceramic recuperators have been in­ stalled in forty-one industrial furnaces. Although they have a potential market value of $250 million, they will be used largely in new and unre­ cuperated furnaces because of the costs involved in changing over indus­ trial furnaces now using metal recuperators. In marketing the recupera­ tor, GTE is advertising fuel savings of 30 to 60 percent and the fact that companies that can conserve on energy use will be more competitive in international markets. 42 Aside from industry, the American public and consumers lack awareness of advanced materials. Ceramics are primarily thought of as chinaware and pottery materials. Innovative marketing strategies will be needed to create an interest in ceramics on the part of the general public, who may one day be asked to buy cars with ceramic engines. A public af­ fairs committee has been established by the new U.s. Advanced Ceram­ ics Association. This group will have the challenge of educating the public and policy makers on the economic advantages and potential ap­ plications of advanced ceramics. After the Japanese fashion, the demon­ stration ceramic engines developed for the government might be used for promotional purposes. Similarly, low-technology consumer products fashioned of ceramics could be used to introduce ceramic engineering materials. Or in typically American fashion, Madison Avenue-style ad­ vertising drives might be the best way to overcome attitudinal blocks to using advanced ceramics in the United States.

Conclusion

Despite increasing reports of Japanese superiority in advanced ceramics, it is not too late for the United States to reap competitive advantages from the use of these materials. Advanced ceramics technology, particularly for structural ceramics, is still at an embryonic stage of development. There is considerable uncertainty regarding which ceramic materials and

303 ADVANCED CERAMICS forms will lead to the best combination of performance, producibility, and design flexibility. Processing, manufacturing, and inspection tech­ nologies for advanced ceramics remain largely undeveloped. It is not known which research activities will precipitate the most viable oppor­ tunities for commercialization. Nor is it certain which path commercial diffusion of ceramics technology will follow. The successful application of ceramics technology has enormous commercial potential. Materials are fundamental to process advances in most industries and generally receive less attention than they deserve in manufacturing competitiveness. Moreover, ceramics can be the basis of new technology-based industries and products. Successful development of structural ceramics will affect every engine technology and engine market segment, from gas turbines to diesels, from stationary power gen­ erators to transportation vehicles. At the same time, market opportunities will be provided to a wide range of ceramics suppliers. The United States, however, may fail to realize the competitive con­ tribution of ceramics because of an inability to diffuse the technology widely. Unlike Japan, the United States underestimates the need to or­ chestrate the diffusion of technical innovations out of the laboratory and into diverse industrial sectors and markets. Japan's diffusion tactics in­ clude targeting Msunrise n technologies, coordinating research on marketa­ ble components, accelerating commercial introduction of products, establishing sizable domestic markets, and reducing initial prices in se­ lected foreign markets. Although the United States cannot be expected to imitate the Japa­ nese approach, it may have to develop its own diffusion and commercial­ ization strategies in self-defense. The responsibility falls on both government and industry. The government should promote more com­ mercial spinoffs from national research and development activities, offer low-cost investment financing for new technology ventures, provide some product liability protection, and fund research on foreign market­ ing opportunities and competition. Industry should cooperate in long­ term product research, set accelerated development schedules for promising technologies, develop uniform data bases and standards, and undertake targeted development of both domestic and foreign markets. A coordinated diffusion strategy for advanced ceramics and other new technologies would yield cumulative competitive advantages in the inter­ national marketplace.

Notes

1. Arthur F. McLean and Thomas J. Whalen, "Ceramics Heat Up," CHEMTECH (April 1985), p. 224.

304 CANDICE STEVENS

2. Roy W. Rice, "A Material Opportunity: Ceramic Composites," CHEMTECH (April 1983), p. 238. 3. Oak Ridge National Laboratory, "Ceramic Technology for Advanced Heat Engines: Program Plan" (Report prepared for the Department of Energy, June 1984), pp. 46-48. 4. U.S. Department of Commerce, "Advanced Ceramics," 1987 U.S. Industrial Outlook Ganuary 1987), p. 12-6. 5. "The Japanese Score on a U.S. Fumble," Fortune, June 1, 1981, pp. 68-72. 6. Charles River Associates, Inc., "A Case Study of Ceramic Capacitors," Tech­ nological and Economic Assessment of Advanced Ceramic Materials, vol. 3 (Report prepared for the National Bureau of Standards, August 1984). 7. Charles River Associates, Inc., "A Case Study of Ceramic Toxic and Com­ bustible Gas Sensors," Technological and Economic Assessment of Advanced Ce­ ramic Materials, vol. 5 (Report prepared for the National Bureau of Standards, August 1984), p. 41. 8. Charles River Associates, Inc., "A Case Study of Ceramic Cutting Tools," Technological and Economic Assessment of Advanced Ceramic Materials, vol. 6 (Re­ port prepared for the National Bureau of Standards, August 1984), p. 50. 9. Elaine Rothman, George Kenney, and H. Kent Bowen, "Potential of Ce­ ramic Materials to Replace Cobalt, Chromium, Manganese, and Platinum in Critical Applications" (Report prepared for the Office of Technology Assess­ ment, January 1984), p. 188. 10. Office of Technology Assessment, "Strategic Materials: Technologies to Reduce U.s. Import Vulnerability," May 1985, p. 296. 11. Richard C. H. Parkinson, USubstitution for Cobalt and Chromium in the Aircraft Gas Turbine Engine" (Report prepared for the Office of Technology As­ sessment, September 1983). 12. D. E. Readey, "Structural Ceramics for Heat Engines: Future Prospects," Materials and Society, vol. 8, no. 2 (1984), p. 232. 13. "Fiber Optics: Poised to Displace Satellites," IEEE Spectrum (August 1985), pp.30-37. 14. Charles River Associates, Inc., "A Case Study ofIntegrated Optic Devices," Technological and Economic Assessment of Advanced Ceramic Materials, vol. 4 (Re­ port prepared for the National Bureau of Standards, August 1984), p. 32. 15. Gene Gregory, "Fine Ceramics: Basic Material for Japan's Next Industrial Structure," Materials and Society, vol. 8, no. 3 (1984), p. 526. 16. "Japan's Fine Ceramics Start-up Firms and Their Business Strategies," Monthly Economic Review, Long-Term Credit Bank of Japan (December 1984), p. 5. 17. "Ceramics Hold Potential/ American Metals Market-Vacuum Metallurgy (April 26, 1984), p. 6. 18. "The Ceramic Age Dawns," New Scientist, January 26,1984, p. 21. 19. Magoroh Maruyama, "Report on a New Technological Community: The Making of a Technopolis in an International Context," Technological Forecasting and Social Change (February 1985), pp. 75-98. 20. Charles River Associates, Inc., "A Case Study of Ceramic Cutting Tools." 21. L. R. Johnson et aI., "A Structural Ceramics Research Program: A Prelimi- 305 ADVANCED CERAMICS nary Economic Analysis," Argonne National Laboratory: Center for Transporta­ tion Research (March 1983), p. 16. 22. Charles River Associates, Inc., "A Case Study of Ceramics in Heat Engine Applications," Technological and Economic Assessment of Advanced Ceramic Mate­ rials, vol. 2 (Report prepared for the National Bureau of Standards, August 1984), p.46. 23. "Allison Develops Non-destructive Ceramics Test," Aviation Week, June 24, 1985, p. 17. 24. Rothman, Kenney, and Bowen, "Potential of Ceramic Materials." 25. "Ceramic Bearings Still Impractical," American Metal Market/Metalworking News, April 16, 1984, p. 7. 26. National Academy of Sciences, High-Technology Ceramics in Japan (Wash­ ington, D.C.: National Academy Press, 1984), pp. 33-34. 27. Stephen J. Kline, "Innovation Is Not a Linear Process," Research Manage­ ment Ouly-August 1985), pp. 36-45. 28. National Science Foundation, "Selected Applications of Ceramics to En­ ergy Technology: An Overview of Technologies and Funding Situations" (No­ vember 1982), p. 15. 29. Paul Maxwell, "Setting Priorities for Research and Technology," in Materi­ als in U.S. Competitiveness (Proceedings of the Eighth Biennial Conference on National Materials Policy, Federation of Materials Societies, 1985), p. 42. 30. "Japan: Managing the Industrial Miracle," High Technology, August 1985, pp.22-30. 31. National Academy of Sciences, High-Technology Ceramics in Japan, p. 34. 32. "Japan Focuses on Basic Research to Close Creativity Gap," Business Week, February 25,1985, pp. 94-95. 33. U.S. Department of Commerce, "A Competitive Assessment of the U.S. Advanced Ceramics Industry" (March 1984), p. 64. 34. Harvey Brooks, "Technology as a Factor in U.S. Competitiveness," in Bruce R. Scott and George C. Lodge, eds., U.S. Competitiveness in the World Economy (Boston: Harvard Business School Press, 1985), pp. 328-56. 35. Julius J. Harwood, "Market Opportunities for Advanced Ceramics" (Ad­ dress at the conference "A National Prospectus on the Future of the U.S. Ad­ vanced Ceramics Industry," sponsored by the National Bureau of Standards, July 10-11,1985). 36. "Panel on Ceramics Assesses Needs," American Ceramic Society Bulletin, August 1985, p. 1050. 37. Albert R. C. Westwood, "Advanced Ceramics: Challenges and Opportuni­ ties for U.S. Industry" (Address at the conference "A National Prospectus on the Future of the U.S. Advanced Ceramics Industry," sponsored by the National Bu­ reau of Standards, July 10-11, 1985). 38. Brooks, "Technology as a Factor in U.S. Competitiveness." 39. "Ceramics: Marching into the New Stone Age," High Technology, August 1985, pp. 50-52. 40. "Program Aims to Close Gap in World Ceramics Research," Research and Development, October 1985.

306 CANDICE STEVENS

41. Donald 0. Wood, "Progress in Ceramics Research for Cutting Tools in the United States, West Germany, U.S.S.R., Japan, and Sweden," Materials and Soci­ ety, vol. 8, no. 2 (1984), p. 295. 42. Kent H. Kohnken, "Energy Conservation-Vital in Today's Competitive International Marketplace," Industrial Heating, July 1983.

307 7 Fiber Optics: Technology Diffusion and Industrial Competitiveness Harvey Blustain and Paul Polishuk

Concern over the competitiveness of American industry has been ex­ pressed repeatedly over the past decade, a concern of which this volume is but one manifestation. Within the context of the more general question of how new technologies can aid in the revitalization of American indus­ try, this chapter explores the potential role of fiber optics. Fiber optics is a segment of the more general field of optoelectronics, which is defined as the production and use of electromagnetic radiation in the optical wave­ length range (10 nanometers [nm] to 1 millimeter [mm]) and its conver­ sion into electrical signals. Fiber optics, as its name implies, relies on the use of hair-thin glass or plastic fibers to transmit the radiation. Fiber optics can contribute to revitalization in two ways. First, fiber optics is a technology for which there is a growing worldwide market. Used initially and primarily in telecommunications, fiber optics is in­ creasingly turned to by telephone operating companies and administra­ tions as a powerful and cost-effective medium of transmission. These applications constitute an enormous market for U.s. products. Second, fiber-optic technology can improve competitiveness in the older, UsunsetH industries. Process control and remote sensing, for exam­ ple, are only two areas in which optical technology can play an important role in increasing productivity and reducing costs. Japan has been espe­ cially quick to exploit these possibilities. This chapter examines fiber optics, its applications, and the policies being pursued by the United States and Japan to realize its potential. The first part of the chapter provides an overview of fiber-optic technology: what it is and how it works. Emerging technological trends and the ad­ vantages offered by fiber optics over competing communications media constitute the primary focuses of this section. The succeeding sections discuss how and where the technology is being applied in the telecom­ munications network and offer an overview of other applications. The chapter ends with a comparison of the technology diffusion process in

308 FIGURE 7-1

A FIBER-OPTIC SYSTEM

Transmission medium (fiber cable) Electrical 1-1\ n ~ Electrical input ~ output Light Drive circuitry Restoration circuitry

SOURCE: Information Gatekeepers, Inc.

Japan and the United States. The central theme of this section is that gov­ ernments must playa critical role in the rational development and diffu­ sion of technologies.

A Fiber-optic System

Fiber optics involves the transmission of data in the form of light along a glass filament. Unlike conventional electronic systems, which carry a continuous flow of electrons, fiber-optic systems transmit digitally en­ coded pulses of light. These signals, originating from a laser or light­ emitting diode (LED), travel along a hair-thin fiber at the speed of light and are picked up by a diode receptor at the other end. On reaching their destination, the light waves are reconverted to sounds and images and are processed by conventional techniques. The development of fiber­ optic technology has been synergistically dependent on advances in a number of related sciences-microprocessing, large-scale integration, and software. Figure 7-1 shows the outlines of a basic fiber-optic system. Regard- less of the uses to which it may be put, the basic elements are the same. • transmitting electronics and a light source • a transmission medium consisting of a cable with one or more fibers • a light detector and receiving electronics • methods to connect optical fiber cables to electronics This is only a simple point-to-point architecture. More complex ar­ chitectures are possible using optical switches, couplers, and so on. This very simplified outline of a fiber-optic system does not, of course, imply a simple or stagnant technology. To appreciate the later discussion on ap­ plications, one must recognize just how new the technology is. The trans­ mission of information over ultrapure glass fibers was proposed as a real 309 FIBER OPTICS

possibility only in 1966. In the early 1970s Corning reported the produc­ tion of a fiber with sufficiently low signal loss to warrant further work on applications. Since then fiber optics has evolved through three genera­ tions of technology and is on its way to becoming a billion-dollar industry in the United States.

Technological Trends in Fiber Optics. The rapid development of fiber­ optic technology is both a blessing and a curse for system designers, users, and industry observers. We see, on the one hand, constant im­ provement in the performance characteristics of components and sys­ tems and, on the other hand, considerable confusion in the industry. The half-life of information is extremely short, six months being the average time within which literature becomes out of date. Hardware and equip­ ment suffer rapid obsolescence as well, but the tremendous investment required to install a system extends its useful life. No quick survey could do justice to the range and complexity of developments in fiber optics. A cursory review of the primary work going on in key areas, however, shows the ferment occurring in the industry. In the area of ligh t sources, progress is occurring in a number of aspects . • Use of devices that will increase wavelengths from 1300 to 1500 nanometers. This shift will result in longer transmission distances of sev­ eral hundred kilometers or more without repeaters. • Transmission at higher bit rates. Historically (to the extent that fiber optics has a history), the rate at which information can be transmitted has doubled annually. Present telecommunications systems operate at 560 megabits (millions of bits) per second; this speed will increase to 2.4 giga­ bits (billions of bits) per second by 1997. • Use of new materials. The replacement of silicon by gallium arsenide and other, more complex semiconductor compounds will increase the speed at which systems can operate. • Narrowing of spectral line width. Reducing the spectral range of the light emitted by a light source makes it possible to stack and combine (Umultiplex") a greater number of message channels of different wave­ lengths on the same fiber, increasing the capacity by the number of wave­ lengths used. • More widespread use of LEDs. An alternative to lasers for optical transmission, LEDs have the advantage of lower temperature sensitivity, higher reliability, simpler circuitry, and lower cost. Significant improvements are also being made in optical fibers. • Use of new materials. Most fibers are made of silica glass. Attenua­ tion levels having already reached their lowest theoretical levels, fibers

310 BLUSTAIN AND POLISHUK are being developed that will allow for operation at longer wavelengths and lower signal loss. Fiber of zirconium fluoride, for example, will allow for a repeaterless link of 8,000 kilometers at 2550 nanometers. • New production processes. New methods of producing optical fi­ bers are expected to result in lower costs. Nippon Telephone and Tele­ graph, for example, recently announced a new vapor axial deposition (VAD) process that lowers the cost of production to one-tenth that of the conventional VAD process. The sensitivity of detectors, traditionally one of the least glamorous components of fiber-optic systems, has been limited by the use of silicon and their dependence on techniques of direct detection. Improvements in performance (absorption, quantum efficiency) can be achieved through the use of germanium, indium gallium arsenide phosphide, and other more sophisticated materials. Increased sensitivity is also being attained through the use of coherent detection, in which the light emerging from the fiber is mixed with a beam from a similar laser at nearly the same wavelength that functions as a local oscillator in the receiver. The result of this process-similar to that used in FM radio-is an intermediate fre­ quency suitable for amplification and tuning. All communications systems rely on the multiplexing (combining) of signals so that they can share a common transmission medium. The use of wavelength-division multiplexing-in which different streams of sig­ nals are carried on multiple wavelengths-currently has limited applica­ tion. By the end of the decade scores of wavelengths will be carried on a single fiber, effectively increasing by that number of wavelengths the car­ rying capacity of the fiber. Fiber-optic systems now require conversion between optical and electronic operations at several points. These conversions are costly, both in signal loss and in expense for additional equipment. Developments are occurring that will result in the near future in all-optical repeaters, switches, and computers.

Advantages of Fiber Optics

To understand the significance of fiber optics as a new technology, we must appreciate the advantages it offers over such other transmission media as copper wire pairs, coaxial cable, microwave, and satellites.

Capacity. Bandwidth, or the amount of information that can be sent over a transmission medium, has always been regarded as a scarce resource. The early telegraphy of dots and dashes could transmit only one message at a time. The first telephone could also send only one voice circuit,

311 FIBER OPTICS

though at the faster rate of normal speech. Since then progress in tele­ communications has entailed advances in the amount of signal (whether analog or digital) that could be transmitted over a medium. • The 1961 introduction by AT&T of T1 transmission lines allowed twenty-four digitized voice channels of 64,000 bits (64 kilobits) to be multiplexed over a single copper wire pair. • Coaxial cables, first developed in the 1940s, can now carry up to 8,000 voice channels. • Microwave highways can transmit 32,000 voice channels. • The twenty-four transponders on a satellite can together transmit up to 48,000 voice channels. Despite the development of these new and more powerful media, the volume of signals that could be transmitted has always been limited. This consideration has been a factor in the design of communications net­ works and in the kinds of services that could be offered. This limitation has proved to be particularly acute since the development of new services-such as facsimile, video teleconferencing, and bulk data transmission-that require large amounts of bandwidth. A particular bottleneck has been in "local distribution,H or that part of the network closest to the residential or business subscriber. Relying on twisted copper wire pair or coaxial technology, this segment has a very narrow bandwidth and can funnel signals only at relatively slow speeds. By contrast, fiber optics has the potential to offer unlimited bandwidth. In the late 1970s optical systems were capable of transmitting at the rate of 45 megabits per second (Mbps), or the equivalent of 632 voice channels. Present systems routinely operate at 565 Mbps, or 8,064 voice channels. By 1989 commercially available systems will transmit at 1.2 and then at 1.8 gigabits per second (Gbps) (see figure 7-2). The research trend has been a doubling of line transmission rates every year, and there is every indication that this trend will continue. Reports coming out of research laboratories are looking toward the realization-and eventual commercialization-of tera­ bit systems, transmitting trillions of bits per second. The knowledge that a pair of optical fibers can transmit many bil­ lions or even trillions of bits per second must be coupled with the realiza­ tion that cables now contain up to seventy-two pairs of fibers; cables with even more fibers are also, of course, possible. Techniques are being devel­ oped that will allow a single fiber to transmit light in both directions (du­ plex operation), thereby doubling the bandwidth of an optical cable. Moreover, each fiber now carries light signals of only one wavelength. Fu­ ture wavelength-division multiplexing will allow signals of several hun­ dred, potentially thousands, of wavelengths to be transmitted simultane­ ously over a single fiber pair.

312 FIGURE 7-2

OPERATIONAL LINE TRANSMISSION RATES, 1981-1990 Line rate (megabits per second) 5,000

4,000

SOURCE: IGI Consulting (1986).

Trillions of bits per wavelength times hundreds of wavelengths per fiber times hundreds of fibers per cable-for the first time engineers and network designers are facing the prospect of unlimited bandwidth. This Hscarce resource" is on its way to becoming a virtually limitless good, with vast possibilities for new applications and services.

Low Signal Loss. Although electrical signals must be boosted every two or three kilometers, recent advances in light-wave technology allow for transmission over several hundred kilometers without repeaters. Fiber's low attenuation makes it an excellent medium for long-distance routes and explains why so many of the new and established long-haul tele­ phone carriers are scrambling to construct fiber-optic networks. Coming generations of undersea telecommunications cables will also be fiber optic. Like bandwidth and many of the other advantages outlined here, the low attenuation offered by optical fibers has not even begun to reach its limit. The use of longer wavelengths (2 to 10 microns) and the develop­ ment of new low-loss heavy metal fluoride fibers promise unrepeatered distances of thousands of kilometers.

313 FIBER OPTICS

TABLE 7-1 COMPARISON OF COAXIAL AND FIBER-OPTIC CABLES

Coaxial Cable Fiber-optic Cable

Range (km) 8-64 8-64 Data rate (Mbps) 19.6-2.3 19.6-2.3 Repeaters 19-39 0-7 Cable cost (dollars) 7,000-56,000 9,000-72,000 Repeater cost (dollars) 15,000-36,000 0-5,600 Total link cost (dollars) 22,000-92,000 9,000-77,600 System weight (kg) 1,100-8,700 280-1,900 Transportation Four two-ton trucks One two-ton truck

SOURCE: U.S. Army, Fort Monmouth, N.]. (1980).

Size and Weight. Compared with copper wire and coaxial cable, optical cables offer a tremendous advantage in their reduced size and weight. A copper wire cable capable of transmitting 36,000 voice channels has a di­ ameter of 7.S centimeters and weighs 11 kilograms per meter. An optical cable transmitting 50,000 voice circuits has a diameter of only 1.25 centi­ meters and weighs only 1.2 kilograms per meter. As shown in table 7-1, the weight and size savings of optical over coaxial cables are also significant. Their reduced size and weight make optical cables ideal for several applications. • In urban areas the growth of the telephone network has led to con­ gested conduits and ducts. Constructing new ducts costs as much as $65,000 per mile; optical cables offer a means of using existing space much more efficiently. • The military is applying fiber optics in its tactical systems, where the lower transportation needs make fiber particularly attractive. It has been estimated, for example, that replacing copper wires with optical fibers can take one ton off the weight of a B-1 bomber. • Fiber optics is being used in building construction not only to meet the communications needs of tenants but also to reduce the weight and space requirements of cables.

Immunity from Interference. Optical signals are immune from radia­ tion and electromagnetic interference from lightning, cross talk, motors, or power lines. They also exhibit stability in high-temperature environ­ ments. These features make light-wave systems very desirable in a vari­ ety of industrial and military applications.

314 BLUSTAIN AND POLISHUK

Security. It is extremely difficult to tap into a glass fiber without detec­ tion. This feature makes fiber an ideal medium for applications requiring confidentiality and security.

Compatibility with Digital Technology. The telephone network was designed to transmit the human voice in analog form, that is, as continuous and modulated waves of electromagnetic energy. For dec­ ades this system was perfectly adequate since voice communication was viewed as the primary, if not the only, use of the telephone and telephone network. Digital technology, based on the D's and l's of computer language, offers several clear advantages over analog transmission: it is more efficient and cost effective; thanks to large­ scale integration, it permits the use of smaller switching machines that require less space and power; and it is more reliable and requires less maintenance. When computers began to communicate with one another, the digital information was transformed into analog form so that it could be transported over the existing analog network. As telecommunica­ tions traffic increasingly consisted of digital data sent to and from computers, it became more efficient to transmit over an all-digital net­ work. This eliminated the costs associated with converting signals from digital to analog and back as they moved through the system. With the rapid evolution of digital technology over the past three dec­ ades, the trend has been toward the transmission of voice, data, and video signals in digital form. The telephone operating companies are planning for eventual con­ version to an all-digital network. The state of Washington is expected to be all digital by 1988; Southern Bell is anticipating total conversion by 1990. All communications technologies can transmit digital signals. Yet with its on-off pulses of light, fiber optics is the natural medium for digi­ tal transmission.

Reliability. Offering greater reliability and requiring less maintenance than other transmission media, fiber-optic components and systems have longer economic lives. Lasers, for example, can operate without faulting for 1 million hours, the equivalent of over 100 years. Eliminating excess repeaters also enhances reliability.

Modular Design. Each component of a fiber-optic system can be up­ graded individually without overhauling the entire network. The techni­ cal capabilities of the fibers installed today will be adequate for components, such as faster lasers, that are not yet developed or commer-

315 FIBER OPTICS

cially available. Such new techniques as wavelength-division multi­ plexing and duplex operation can also be instituted without a change in the cable infrastructure.

Ease of Installation. Although splicing and connecting optical cable at one time presented a major hurdle, the barrier has been largely over­ come. New cable and connector designs have made for more routine in­ stallation, and a new generation of trained personnel is acquiring the necessary expertise.

Telecommunications Applications of Fiber Optics

The primary application of fiber optics is and for the foreseeable future will be in telecommunications, an industry that in the United States was until recently virtually synonymous with the Bell system. Over the past twenty years, however, especially since the 1984 divestiture, the market has been characterized by a greater variety of services and service pro­ viders. Examining the ways in which fiber optics has been applied throughout this industry illustrates one set of paths through which the technology is being diffused. Here we discuss four segments of the tele­ communications industry: long-distance carriers; telephone operating companies; alternatives to the public operating companies (bypass); and private networks.

Long-Distance Networks. Because of deregulation both new and estab­ lished long-haul common carriers have started major route construction programs. A considerable portion of the new routes will consist of fiber­ optic cable. Sixteen companies are currently operating or planning na­ tional or regional long-distance networks. These range from AT&T Communications, with its ubiquitous network, to Laser-Net, which is limiting its network to Florida and Georgia. Between 1984 and 1990 the fiber optics in AT&T's network will in­ crease from 10 to 41 percent of total route miles. This will be at the ex­ pense of microwave (which will decrease from 33 to 25 percent), copper wire (35 to 20 percent), and satellite (12 to 4 percent). During the samepe­ riod the share of fiber in MCI's network will rise from 1 to 60 percent. We estimate that by 1988 almost 50,000 miles of long-distance optical cables will have been installed at a cost of approximately $6 billion. Between ad­ vances in optical technology and the completion of new fiber networks, the end of this decade should witness a fivefold or sixfold increase in long-distance communication capacity in the United States.

Telephone Operating Companies. Before divestiture local service was

316 BLUSTAIN AND POLISHUK provided by a unified Bell system and by 1,400 independent operating companies. Since 1984, however, the Bell network has been divided into seven regional holding companies, within which twenty-two Bell operat­ ing companies provide service. The telephone companies were among the first to recognize the advantages of fiber-optic technology, particu­ larly its high bandwidth, low attenuation, and small size and weight. Since the mid-1970s they have been vigorously installing optical cables and devices in the two major portions of their networks: interoffice trunking and the local loop.

Interoffice trunking. The trunking plant connects central offices in the same or in different urban locations. About 1976 the telephone companies discovered that fiber optics offers a reliable, cost-competitive, high-cross­ sectional medium of transportation. Just as important, optical cables are smaller and better suited to the crowded underground conduits. An indication of the rapid migration of fiber optics into trunking is provided by the Copper Development Association, which in a 1981 study predicted a 20 percent penetration of fiber optics into new trunking instal­ lations by 1985. Within three years the association had changed its mind; in a 1984 report it predicted that 100 percent of new trunking installations would be optical-a prediction that has in fact been realized. 1 The use of high-capacity fiber allows all links in the network to carry heavy loads of traffic; the trunking architecture can thus follow a ring configuration rather than its traditional hierarchical structure. Trunking rings, analogous to ring networks in computing, facilitate distributed control and the sharing of expensive equipment. New York Telephone's Ring around Manhattan and Boston's Pegasus were two early ring proj­ ects, and by the 1990s most u.s. cities will probably link their switching offices with fiber rings.

Local distribution. The local loop-which accounts for over $40 bil­ lion of the Bell operating companies' investment, or about 49 percent of their total assets-consists of two parts. The feeder portion of the loop ex­ tends from the local central office to a concentration and branching point. The distribution loop extends transmission from the branching point to the individual subscriber's home or business. Since the early 1960s feeder loops have consisted of digital sub­ scriber carrier systems, also called Tl carriers. These lines multiplex up to ninety-six voice channels at an aggregate transmission speed of 1,544 megabits per second. Until recently these carrier systems used copper as their transmission medium. Now, however, significant advantages are being realized through the use of fiber: greater bandwidth, allowing many Tl signals to be multiplexed over a single line; lower attenuation,

317 FIBER OPTICS eliminating the need for costly repeaters; and smaller cables, alleviating the overcrowding of ducts and conduits. In addition to these advantages, high-bandwidth fiber creates sav­ ings for the telephone companies. The operating companies extend feeder loops to new areas on the basis of anticipated demand; they do not wait for pent-up demand before installing them. The uncertainty of de­ mand means that excess capacity must be provided to ensure that the de­ mand is met. Feeder loops consequently have a low efficiency of use. Further, changing patterns of demand require that a company rearrange and reinstall a feeder line every five to seven years, an activity that costs up to $ 7 billion a year. The use of wide-band fiber, however, allows com­ panies to install a new feeder without worrying about future demand. That demand is met by changing the electronics at the central office or the remote terminal. The companies save money by having a feeder plant that is stabilized for much longer periods of time. As older copper feeder loops deteriorate, they are being replaced by optical fibers. Present feeder plant consists of 40 percent fiber and 60 per­ cent copper. As new transmission systems are installed, the proportion will be 80 percent fiber and 20 percent copper. By 1989 all digital carrier lines are expected to be fiber. The distribution loop constitutes the Nlast mile" of transmission-the portion of the network from the remote concentration point to the cus­ tomer's premises. Fiber in this segment is currently limited to high­ density links to heavy users of telecommunications, typically large businesses. One of the fastest growing markets for fiber optics is in metro­ politan areas, where telephone and private companies are competing to make direct optical connections to businesses requiring large bandwidth to meet their heavy communications needs. The extension of optical fibers to all households is a long-term activ­ ity but one that the telephone companies are confident will one day be ac­ complished. They anticipate that demand for wide-band services (shop­ ping and banking at home, entertainment, information resources) will justify the cost of replacing the copper distribution plant. Researchers at Bell Communications Research envision several tens of thousands of homes linked with fiber in a series of trials, followed by connections numbering several million per year.

Summary. The seven regional holding companies and twenty-two operating companies resulting from the divestiture of the Bell system, as well as many of the 1,400 independent telephone companies, are mak­ ing substantial investments in fiber optics throughout their networks. These companies were expected to spend over $579 million on fiber op­ tics in 1986.

318 BLUsTAIN AND POLISH UK

• By the end of 1985 Illinois Bell had over 18,000 miles of fiber in­ stalled in its network, up from only 8,000 miles at the end of 1984. • Ameritech planned to increase the amount of fiber in its network from 77,000 cable miles at the end of 1985 to 120,000 by the end of 1986. • Southern Bell, one of the more ambitious of the telephone compa­ nies, has set a goal of no copper in the local network by the year 2000.

Alternatives to the Public Operating Companies (Bypass). Bypass oc­ curs when a business avoids the local telephone exchange and establishes an alternative connection to long-distance or value-added services, to far-flung branches of its own firm, or to other kinds of facilities. One ef­ fect of deregulation has been a flood of companies competing to provide bypass services. A business might want to avoid the local telephone com­ pany for several reasons: improved services, cost savings, unhappiness over the local company's unresponsiveness, or greater control over com­ munications facilities. Whatever the reason, an enormous industry has emerged that is catering to the demands-and, to a considerable extent, creating the demands-of these businesses. Bypass does not depend on any particular technology, and bypassers are using the full range of communications technologies: satellites, mi­ crowave, coaxial cable, and fiber optics. Unburdened by an old installed plant that may be obsolete, these new providers can deploy the technol­ ogy best suited to the needs of their customers. Many bypassers, particu­ larly in metropolitan areas, are relying on fiber optics. The Chicago Fiber Optic Corporation, for example, is constructing a fiber network that will link its customers with other users, the point-of­ presence of long-distance carriers, and Illinois Bell's switched network. The New York Teleport is a satellite communications center and office park complex on Staten Island. When completed in 1990, the teleport's seventeen satellite dishes will be linked to a fiber-optic network that will extend from Princeton, New Jersey, to midtown Manhattan. Because of the bandwidth of fiber, businesses connected to the network will be able to transmit huge quantities of voice, video, and data around the country and the world. The aggressive marketing by bypassers, as well as the evident will­ ingness of the business community to purchase their services, has made the telephone companies nervous. This is understandable since a large proportion of their revenues comes from large businesses, the companies most likely to bypass their networks. New York Telephone, for example, derives one-quarter of its revenues from 1 percent of its business custom­ ers. Similarly, the Wisconsin Telephone Company derives 83 percent of its business revenues from 10 percent of its business customers. To counter the threat of bypass, many telephone companies have

319 FIBER OPTICS embarked on campaigns to provide light-wave facilities in metropolitan areas. In virtually every city in the country, telephone companies are in­ stalling fiber networks for use by business customers. We estimate that the metropolitan fiber optics market, $100 million in 1985, will grow to $400 million by 1990. In the aggressive competition for the hearts, minds, and pocketbooks of business customers, all parties-telephone compa­ nies and bypassers-are committed to optical transmission.

Private Networks. The public telephone operating companies and their competitors are not the only telecommunications providers interested in fiber optics. Many large companies are establishing their own optical net­ works to provide internal communications. Martin Marietta Data Systems Division, for example, installed a 10- kilometer fiber link between two of its facilities in Orlando, Florida. Operating initially at 45 megabits per second, the system was expected to satisfy the company's communications needs for the indefinite future. Network capacity was quickly filled, however, and the system has been upgraded to 565 Mbps. Other examples of private fiber-optic networks include Kodak's 405-Mbps network in Rochester, New York; Digital Equipment's network connecting twenty-two sites in Massachusetts and New Hampshire; Aetna Life and Casualty's system around Hartford, Connecticut; and forty miles of optical links connecting twenty Du Pont sites in New Castle County, Delaware. University campuses are also installing fiber networks. The Univer­ sity of Pittsburgh has constructed a fiber-optic local area network that connects fifty-four buildings. In addition to supporting 11,000 tele­ phones, the network will provide links among the campus's microcom­ puters, office machines, superminicomputers, and other devices. Across the state the University of Pennsylvania recently announced plans to develop an $8 million fiber-optic system that will link 10,000 campus work stations.

Forces Driving the Industry. The rate at which fiber optics has been in­ stalled in all segments of telecommunications networks has been nothing less than phenomenal. From a barely accepted technology fifteen years ago, fiber optics has evolved into an $800 million industry. This figure, though impressive, can only begin to estimate the size of the economy spawned by fiber optics. Along with manufacturers of the primary com­ ponents and systems are scores of service and product providers-from manufacturers of the lubrication that enables cable to be pulled through ducts to public relations and advertising firms, designers of test and mea­ surement equipment, and, of course, publishers and consultants special­ izing in fiber-optic markets and technology.

320 BLUSTAIN AND POLISHUK

What forces have made fiber optics such a successful technology? One set of explanations, obviously, is its outstanding performance characteristics. • For telephone companies the overcrowding of ducts may make fiber the only viable alternative. • For utility companies wanting to string their communications net­ works along power lines, the immunity of optical fibers from electromag­ netic interference makes them an ideal medium. • For the military the reduced transport costs associated with lower­ weight fiber overshadow strict cost comparisons with other media. • For government, military, and industrial applications where confidenti­ ality is a prime consideration, the security offered by fiber is unparalleled. Yet these performance factors alone do not account for the spectacular rate at which fiber has penetrated an industry that until recently had ap­ proached technological change very cautiously. Declining costs, competi­ tion, and the demand for new services also help to account for the rapid diffusion of fiber optics. Cost. Perhaps the most fundamental of the forces driving the indus­ try has been the steady decrease in the cost of components and systems. As one would expect with a new technology, the industry is experiencing rapid improvements in both technical capabilities and production pro­ cesses. Its steep learning curve is resulting in a 15 to 20 percent annual de­ crease in the prices of components and systems. The cost of optical fibers exemplifies this trend (see table 7-2). The conclusions to be drawn from the table are clear. Over this decade the op­ tical fiber industry will have experienced a forty-five-fold increase in the amount of cabled fiber used and a more than twenty-one-fold increase in the total value of the product. During the same period the unit cost per meter of optical fiber will have declined over 70 percent, and the per­ formance characteristics will have improved sharply. Similar trends can be discerned for other components as well-sources, detectors, connec­ tors, and so on. The continuing decrease in cost has meant an expansion in the kinds of applications for which fiber optics is cost efficient. In the tele­ phone industry, for example, the distance within the local loop for which fiber optics is economically justifiable (the Hproving-in distanceD) has been steadily declining. This has pushed fiber closer and closer to residential use. Competition. Another factor driving the telecommunications indus­ try toward the adoption of fiber optics is competition. Although the breakup of the Bell system has been the most dramatic of the steps toward 321 FIBER OPTICS

TABLE 7-2 CABLED OPTICAL FIBER MARKET, 1981-1989

Shipments Average Price ($ per Total (thousand km) cabled fiber-meter) ($ millions) 1981 80 0.69 55 1982 240 0.51 123 1983 455 0.43 196 1984 700 0.41 285 1985 1,200 0.33 400 1986 1,550 0.28 554 1987a 1,600 0.25 680 1988a 1,550 0.22 910 1989a 1,500 0.19 1,170 a. Estimate. SOURCE: IGI Consulting (1986). deregulation, it was only the culmination of a series of moves designed to foster greater competition in telecommunications. From the 1956 consent decree between AT&T and the Justice Department, through the 1968 Carterfone decision, to the evolving Computer III inquiry, the courts and the Federal Communications Commission have been actively involved in promoting greater competition. These actions and decisions have brought about an increased com­ plexity and diversity in nearly every segment of the telecommunica­ tions industry. • A number of carriers are vigorously trying to position themselves in the long-haul market. • A diversity of equipment for customers' premises is now being of­ fered by a wide range of suppliers. • New services based on new technologies, such as cellular radiotele­ phones and digital termination services, are being offered. • Companies are offering businesses a wide array of enhanced and value-added services. • Purveyors of private branch exchanges and local area networks are competing to install entire telecommunications systems. • Specialized common carriers are operating at the national, regional, and state levels. Competition has been particularly intense in the telephone service industry, where private providers are offering alternatives to the public switched network. "Bypass" has meant more than just alternative means

322 BLUSTAIN AND POLISHUK of acquiring plain old telephone service (POTS). Deregulation has also affected the kinds of services provided and has thus stimulated the de­ mand for fiber optics.

The demand for new services. Before deregulation the monopolies held by the telephone companies offered little incentive to provide more than POTS. For years the companies could afford to introduce changes at an orderly, controlled, even leisurely pace. There was virtu­ ally no competition to encourage innovation, and dissatisfied users had nowhere else to go. Since deregulation, however, the situation has changed dramatically as competitive forces have been unleashed. The emergence of new suppliers and carriers has spawned a drive for new services and new networks. Users of telecommunications are now being offered a smorgasbord of services: videotext, videoconferencing, digital facsimile, electronic mail, data processing, store-and-forward, and a multitude of others. Many of these services transmit extensive amounts of information, which requires the use of a broad-band medium such as fiber. To provide these services, telephone companies and bypassers alike are rushing to install optical connections direct to their customers. Fi~r is often being installed because it is the most cost-effective and future-proof way to pro­ vide the bandwidth needed to support the desired services. Sometimes, however, it is being installed simply because the customer wants and ex­ pects it. The present environment of frenzied competition has fostered a market psychology in which fiber optics is installed even though the eco­ nomics of the situation may not justify it. These factors-cost, competition, and consumer demand-are driv­ ing telecommunications in an unprecedented way. The forces of competi­ tion and demand are occurring at a time when a new technology, fiber optics, is available to meet the needs imposed by those demands.

Other Applications of Fiber Optics

Although telephony is and will remain the largest market for fiber-optic technology, other applications are emerging and becoming increasingly important. These include the military, sensors, local area networks, medi­ cine, and automobile production.

The Military. The Defense Department's principal rationale for using fiber optics is essentially the same as that of commercial telecommunica­ tions users. Of special interest are the features of low weight, small size, immunity from interference, and security. Military planners and system designers quickly realized that using light for signal transmission could 323 FIBER OPTICS circumvent many of the logistic and security shortcomings inherent in conventional copper cables. By the mid-1970s the early efforts sponsored by the military re­ search laboratories and jointly carried out in industry began to show clearly that optical fibers could be used effectively to improve the strate­ gic and tactical capabilities of the military. A recent eight-volume study of military fiber optics by IGI Consulting described 243 systems em­ ploying optical components. 2 Only 10 percent of these systems have reached the production stage, an indication of the future wave of fiber­ optic systems that can be expected. These military systems fall into five broad areas of application. • fixed plant-including telephone systems, local area networks, video networks, satellite earth station entrance links, computer intercon­ nections, security systems, and air traffic control • tactical communications-including field communications centers, air-deployable battlefield links, jeep-mounted cable systems, air traffic control, and tethered weapon systems • mobile platform-including airborne and shipboard systems such as weapons, communications, and radar interconnection • strategic communications-including weapon systems interconnec­ tions and communications • sensors-including underwater detection, missile guidance, radia­ tion detection, and temperature, strain, flow, and torque monitoring While all these systems take advantage of fiber optics, they use them in varying degrees. Tactical systems, which require high mobility, benefit from the size, weight, and security advantages offered by fiber cables. Base communications, however, which need not be military qualified, use the performance characteristics of wide bandwidth, larger repeater spacings, security, and immunity from electromagnetic interference. In the 1980s high-technology components, a category that includes fiber optics, have gained increasingly large shares of total defense spend­ ing and now constitute approximately 40 percent of the appropriated funds for hardware and research. From IGI's analysis of Defense Depart­ ment plans, we project that spending on fiber-optic components and sys­ tems by the military will increase from $109.5 million in 1985 to $473 million by 1990.

Sensors and Process Control. Fiber optics is assuming an increasingly important role in sensing and process control, particularly in hostile envi­ ronments where the use of electrical signals is hazardous. Three exam­ ples can serve to illustrate the various uses to which fiber-optic sensors are being applied.

324 BLUSTAIN AND POLISHUK

First, fiber optics has been used to detect cracks in a number of mate­ rials. When a fiber is bonded to the surface of a structure, any crack in the material creates a crack in the fiber resulting in measurable attenuation. The sensitivity of this technique allows for the detection of cracks as small as 10 microns in steel welds and aluminum rivet holes and 20 microns in concrete. Second, a fiber-optic sensor has been developed by researchers at Tufts University that can detect and measure the quantity of contami­ nants in water. The sensor consists of a glass probe containing two optical fibers held at a precise angle to each other. As light is emitted from one fiber, the other reads the fluorescence created by various contaminants. The technique's developers anticipate that its use will lower measure­ ment costs by a factor of ten. Third, General Electric has developed a technique for delivering laser energy to a robot unit that can cut, drill, or weld. The use of lasers for these applications had been limited by the inability to transmit a high­ power laser beam through a fiber without destroying the fiber's protec­ tive cladding, a problem that has been solved by using a special kind of input coupler. With this technique a workpiece can be approached from any direction and angle. This technique also holds the promise of using energy from a single centralized laser at several work stations. Nearly sixty physical variables can be monitored through the use of fiber-optic sensors. The primary categories are mechanical (for example, displacement, pressure, flow), temperature, electrical, magnetic, nuclear, and chemical. Five main markets-as well as specific applications within each market-can be identified for fiber-optic sensors.

• the military-including fiber gyroscope, undersea detection, chemi­ cal analysis, nuclear radiation detection and testing, aircraft flight con­ trols, aircraft engine monitoring, and security systems • manufacturing-including automation, machine tool control, robotics, process control, inspection and metrology, and chemical instrumentation • the energy industry-including petrochemical, mining, electricity transmission and plant control, and wastewater treatment • consumers-including automobiles, electrical appliances, building management systems, and data-processing and office equipment • medical and chemical-including diagnostic equipment (blood flow and pressure), surgical support, and spectrometers

The major growth of sensors, like that of other applications of fiber optics, will occur in markets that have not yet been imagined or devel­ oped. The fiber-optic sensor market in the United States alone is expected to experience a 30 percent annual growth, rising from $20 million in 1983

325 FIBER OPTICS to $278 million by 1993. Though a relative novelty now, sensor applica­ tions are expected to constitute 10 percent of the fiber-optic industry.3

Local Area Networks. A local area network is a communications system that interconnects a variety of equipment through a shared medium and within a fairly small geographical area. It is the product of technological developments in the data-processing and communications industries. With the number of computers and intelligent devices increasing at a rapid rate, local networks provide a cost-effective means of providing users with real-time interactive work stations. Most local networks are wired with copper or coaxial cables, but in­ dividuallinks may be fiber optic when a particular section of a network requires extra security or runs through an area of high interference. Many persons in the industry are predicting that fiber will be the transmission medium of the future. One manufacturer estimated that the market share of fiber-optic local networks would surpass that of twisted wire pairs (but still lag behind coaxial cable) by 1988.4

Medicine. Lasers are being used in an increasing number of medical applications-cataract and other eye surgery, dentistry, treatment of cancer, plastic surgery. The market for medical lasers is $50 million to $70 million, with an annual growth rate of about 30 percent. One seg­ ment of this market entails the use of optical fibers for imaging, diagno­ sis, and therapy. Fiber-optic biosensors have been developed that can analyze blood photometricaIly. These sensors, called optrodes, consist of a smaIl cavity or porous substance where the solution under analysis coIlects and inter­ acts with a specific reagent. The sample is irradiated in laser light, which then returns up the fiber for analysis. Optrodes are being developed that can determine the pH and temperature of the blood, as well as its levels of oxygen, glucose, carbon dioxide, sodium, and potassium. In the treatment of heart disease and as an alternative to bypass sur­ gery, optical fibers can be used to remove the plaque from clogged arter­ ies. An optical fiber enclosed in a catheter is maneuvered to the site of the blockage, where a beam transmitted through the fiber blasts the deposit. Using the same catheter technique, Matsushita Industrial Equipment Company has begun marketing a surgical Nknife H that can burn away can­ cer cells.

Automobile Production. Automobile manufacture is an emerging appli­ cation for fiber optics. As more distributed components are connected by multicircuit wires carrying a very smaIl current, wire harnesses get larger, more complicated, more expensive, and more susceptible to electromag-

326 BLUSTAIN AND POLISHUK netic noise. One method of coping with this problem is to use a multi­ plexed optical communication system. Two plastic optical fibers can re­ place the more than thirty wires that would otherwise be needed to run through the space between the seat and the floor. Until recently plastic fibers could be used only for applications away from the engine. Now, however, plastic fibers are being developed that can withstand the high temperatures found in the engine compartment. Mitsubishi Rayon Company, for example, has just announced the pro­ duction of plastic fibers resistant to temperatures of 115 to 125 degrees Celsius under dry conditions. At least two major suppliers and automo­ bile manufacturers have already introduced fiber-optic links into their top-of-the-line cars: Amp Japan, in association with Nissan Motors; and Sumitomo Electric, in conjunction with Toyota. These fiber-optic applications are only the tip of the iceberg. As costs decline and knowledge and confidence in the technology increase, it will expand into a greater number and diversity of applications.

The Role of Government in Technology Diffusion

The routes through which technologies are generated and diffused are varied and often convoluted: workers in one industry have a problem that demands the search for a new technology; people move from one com­ pany or industry to another, bringing with them their knowledge and ex­ periences; corporate acquisitions and mergers may integrate teams of researchers using different approaches and techniques. Whatever form technological diffusion may take, it is important to recognize that the process is as much social as technical. Because people create and use tech­ nology, the transfer of technology involves most fundamentally not the movement of machinery and equipment but the transfer of ideas, knowl­ edge, and values. From the construction of rice terraces in Nepal to the introduction of the plow in the New World to the expansion of the U.S. space program, it is impossible to explain the development of technology adequately with­ out reference to the sociopolitical and cultural structures and processes that support that development. Any discussion of technology diffusion must appreciate the inherently social nature of technology. Ever since the construction of irrigation systems in Mesopotamia, one of the most important factors in the promotion, transfer, and accept­ ance of technology has been the state. As societies and institutions have become increasingly complex, governments have come to playa critical role in oversight and coordination. And as technology has become more complex and capital-intensive, the state has taken on a more important role as sponsor of technology development. As a new technology, fiber 327 FIBER OPTICS optics provides an excellent case study of how governments can affect the diffusion of technology. We focus here on Japan and the United States, two countries whose governments have adopted different ap­ proaches to the use of fiber optics to restore industrial competitiveness.

Japan. In Japan, as in the United States and elsewhere, fiber optics is gaining increased acceptance and application because of its inherent advantages as a communications medium. In 1985 more than 400 large­ scale optical local area networks were constructed, an increase of over 100 from the year before. Half were installed in steel and other indus­ trial plants and in electric power companies. Nippon Telephone and Telegraph (NTT) has embarked on a program to install optical fibers throughout the telephone network. Significant research and develop­ ment (R&D), systems development, and commercialization are occur­ ring on all fronts: telecommunications (including local area networks), equipment (including optical disks, laser printers, and electronic files), sensors and control systems, and components (including fibers, light sources, and photodetectors). Although projections about the Japanese optoelectronics industry vary, all agree that it will grow rapidly and will penetrate all sectors of the world market. The Tokyo-based Optoelectronics Industry and Technol­ ogy Development Association-the only such association in the world­ estimates the industry's average annual growth rate in monetary terms at 28 percent for the 1980-2000 period. Output for the 1984 fiscal year was $3.1 billion, an eightfold increase over the $394 million in fiscal 1980. The association projects that Japan's total production will reach $10 bil­ lion in 1990 and $57 billion by 2000. As in the United States, the Japanese optoelectronics industry has re­ ceived a boost from deregulation and increased competition in domestic telecommunications. Since April 1, 1985, when the NTT was privatized, several major competitors have entered the long-distance-transmission market. At least two of them plan to use fiber optics as an integral part of their networks. Teleway Japan is laying optical cables along the highways linking Tokyo, Nagoya, Osaka, and, eventually, Kyushu. Leased-line op­ erations were scheduled to begin in 1986 and telephone service a year later. Japan Telecom is installing optical cables alongside the Shinkansen high -speed rail link. When the network is completed in 1991, routes will link Tokyo, Osaka, Nagoya, Fukuoka, Morioka, Niigata, and possibly the island of Hokkaido. These projects will undoubtedly stimulate demand for optical fibers, cables, light sources, and other components. Although we should not underestimate the vision, tenacity, or entre­ preneurship of the Japanese private sector-or the invigorating effects of competition-credit for the growth is not theirs alone. The success of the

328 BLUSTAIN AND POUSHUK

Japanese optoelectronics industry has been achieved largely because of the organization of R&D in the industry. The efforts of the government, particularly the Ministry of International Trade and Industry (MITI), have been especially important. The 1985 MITI Handbook states that the ministry's ubasic policy" is to provide an environment in which the vitality of the private sector-the foundation of national technological development -can be maximized and to promote development programs in organic linkage between industry, universities, and the govern­ ment, in those areas where a high degree of financial and techni­ cal risks are involved and where the private sector alone finds it difficult to carry out development programs smoothly in spite of the economic importance and urgency of the programs. 5 The intervention of MITI is credited with the development and suc­ cess of Japan's semiconductor industry. According to a report issued in 1983 by the Washington-based Semiconductor Industry Association, tar­ geting of the Japanese industry by MITI ugave Japanese semiconductor firms an advantage over their U.s. counterparts, enabling them to ex­ pand their share of the world RAM [random access memory] market at the expense of U.S. semiconductor firms.H6 Among the steps taken by MITI to foster the growth and competitiveness of the industry were the establishment of industry-wide goals; the reorganization of the semicon­ ductor industry in accordance with those goals; the subsidization of a joint industry R&D effort including the issuance of loans that would be repaid only if the resulting technologies were profitable; the extension of other forms of financial assistance, including low-interest loans and de­ preciation and other tax benefits; the exclusion of foreign investment and control over the licensing of foreign technologies within Japan; and the protection of domestic producers through UBuy JapanH practices. A similar strategy is being pursued in Japan with regard to the opto­ electronics industry and its constituent fiber optics industry. By the turn of the century, worldwide sales in optoelectronics are expected to ap­ proach $100 billion, and the Japanese declared in 1981 thatthey intend to capture 40 to 50 percent of that world market. Four major activities can be discerned through which MIT!, along with other government agencies and industrial firms, intends to achieve its goals: market protection; spon­ sorship of research and industry organizations; widespread applications in almost every industry; and sponsorship of large national projects. Market protection. One method employed by the Japanese fornurtur­ ing the optoelectronics industry-and the one currently receiving most attention from the U.s. government, industry, and the press-is protec­ tion of the domestic market. The strategy is to secure the domestic mar-

329 FIBER OPTICS ket, refine production processes, reduce costs, and then, on the basis of the competitive advantage secured at home, capture a significant share of the world market. Defense is one area in which U. S. firms have been excluded from the Japanese market. While the Pentagon has expressed interest in obtaining Japanese technology, American companies are finding it difficult to sell to the Japan Defense Agency. Of the $11.7 billion Japanese defense bud­ get, only $28 million was spent on foreign electronics products. None of that amount was spent on light-wave equipment. 7 Protection of the Japanese market has provoked nervousness and hostility in some quarters, particularly among U.s. manufacturers who feel doubly squeezed-by Japanese competition at home and by exclu­ sion from Japanese markets. On January 10, 1986, the U.S. secretary of state and the Japanese foreign minister concluded a series of market­ oriented, sector-selective (MOSS) talks aimed at resolving trade differ­ ences. According to their joint statement, Hefforts in the telecommunica­ tions sector ... achieved a remarkable success, substantially resolving all the problems raised in the course of discussions." How remarkable that success is, of course, remains to be seen.

Establishment of goals and sponsorship of organizations. The mainte­ nance of American competitiveness in optoelectronics will depend on more than gaining access to the Japanese market. More deep-seated problems need to be confronted as well. In addition to providing protec­ tion for domestic firms, the Japanese government is instrumental in orga­ nizing and establishing priorities for the industry. Rather than let the market alone determine research priorities and the allocation of re­ sources, government and industry leaders together set goals for research, development, and commercialization. By fostering cooperative efforts among government, industry, and universities, all parties hope to avoid wasteful duplication of effort and to promote comprehensive and coordi­ nated development. One example of such broad-based cooperation is in the development of new semiconductor materials. The Japanese are convinced that future generations of semiconductors will be based on materials other than sili­ con. First, optoelectronic devices such as lasers or LEOs cannot be made of silicon because it does not possess the required technical characteris­ tics. Second, devices made of compounds of other materials operate much faster than silicon and with a lower dissipation of energy. For these reasons Japanese and other researchers are looking at com­ pounds made from elements selected from columns III and V of the peri­ odic table: binary compounds such as gallium arsenide (GaAs) or gallium phosphide (GaP); ternary compounds such as aluminum gallium

330 BLUSTAIN AND POLISHUK arsenide (AIGaAs); and quaternary compounds such as indium gallium arsenide phosphide (InGaAsP). Using these materials in the production of semiconductors necessitates the development of more complex pro­ cesses for growing crystals. Perceiving these materials as a key to future command of the market, the Japanese quadrupled their production of bulk gallium arsenide between 1982 and 1985 to eight tons a year­ enough for 10 billion lasers if all the material were used for that purpose. 8 As a result, the Japanese are likely to become the world's major commer­ cial suppliers of this critical resource. Much of the impetus and direction for this and other major R&D programs have been provided through research projects sponsored by MIT! and other government agencies. A major vehicle for this aid is the Agency of Industrial Science and Technology (AIST), which in 1966 ini­ tiated a National Research and Development Program, popularly known as the Large-Scale Project, one of nine such projects launched by MIT! in the early 1970s. Under the AIST umbrella several major projects have been undertaken, including new energy technologies, energy con­ servation, industrial and medical technologies, and regional technology development. Typically, these projects have limited lifetimes, and the work is conducted in both special government laboratories (basic and generic processes and technologies) and industry laboratories (systems and applications). One of the large-scale projects was the Optoelectronic Measurement and Control System, or Large-Scale Optical Project, designed to run from 1979 through 1986. The purpose of the program was to develop the com­ pound semiconductors, optoelectronic integrated circuits, and other ad­ vanced technologies that would ensure Japan's technical and market leadership well into the next millennium. Another important goal was to install a working system in a specific application-an oil refinery-to serve as a model of how new technologies can revitalize more established industries. MIT! has committed $75 million to this effort. When the proj­ ect ends, the continued input of funds by participating companies will probably increase the total resources by a factor of four. 9 The Ministry of Education and Culture is also committing funds through the sponsorship of university research. A key component of the project is the Optoelectronics Joint Research Laboratory, with a budget of nearly $80 million, where work is proceed­ ing in six areas deemed critical by government and industry leaders: bulk crystal growth; maskless ion implementation; epitaxial growth; applied surface physics; fabrication technology; and analysis and characteriza­ tion. The staff of fifty research engineers and physicists is drawn from the permanent staffs of private industry. After participating in the research, these people will return to their home companies to promote and guide 331 FIBER OPTICS the application of the new technology or process in systems development and commercialization. While the joint research laboratory is responsible for work on these basic technologies, additional work is being performed in other government and industry laboratories, much of it concerned with the design of complete systems. The overall objective of the Large-Scale Optical Project is to develop optical technology for measuring, monitoring, and controlling large vol­ umes of information in industrial and plant environments. Five subsys­ tems are being incorporated in the project, with R&D work on specific devices assigned to individual companies: • high-speed image-direct measurement, transfer, processing, and monitoring of fast-changing image data • high-quality image-collection, processing, transmission, and dis­ play of high-quality image data • high-speed data processing-reliable process control through the development of data collection and transmission systems • complex process control-simultaneous collection and transmission of multiple sources of data for flexible process control • data control-system technology for the development of ultra-high­ speed networks for overall control of the other functional subsystems In addition to industry cooperation achieved by working on government-sponsored research projects, coordination is attained through participation in industry organizations. Two associations are of particular importance: the Optoelectronics Industry and Technology De­ velopment Association (OITDA) and the Engineering Research Associa­ tion of Optoelectronics Applied Systems (ERAOAS). Founded by eleven of the largest industrial powers in Japan, the OITDA has grown to include over 200 companies, including almost twenty banks. The association's activities include long-term forecasting of the industry, tracking of optoelectronic technologies, research into the feasibility of new systems applications, demonstration of new sys­ tems development, research into the application of optoelectronics for the industrial sector, and standardization of components and systems. The OITDA also organizes an annual optoelectronics trade show. The show held in September 1985 attracted over 32,000 attenders and ninety-six companies. The purpose of the ERAOAS, which was formed in 1980 by MIT!, is to promote and coordinate research in optoelectronics in Japanese indus­ try. An ERAOAS brochure states: Nit is necessary to set up a systematic and efficient structure for research and development in government, in­ dustries, and academic circles." The organization's major activity is the operation of the Optoelectronics Joint Research Laboratory. The list of

332 BLUSTAIN AND POLISHUK members of the ERAOAS reads like a who's who in the Japanese opto­ electronics industry: Optoelectronics Industry and Technology Develop­ ment Association, Oki Electric Industry Company, Shimadzu Seisakusho, Sumitomo Electric Industries, Toshiba Corporation, Nippon Sheet Glass Company, Nippon Electric Company, Hitachi, Fujitsu, Fuji Electric Components Research and Development, Fujikura Cable Works, Furukawa Electric Company, Matsushita Electric Industrial Company, Mitsubishi Electric Corporation, and Yokogawa Electric Works. Sponsorship of large projects. In addition to protecting domestic mar­ kets, setting goals and priorities, promoting cooperation, and sponsoring basic research, the Japanese government to a great extent creates markets by financing large capital- and technology-intensive projects. Major funding for fiber optics and optoelectronics has come through the gov­ ernment's commitment to the Information Network System (INS), spear­ headed by the NTT. The INS was designed to meet the challenges of the uinformation-intensive society of the twenty-first century." The most am­ bitious of the national plans to develop a broad-band integrated services digital network (ISDN), the INS aims for full digital switching; integra­ tion of voice, text, data, and video services; and extension of optical fibers to all users. Completion of this program is not expected until the next century, but the NTT and MITI are engaged in a series of field trials and pilot proj­ ects designed to test the technology and public demand. lo Although these two organizations are often at odds with each other over leadership of sunrise industries and applications, they agree about the general direc­ tion they want to see Japan pursue. The field trials operated by the NTT and MITI have included Hi-OVIS (highly integrated optical visual infor­ mation system) (1972-1985), MIT!; visual information system for the textile industry in Osaka (1984), MITI; Yokosuka (development of business-oriented systems) (1980-1981), NTT; Mitaka (1984-1989), NTT; and new media development project (1985), MITI. The sums of money being devoted to these projects constitute an enormous investment in the optoelectronics and telecommunications in­ dustries. In 1984 some $7.2 billion was earmarked for the INS. Total spending by the NTT on the program is expected to reach $125 billion. I I Of this amount $8 billion to $13 billion will go for optoelectronics-by any measure a firm commitment by the government to the strong and sustained growth of the optoelectronics industry. Summary. The Japanese view optoelectronics and fiber optics as emerging industries that will become increasingly vital over the decades to come. Both government and industry are engaged in a concerted effort to develop technologies, applications, and markets. The Japanese are

333 FIBER OPTICS committed to long-term success and emphasize a coordinated, coopera­ tive, and systematic approach to technology diffusion. The most striking feature of this approach is its organization. Objec­ tives and plans are developed jointly by leaders of government, business, and academia. With all parties in agreement on fundamental goals, work proceeds systematically. This coordination allows for a rational R&D process that avoids much of the duplication and associated waste of re­ sources that accompany R&D efforts elsewhere. This cooperative ar­ rangement brings about greater communication between industry and government in Japan. Government officials are much more aware of re­ cent technological developments and can base their policies on a more so­ phisticated understanding of technology. Companies have easier access to public decision makers and (for better or for worse) can exert more in­ fluence on government policy. Another form of cooperation occurs in the joint research laboratories that affects the way in which knowledge is diffused. The aggregation of researchers and their return to their permanent companies are the pri­ mary means by which information and technology are transferred. What are diffused throughout industry are not bits of information about a proc­ ess or a technique but people who have learned all facets of a research problem and can transfer a corpus of knowledge back to the home com­ pany, which can use it to develop product lines. Research funds expended by the Japanese government are given with an eye to their eventual application and commercialization. As a member of the Japanese Technology Evaluation Program team has reported:

Most Japanese companies which accept Japanese government R&D funding are in an excellent position to apply the developed technologies to their expanding commercial markets. For exam­ ple, Fujitsu receives Japanese government funds for semicon­ ductor laser R&D (potential commercial application: high­ speed optical data links for their computer systems), NTT receives Japanese government funds for short and long­ wavelength laser R&D (potential commercial application: opti­ cal communication systems), and Sony receives Japanese gov­ ernment funds for visible laser R&D (potential commercial application: optical video and audio disc players)Y

Assured funding over a period of years provides desirable stability and continuity. Rather than being subject to the whims of sudden and short-term shifts in the marketplace, researchers can follow paths of in­ quiry laid out by technical forces. They can pursue technologies even when the size of the applications market would not justify the commit­ ment of resources. Although the commercialization of products and

334 BLUSTAIN AND POLISHUK dominance of world markets are long-term goals, the driving force in fiber optics development is the large domestic market, a market that is both protected and to some extent created by the actions of the government.

The United States. The development of the optoelectronics industry is characterized by a more diffuse R&D and commercialization process in the United States than in Japan. While there is some sharing of informa­ tion and cooperative effort, R&D by and large occurs in the laboratories and facilities of individual companies. Attempts in the fiber optics and optoelectronics industries to foster greater cooperation have not worked as well as their sponsors have hoped. The Battelle Memorial Institute's cooperative research program in light-wave technology was intended as a means of sharing R&D in laser packaging. After declaring that seven companies would be needed to initiate the program, Battelle started last November with only six. One Department of Commerce official attributed the shaky start to the fact that U.S. businesses Udon't trust each other. They won't share time and personnel. H Another cause for concern has been the failure of many industries­ particularly the sunset industries-to apply new technologies in manu­ facturing. As the President's Commission on Industrial Competitiveness argued: Robotics, automation, and statistical quality control were all first developed in the United States, but in recent years they have been more effectively applied elsewhere. The Japanese have been the most aggressive in applying process technology, and the results have often been lower cost and superior quality products-attributes well accepted by both American and for­ eign consumers. The use of technology cannot be limited to Uhigh-techH indus­ tries. Mature industries can and should make better use of ad­ vanced technologies as part of their own renewal processes. There need be no distinction between high-technology and ma­ ture industries-only between industries that have taken ad­ vantage of technological advances and those that have not. 13 As we have repeatedly stated, fiber optics offers enormous advantages to industries in the areas of process manufacturing and sensing. The extent to which this technology is adopted will significantly depend on the good judgment of leaders in those industries. Another factor will be the role of the U.s. government in the diffusion process. Perhaps the most striking difference between Japan and the United States is the support provided by the two governments in the promotion 335 FIBER OPTICS

and development of the fiber optics industry. The U.s. government is certainly interested in developing a fiber optics industry that is at the forefront of R&D and commercialization and is competitive in world markets. Close examination of the policies pursued by the government, however, indicates a role that is often counterproductive to the achieve­ ment of that goal.

Government support for R&D. An analysis of the role of the U.S. gov­ ernment in fiber optics R&D consists largely of a list of what the govern­ ment does not do: it does not foster cooperation between industrial firms; it does not encourage the formation of industry associations; it does not set the research agenda (except for certain limited military applications); and it does not sponsor large-scale projects that would stimulate the dif­ fusion of fiber optics to other industrial sectors. Approximately one-third of all R&D funding by the federal government is spent in the 400 federal research facilities. With an $18 billion appropriation and employing nearly 185,000 scientists and engineers, these centers conduct work on everything from agricultural pest control to crime detection to astronomy to weapons development. Longstanding criticism of these laboratories concerns the ways in which their results reach-or, more accurately, do not reach­ commercial firms. Several studies, including a 1983 report by a panel of the White House Science Council, have decried the unresponsiveness of the federal laboratories to national needs. The 1980 Stevenson-Wydler Technology Innovation Act was introduced to improve the transfer of technology from national laboratories, to promote commercialization, and "to ensure the full use of the results of the nation's Federal invest­ ment in research and development.HI4 Further, much of the work being done under government auspices is not oriented toward commercialization or industrial competitiveness. The President's Commission on Industrial Competitiveness noted: "Roughly half of the total R&D done in the United States is funded by the Federal Government, which spends most of its money (about two-thirds) on defense and space programs. And in those two areas, any commercial spillover is not a prime objective.HIs This argument is valid for fiber optics. All three services have initi­ ated intense R&D programs to install fiber optics in a variety of applica­ tions. Facilities at the Rome Air Development Center, the Sacramento Air Logistic Center, Fort Monmouth, the Aberdeen Proving Ground, the Naval Research Laboratory, the Naval Sea Systems Command, and oth­ ers have committed millions of dollars over the short and long run to de­ velop and apply optical technology. The Strategic Defense Initiative (SDI) also depends heavily on optoelectronics and is expected to provide many

336 BLUSTAIN AND POLISHUK millions of dollars to the industry. Although all this military activity may contribute to national de­ fense, it does little to develop new processes or to promote the commer­ cialization of optical technologies. There will, of course, be some spillover and benefits for the commercial industry (especially in the de­ velopment of sensors), but by and large the technologies being used by the military are based on processes and products developed by industry. As the Commission on Industrial Competitiveness stated, "Industry is [today] the principal initiator of technological advances and Govern­ ment is a net user."'16 Protection of domestic markets. Another critical criterion of govern­ ment support for the development of the fiber optics industry (or any in­ dustry) is the protection of domestic markets. While this protection need not and should not extend to import restrictions, it is unseemly when, for its own applications, the government pursues foreign products at the ex­ pense of those produced by domestic industry. In 1983 the Japanese government decided that defense cooperation with the United States would be extended to include the transfer of mili­ tary technologies. As a preliminary step in identifying technologies of in­ terest to the United States, the Department of Defense sent teams of scientists and engineers to assess Japanese R&D facilities and programs. The first team was sent in the summer of 1984 to review Japanese devel­ opments in electrooptics and millimeter-wave technologies. The team re­ turned to the United States quite starry-eyed with what it saw. According to the team's 1985 report, members were impressed with how the companies visited have changed their corporate culture from that of mature, heavy industries, requiring large amounts of materials and energy to advanced information processing/communications/electronic type in­ dustries which require little imported raw material or energy. This transition could only have been accomplished by su­ perb technical, financial, and administrative management working in relatively close cooperation with government, fi­ nancial, and business organizations within Japan. Technical creativity in Japan may not have led to many Nobel prizes, but considerable creativity in management, financial, and government leadership has been exercised to create this mod­ ern day miracle,17 One result of the team's visit and the offer of Japanese military tech­ nology to the United States has been a series of moves by the Pentagon to purchase Japanese fiber-optic products. In March 1986 a Defense De­ partment team traveled to Japan to visit fiber-optic vendors. It is unclear 337 FIBER OPTICS what the purpose of the mission was and to what extent the Pentagon would encourage contractors to purchase Japanese products and technology. IS Needless to say, this flirtation with Japanese products has upset many domestic producers. The president of one optoelectronics firm, for example, wrote to a leading trade journal to deplore the government's noncompliance with federal acquisition regulations. With notable exceptions, the recent Department of Defense Federal Acquisition Regulation (FAR), Number 52.207-704, has had limited impact on the domestic optics industry.... The in­ tent of the regulation is clear. It is to be used to Hpreserve the do­ mestic optical manufacturing base by requiring that DoD components containing precision optics be acquired from do­ mestic sources." I hope that most readers will realize the impact to the optics industry from the above procurement require­ ments. It can save it from the same fate as so many other US in­ dustries facing extinction in the 1980's and 1990's due to overseas procurement policies by our own US government.19

It is still unclear how far this enchantment with Japanese technology will translate into hard sales. Over 90 percent of fiber-optic technology is developed by and for industrial and commercial interests, and the gov­ ernment has little coercive power to force companies to begin large-scale military production. Furthermore, the Japanese have expressed more en­ thusiasm for selling products than for transferring know-how. Still, the seeming preference by the U.S. government for Japanese products betrays an insensitivity to the requirements of a new domestic industry. Although the Pentagon justifies its interest in foreign products by claims of national security, the supposed comparative advantages of Japanese technology for defense do not equal the potential damages to the domestic fiber optics industry. Export promotion. Japanese industry and government have chosen fiber optics and optoelectronics for a major export drive. Their goal is to capture a major share of the world market by the end of the century. What about the U.S. government? What role is it playing in the promotion of U.S. exports? Although the government has established the machinery (primarily in the Department of Commerce) to help American firms sell their products overseas, the policies being pursued by the present admin­ istration largely frustrate those efforts. The most significant case is the barriers erected by our government to markets in the People's Republic of China. Burdened by one of the most outdated telephone networks in the world, China's leaders declared in 1984 that $3.7 billion would be spent by 1990 to upgrade and develop

338 BLUSTAIN AND POLISHUK the telecommunications network. Given the vast distances across China, one of the areas of particular interest to the Chinese is fiber optics. Their declaration instigated a rush by foreign firms to cash in on this lucrative market. The move to decentralize decision making in the procurement of systems and equipment added to the circuslike atmosphere as represen­ tatives of foreign firms zigzagged across China looking for export opportunities. In the search for markets in China, the United States has been left behind. According to a House Special Subcommittee on U.s. Trade with China, the United States accounted for 7 percent of the $10 million Chi­ nese market in 1977. In 1979 the U.s. share of the $134.5 million of equipment imported by China was 4.6 percent. By 1980 Chinese imports had doubled, but U.S. exports amounted to only 2.8 percent. Now, with the Chinese market nearing $500 million a year, the share captured by the United States hovers around 2 percent. 20 Although U.s. firms have expressed interest in vigorously pursuing this market, they have been held back by export controls imposed by their own government. The United States has made moves to liberalize trade with China, but a company attempting to consummate a deal with China faces significant obstacles. Even assuming that an item is not on the list of proscribed products, a prospective sale must be approved by the Com­ merce and Energy departments, which scrutinize the product for viola­ tions of export restrictions. This process can take up to two years. After that hurdle has been cleared, the company must also make an application to the Coordinating Committee for Multilateral Export Controls (COCOM), made up of representatives of Japan and NATO countries. By the time the deal is approved, it may be too late. Frustration with government blockage of trade with China has been expressed from a number of quarters. One of the more forceful state­ ments came from John D. Seiver, a representative of General Optronics, in testimony before the Technical Advisory Committee on Fiber Optics of the Office of Export Administration, U.s. Department of Commerce. In arguing specifically in favor of exporting 1.3-micron fiber-optic technol­ ogy to China, Seiver questions more generally the wisdom of invoking national security claims to exclude U.S. companies from that market. Long pigeon-holed as a potential adversary of the U.s., it is still categorized with the Soviet Union and Eastern Bloc as a poten­ tial adversary for purposes of export controls. This is an anti­ quated and dangerously outdated posture to be taken by the U.s. toward such an important trading partner. There are signs that the Administration is aware of this anachronism ... [but] the fact remains that the Defense Depart­ ment commitment to keeping China one or two generations be-

339 FIBER OPTICS

hind in specific technological fields-telecom and fibre optics among them-is a significant barrier to telecommunications trade. The Defense Department is apparently not content with fol­ lowing trends in U.5./PRC relations, and with Commerce De­ partment cooperation has embellished the anachronism with paradox-a level of political and military cooperation for nu­ clear power production and arms sales enjoyed only by our al­ lies alongside trade policy measures reserved for potential adversaries. 21 Despite indications that export controls to China are being modified, it is questionable to what extent U.S. firms can catch up with their foreign competitors. It may well be that the policies of the government have cre­ ated a severe handicap in the quest for a share of the world's most lucra­ tive market.

Conclusion

Fiber optics is still in its infancy. Analysts agree that the technology is in its radio tube stage of development, with the most significant prog­ ress (such as wavelength-division multiplexing and coherent commu­ nications) yet to come. Although fiber optics is currently used primarily in telecommunications, the technology of sending light through glass or plastic filaments is adaptable to a wide range of appli­ cations. Process control, remote sensing, manufacture, medicine, construction-in all these areas fiber optics can contribute to greater productivity and lower cost. By now it is a truism that older, more established, and more belea­ guered industries must adapt new processes and techniques that can en­ hance their competitiveness. Yet despite increasing awareness and sophistication about the technology, fiber optics has not diffused into older, more established industries at the pace warranted by its potential contribution. As one of the leaders in fiber-optic technologies, the United States has a tremendous opportunity to maintain and enhance its com­ petitiveness in world markets. Through the effective diffusion of this technology into other industrial sectors, the United States can recapture some of its lost advantage. That goal cannot be achieved, however, solely through faith in the ultimate triumph of market principles or American ingenuity. What is needed is a concerted effort to nurture the kinds of organizations and processes that can systematically achieve the desired results. To a signifi­ cant extent, this effort requires the active involvement of the government in formulating goals and coordinating industries.

340 BLUSTAIN AND POLISHUK

Notes

1. Copper Development Association, "Copper in Telecommunications," CDA Market Data, November 27,1984. 2. IGI Consulting, "Fiber Optics Developments in Japan: A Defensive Strate­ gic Analysis," 5 vols., 1984. 3. Jon Zilber, "Fiberoptic Sensor Market Development" (Paper presented at Second International Conference on Optical Fiber Sensors, Stuttgart, September 5-7, 1984), p. 177. 4. F. Ray McDevitt, HFiber Optic LANs in the United States," FiberLAN, Inc., September 1985. 5. Japan, Ministry of International Trade and Industry (MITI), H1985 MITI Handbook." 6. Semiconductor Industry Association, The Effect of Government Targeting on World Semiconductor Competition: A Case History of Japanese Industrial Strategy, and Its Costs for America (Washington, D.C.: Semiconductor Industry Associa­ tion, 1983). 7. George Faas, HJapan's Military Is Off Limits to Most U.S. Vendors," Lightwave (October 1985), pp. 38-39. 8. IGI Consulting, HFiber Optics Development in Japan." 9. W. E. Spicer, HOrganization of the Japanese Effort on Non-Silicon Based Opto- and Micro-Electronics," in Japanese Technology Evaluation Program, JTECH Panel Report on Opto- and Microelectronics (U.S. Department of De­ fense, 1985). 10. Harvey Blustain, Fiber Optics Broadband ISDN Field Trials (Boston: Infor­ mation Gatekeepers Consulting, 1985). 11. Yoshitatsu Tsutsumi, HMoving Ahead-at the Speed of Light: The Japa­ nese Optoelectronic Industry," Journal of Japanese Trade and Industry (April 1984), pp. 28-30. 12. Douglas M. Collins, HSynthesis of Compound Semiconductor Materials," in Japanese Technology Evaluation Program, JTECH Panel Report. 13. President's Commission on Industrial Competitiveness, Global Competi­ tion: The New Reality (Washington, D.C., 1985). 14. Paul A. Blanchard and Frank B. McDonald, HReviving the Spirit of Enter- prise: Role of the Federal Labs," Physics Today (January 1986), pp. 39-50. 15. President's Commission on Industrial Competitiveness, Global Competition. 16. Ibid. 17. Department of Defense, Electro-Optics Millimeter/Microwave Technology in Japan: Report of DoD Technology Team (May 1985). 18. Stephen Barlas, HPentagon Accelerates Pursuit of Japanese Fiber Technol­ ogy," Lightwave (November 1985), pp. lff. 19. Richard L. Sellers, HOn 'Domestic Procurement' of Optics," Lasers and Ap­ plications (December 1985), p. 100. 20. U.S. House of Representatives, Special Subcommittee on U.s. Trade with China, Committee on Energy and Commerce, HChina's Economic Development and U.s. Trade Interests," May 1985. 341 FIBER OPTICS

21. John D. Seiver, "Comments on Behalf of General Optronics" (Testimony before U.5. Department of Commerce, Office of Export Administration, Techni­ cal Advisory Committee on Fiber Optics, October 22, 1985).

342 Index

Aberdeen Proving Ground, 336 AiResearch, Automotive Products Absolute gauges, 33 Division, 303 Accelerator effect, 20 Air Force, 14,46,47, 72, 276 Accounting practices, barrier to Alabama, 211 technology diffusion, 14,66-68 Alcoa, 279, 297 Acetate fiber, 213 Alvord, Joseph Dana, 31 Acheson, E. G., 260 Amada Company, 76 Acrylic fiber, 214-15 American Ceramics Society, 299 Advanced ceramics, 277-307 American Counterattack: Plan Z, 1985 attitudinal barriers, 11, 299, 302 (Sasa),272 automotive applications, 9, 123-24 American Cutting Tool Manufacturers biological implants, 277 Association, 302 commercialization strategies, 7-8, American Machinist Inventory, 54 299-303 American Motors Corporation, 91 competitiveness, 288-89, 303-4 American Petroleum Institute, 271 conventional ceramics compared, American Society of Mechanical 256-57 Engineers, 29 cost limitations, 287-88 Ameritech,319 cutting tools, 269-71, 281, 282 Ames Manufacturing Company, 26 electronic components, 262, 264-69, Amp Japan, 327 280,282,284 Antitrust regulations, 295, 297 heatengines,272-76,283,284,301 A.D. Smith Corporation, 43 industrial adjustment, 277-84 Apparel industry. See Fiber, textile, and industrial applications, 262-65 apparel industry industry coordination, 294-99 Argonne National Laboratory, 291 magnetic components, 277 Arma Corporation, 48 markets, 264, 278-80 Arms manufacturing, 8, 23-28, 30 optical components, 276-77, 284 Army Department, 72, 73 production processes, 257-60 Army Materials Research Center, 291 productivity and performance Arnold, Horace (pseud. Hugh Dolnar), 34 improvements from, 280-82 Asahi Glass, 277, 278 raw materials used, 260-62 Ashburn, Anderson, 6, 9,14,19-85 reliability problem, 272, 284-86 Asia, 226. See also specific countries reproducibility problem, 272, 286-87 AT&T Communications, 277, 281, 283, research strategies, 14,289-94 312,316,322 sector importance, 255-56 Australia, 170, 173, 183, 198, 211, 280, 288 structural ceramics, 262, 264 Automated Manufacturing Research wear parts, 271-72 Facility, 73 Advanced Research Projects Agency Automatically programmed tools (APT), (ARPA), 275, 291 47, 72 Aerospace industry, 8-9,270,276 Automatic guided vehicles (AGVs), 61, 128 Aetna Life and Casualty, 320 Automation, 6, 11. See also Numerical Africa, 170, 183,226 control Agency of Industrial Science and automotive industry, 42-44 Technology, 331 ceramic sensors use, 268, 269 Aircraft industry, 8-9,45-47,54,270,276 flexible manufacturing system, 58-62

343 INDEX

machine tool industry, 40, 42-44 Baily, Martin, 236-38 textile industry, 45, 223-24, 232, 233 Baldwin Locomotive Works, 36 Automotive industry, 86-161 Ball bearings, 271, 272 automation, 42-44 Bankruptcy proceedings, steel industry, automobile weight reduction, 122 194-97,201,207 automotive suppliers, 87, 92-93, Barnett, Donald E, 12, 15, 162-208 97-98,109-10 Basic oxygen furnace (BOF) technology, ceramic cutting tools, 270, 271 173 ceramic engines, 9, 272-76, 283,284, Basic Technologies for Future Industries 293,301 program, 296 ceramic sensors, 269 Battelle Memorial Institute, 335 characteristics of, 93 Bearings, 271,272,301 chassis design developments, 120-21 Bell Communications Research, 318 computer-integrated manufacturing, Bell Laboratories, 277 140-41, 144-53 Bell telephone system, 316, 317 coordination and integration Bendix Aviation, 47 practices, 141-44 Beneficiation of iron ore, 166 current status, 86-87 Besly, Charles, 39 economic cycles, 100, 102, 110 Bethlehem Steel, 35 electric self-starter, 37-38 Bicycle industry, 11,33-35 electronic systems, 121-22 Billings, Charles, 28 fiber optics applications, 326-27 Biomedical implants, 277 future prospects, 87-89, 153-58 Black & Decker, 62 government policies, 94-95, 156-58 Blast furnace technology, 166 historical background, 90-91 Blustain, Harvey, 308-42 in ventory practices, 129-33 Bodmer, J. G., 23 Japanese competition, 87, 100, Boeing aircraft, 45 108-10,119,142 Boring machines, 22 Japanese development, 15, 95-99 Boston, 317 Japanese transplant companies, Bow drills, 22 109-10,155-58 Brazil, 170, 173, 180, 183, 191, 194, 197, just-in-time (inventory) technology, 198 117-18,125,128,129,133-40 Bridgeport Modell milling machine, 78, 79 labor relations, 13,93,98, 138-40 Britain. See United Kingdom machine tool industry relationship, Brown, J. R., 30 9-10,19,37-40 Brown & Sharpe, 30, 32, 38 manufacturer-supplier relationships, Bryan, James, 64 7,9-10,112-13,115-18,138, Bullard, E. P., 28 143-44, 149, 151-52 Bureau of Mines, 291 manufacturing cost, 104-8 Bushless Week, 81 market restrictions, 103-4 Bypass communication systems, 319-20, materials technology, 89, 122-24 322 oil shocks, 88, 102-3 power train technology, 119-20 Cadillac Motor Car Company, 32, 37-38 process technology, 89, 124-29 California, 109, 280 productivity and employment, Canada, 113, 165, 170, 183, 198,288 111-12 Cannon Company, 241 productivity comparisons, 106, 108 Capacitors manufacture, 268 product quality, 113-15 Carbide cutting-tool material, 40-42 product technology, 89, 119-22 Carboloy, 41 sector importance, 89-90 Carborundum Company, 260, 278 steel industry relationship, 9 Carrington, James, 25 structure of, 91-93 Carter, Byron, 37 technological development, 2-3, 11, Carter, Jimmy, 70 93-94,118-19 Carterfone decision, 322 trade balance, 100-102 Celanese Corporation, 279 wages, 106 Centennial Exhibition, 31

344 INDEX

Center for Manufacturing Engineering, 73 Computer III inquiry, 322 Centorr Associates, 279 Connecticut, 320 Centrally planned economies Contractor system, 32 steel industry, 168, 169, 175, 190 Coordinating Committee for Multilateral textile industry, 215, 226, 250 Export Controls (COCOM), 73,339 Ceradyne Company, 280 Coors Ceramics, 278, 297, 298 Ceramics industry. See Advanced ceramics Copper Development Association, 317 Ceramic Society of Japan, 295 Corliss engine, 31 Charles River Associates, 299 Cornell University, 298 Chemical Abstracts, 236 Corning Glass Works, 297, 298, 310 Chemical industry, 236-37, 241, 279, 281 Corporate average fuel economy (CAFE) Chicago, 166 standards, 102, 156 Chicago Fiber Optic Corporation, 319 Corporate structure, textile industry, Chicago machine tool show, 51, 52 241-43 China, People's Republic of, 338-40 Cost-reduction strategies, 13-14, 16, Chrysler Corporation, 91, 92, 104, 125, 67-68 137 Cotton cultivation, 213 Chrysler-Mitsubishi joint venture, 109 Cotton dust, 221, 240 Cincinnati Milling Machine Company, 39, Cotton production, 214, 220 47,60 Crystal Palace exhibition, 27, 31 Clark, Edward, 33 Cummins Engine Company, 275, 302 Cleveland Cliffs, 170 Cunningham, Frederick, 48 Clothing industry. See Fiber, textile, and Currency fluctuations, 16, 100-101, apparel industry 106-7, 244-45 Cluett Peabody, 241 Cutting tools, 269-71, 281, 282, 300-302 Coal sources, 165-66, 170-71, 183, 198 COCOM, 73, 339 Daimler-Benz, 272, 284 Cole, David E., 7, 86-161 Daini-Denden, 283 Colt, Samuel, 27 Defense concerns. See Military Colt's Patent Firearms Company, 26-28 applications; National security Commerce Department, 291, 296, 299, Defense Department, 14, 17n.5, 72, 73, 338-40 275,290,323-24,337-40 Communications industry. See Fiber optics Defense Industrial Reserve Act, 72 Compensation. See also Labor costs; Defense Science Board, 72 Wages Delaware, 320 Japanese system, 108 Delphi III, 124 Competitiveness, 1, 15-16 Delphi IV, 121 advanced ceramics, 288-89, 303-4 Depreciation, 66, 69-71, 243 automotive industry, 87, 100, 108-10, Design for manufacture (DFM), 128 119,142 Design of experiments (DOE), 127 steel industry, 171, 175-83, 194-97 Developing countries textile industry, 209-10 steel industry, 168, 175, 176, 190, 191 Computer-aided design (CAD) textile industry, 215, 229 automotive industry, 146-47, 152, Diamond turning process, 64 153 Diesel engines, 273-75, 291, 293 machine tool industry, 62-63 Digital Equipment Company, 320 Computer-aided manufacturing (CAM) Direct numerical control (DNC), 51-52 automotive industry, 147 Direct-reduced iron (DRI), 184 machine tool industry, 62-63, 72 Dolnar, Hugh (Horace Arnold), 34 textile industry, 233-34 Douglas aircraft, 45 Computer control, flexible manufacturing Dow Company, 279 system, 58-62, 73, 79. See also Drills, 22 Numerical control Du Pont Corporation, 91, 213, 219, 279, 320 Computer equipment industry, 283 Dyeing process, 231-32, 240 Computer-integrated manufacturing (CIM), automotive industry, 128, Eastern bloc countries. See Centrally 140-41, 144-53 planned economies

345 INDEX

Electric motors, 36-37 economic effects of technological Electric steel furnaces, 181, 198,204 change,244-49 Electronic communications technology employment figures, 209 (ECT), 148-50 fiber extrusion process, 218 Electronic Control Systems Company, 47 fiber texturizing process, 216-17 Electronic Data Systems (EDS), 151 government policies and regulations, Electronics industry, 262, 264-69, 280, 240-41, 243-44 282,283,300-301 high-performance fibers, 219 Employment. See also Job losses historical background, 7,210-11 automotive industry, 89-90 job losses, 247, 248 Japanese "permanent" system, 108, labor costs, 245-47 150 labor relations, 13 textile industry, 209 loom technology, 45, 227-30, 246 Energy costs, 245, 281-82 machine tool industry relationship, 29 Energy Department, 275, 290, 291, 303, mill operating schedules, 246-47 339 natural fiber production, 213, 214, Energy industries, 271, 281, 325 220 Engineering Research Association for nonwoven textiles, 232-33 High Performance Ceramics, 296 product desirability criteria, 211-12 Engineering Research Association of productivity, 215-16, 225-26, 236-38 Optoelectronics Applied Systems, regenerated fiber production, 211, 332-33 213,214,220 Engine technology, 9, 272-76, 283, 284, research and development, 234-38 293,301,303 spinning technology, 220-27, 245-46 England. See United Kingdom synthetic fiber production, 211, Environmental regulations, 240-41 213-20,252 Erosion machines, 21 trade imbalance, 244-45 Europe. See also specific countries trade policies, 243-44, 249-50 advanced ceramics, 256, 264, 269, Fiber optics, 308-42 272,288 advantages, 311-16 steel industry. See Steel industry automotive industry applications, textile industry, 211, 215, 217, 218, 326-37 226,227,235,238,250 bandwidth capacity, 311-13 Export Administration, Office of, 339 basic system, 309-10 Export controls, 14, 73-74, 339-40 bypass systems, 319-20, 322 Export-Import Bank, 74 cable size and weight, 314 Export loans, 74 ceramic optical components, 276, 283 compatibility with digital technology, Factory system, 24 315 Fanuc Company, 52, 56-58 cost factors, 314, 321 Fasteners, 271 future prospects, 340 Federal Communications Commission, 322 installation ease, 316 Ferranti Company, 59 Japanese strategies, 308, 328-35, 338 Fiat, 284 local area networks, 326 Fiber, textile, and apparel industry, long-distance networks, 316 209-54 low signal loss, 313 adjustment strategies, 11,212,213, medical applications, 326 249-52 military applications, 314, 321, 323, apparel manufacture, 213, 233-34 325,336-38 automation, 45, 223-24, 232, 233 modular design, 315-16 capital investment, 238-41 private networks, 320 ceramic fibers, 279 reliability, 315 competitiveness, 209-10 sector importance, 8, 308-9 corporate structure, 241-43 sensors and process control cultural factors, 13 applications, 324-26 dyeing and finishing processes, signal immunity from interference, 231-32 314-15

346 INDEX

system security, 315 coordination and integration technological trends, 310-11 practices, 140, 146, 151 telecommunications applications, exclusion from Japanese industry, 95 316-23 industry structure, 91, 92 telephone service, 315-19, 322-23 JIT manufacturing, 137 U.S. strategies, 335-40 opposition to trade restraints, 104 Fitch, Charles H., 23, 26 research and development Flexible manufacturing systems (FMS), 10, expenditures, 94 58-62, 67, 73, 79 General Numeric, 57 Florida, 316, 320 General Optronics, 339 Flynn, Michael S., 7, 86-161 Georgia, 211, 316 Ford, Gerald R., 70 Germany, Federal Republic of (West), 76, 80 Ford, Henry, 92 advanced ceramics, 272, 284, 288, Ford Model T cars, 38, 40 298 Ford Motor Company, 39, 40, 45, 95, 109, steel industry, 165, 167, 172, 177-80, 138, 140, 157 194 advanced ceramics applications, 269, textile industry, 217, 226, 244, 246, 251 271, 275, 284 Giddings & Lewis, 47 automation, 43-44 Gleason, William, 28 coordination and integration Goss Printing Press Company, 48 practices, 140 Government Industrial Research Institute, exclusion from Japanese industry, 95 293 industry structure, 91, 92 Government policy effects, 14-15 JIT manufacturing, 137 advanced ceramics, 290-97 research and development automotive industry, 94-95, 102-4, expenditures, 94 156-58 support for trade restraints, 104 fiber optics, 327-40 Fort Monmouth, 336 machine tool industry, 69-77 France steel industry, 15, 165, 166, 169, 173, advanced ceramics, 272, 288, 298 205-6 machine tool industry, 23 textile industry, 240-41, 243-44 steel industry, 165 Great Sewing Machine Combination, 31 textile industry, 226, 246 Great Society programs, 167 Fuel economy, 102-3, 156,273,284 Greece, 246 Fuji Electric Components Research and Greenleaf Corporation, 271 Development, 333, 334 Grinding processes, 38-40 Fujikura Cable Works, 333 GTE,283 Fujitsu, 283, 333 GTE Sylvania, 303 Fujitsu Fanuc, 52 GTE Walmut, 271 Fuji Tsushinki, 57 Furukawa Electric Company, 333 Hall, John H., 24-26, 64 Hanna Company, 170 Gardner, Frederick, 39 Hanover machine tool shows, 50, 52, 80 Garret Corporation, 275, 297 Harder, Del, 42 Gas turbine engines, 273-76, 291, 293, Harpers Ferry Armory, 23-25 301 Harrah, Charles, Jr., 35 Gauges system, 23, 25, 26, 33 Heald, James, 39 Gay, Silver & Company, 30 Heat engines, 9, 272-76, 283, 284, 293, GCA Vacuum Industries, 279 301,303 General Agreement on Tariffs and Trade, Heat exchangers, 282 243,250 Heim, L. R., 39 General Electric Company (GE), 41, 47, 58, Hicks, Donald A., 1-18 272,283,298,325 High-speed steel, 35-36 General Motors Corporation (GM), 9-10, Hitachi, 283, 333 63, 69, 109, 157 Hollow corporation, 81 advanced ceramics applications, 275, Hollow economy, 7, 86 284 Holmberg, Adrian, 48-49

347 INDEX

Honda Motor Company, 109 machine tool exports, U.s. response Honeywell, 283 to, 74-76, 79 Hong Kong, 226, 247 machine tool industry, assessment of, Houdaille Industries, 74-75 78-81 Hounshell, David, 31 numerical control, 52, 56-58 Howe, Frederick, 30 research and development Hughes Company, 151 expenditures, 292 Hyundai Motor Company, 113 steel industry. See Steel industry textile industry, 211, 215, 218, 219, IBM,46,47,283,297,298 226,227,235,238,243,244,246 IGI Consulting, 324 Japan Auto Workers, 98 Illinois, 109 Japan Development Bank, 280 Illinois Bell, 319 Japanese Technology Evaluation Program, Illinois Institute of Technology, 291 334 Imports. See Trade issues Japan Fine Ceramics Association, 295 Inaba, Seiuemon, 56-57 Japan Telecom, 328 India, 211, 213, 247 Jefferson, Thomas, 23 Indiana, 109 Jet looms, 229 Indonesia, 246 JIT. See just-in-time inventory system Industrial Technology Institute, 136 job losses Information Network System, 333 automotive industry, 111-12, 138-39, Ingersoll Milling, 59 152 Innovative ability, 7, 65-66 steel industry, 173-74, 193-94, 205 Integrated circuit packaging, 266-68, 300 textile industry, 247, 248 Integrated steel industry. See Steel John Deere, 59 industry johnson, Lyndon B., 70, 194 Interest expense, 245 Joint U.s.-Japan Automotive Study, 114 Interior Department, 291 J. P. Stevens, 241, 242 International Textile Machinery Justice Department, 322 Federation, 222 Just-in-time (JIT) inventory system, Inventory control 117-18,125,128,129,133-40 just-in-time OIT) scheduling, 117-18, 125, 128, 129, 133-40 Kanban card, 137 traditional practices, 129-33 Kaplan, Robert 5., 67 Investment policies, 15 Kearney & Trecker, 47, 49 machine tool industry, 66-71, 81 Kelsey-Hayes, 109 textile industry, 238-41 Kennametal Company, 279 Investment tax credit (lTC), 14, 70-71, 74, Kennedy, john F., 12, 70 243 Kentucky, 109 Iron ore sources, 165-66, 170, 173, 193, Kettering, Charles, 38 197-98 Knitting industry, 213 Isuzu Motor Company, 109, 124, 284, 293 Kodak Company, 320 Italy, 76, 226, 284 Korea automotive industry, 110, 113 Jacquard, Joseph M., 45 steel industry, 180, 191, 194,200 Jaikumar, Ramchandran, 10 textile industry, 226, 243, 247 Japan, 7, 73,273 Korean War, 165, 169, 173 advanced ceramics. See Advanced Koyo Seiko, 301 ceramics Krupp, 40-41 automotive industry. See Automotive Kyocera Company, 267, 271, 272, 277, industry 281. 283, 296, 301 computer-integrated manufacturing, 63 defense cooperation with United Labor costs States, 337-38 manufacturing operations, 13,67 fiber optics, 308, 328-35, 338 steel industry, 166, 194-95 flexible manufacturing systems, 61, textile industry, 245-47 62, 79 Labor force, 150, 151

348 INDEX

Labor relations, 13 technological development and automotive industry, 93, 98, 138-40 diffusion, 6, 8-9, 11-13, 19-20, 22, steel industry, 166-67, 172, 173, 29-31, 63-69 194-95 types and uses of tools, 21-22 Labrador, 166, 170, 173 Machine Tool Task Force, 72 Landis tool, 39 Machining centers, 50, 51,74,76,77 Large-Scale Optical Project, 331-32 Magnetic components, 277 Large-Scale Project, 331 Management Laser-Net, 316 software systems, 125-26 Lathes, 22-23,50-51, 76, 77 textile industry needs, 234 Lawrence, Richard S., 26, 28, 30 Manufacturing automation protocol Lawrence Livermore National Laboratory, 64 (MAP), 10,63, 161n.31 Leipzig Fair, 41 Manufacturing cost difference (MCD), Leland, Henry, 32, 37-38 104-8 Limit gauges, 33 Manufacturing industries, 86 Lincoln, Levi, 30 fiber optics applications, 325 Lincoln miller, 30 integration of design function, Loan regulations, 74 142-43, 149 Local area networks, 326, 328 labor costs, 13, 67 Lockheed aircraft, 46 just-in-time technology, 136 Long-distance networks, 316 Manufacturing studies board, 73 Loom technology, 45, 227-30, 246 Manufacturing technology (Man Tech) Lord, P. R., 245 programs, 72 Lowenstein Company, 241 Market changes and effects, 6-7, 11 LTV Company, 194, 195 advanced ceramics, 264, 278-80 Lucas Cookson Syalon, 280 automotive industry, 100, 102-3, 110 Ludwig Loewe Company, 36 mini-mills, 181-83, 186-88, 191-93, 197,200-203 Machinery Hall, 31 steel industry, 164, 167-68, 174-75, Machine shops, 28, 29 188-90,203 Machine tool industry textile industry, 244, 250-51 advanced ceramics applications, Market restrictions. See Voluntary export 269-71,281,282,300 restraints; Voluntary restraint automation development, 40, 42-44 agreements automotive industry relationship, Marsh, John, 46 9-10,19,37-40 Martin Marietta, 297, 320 bicycle industry relationship, 33-35 Massachusetts, 320 carbide tools, 40-42 Massachusetts Institute of Technology computer-aided manufacturing, 62-63 (MIT), 46-47, 49, 298 current status, 77-81 Material requirements planning (MRP) demand fluctuations, 20-21 programs, 63, 125, 126 early tools, 22-23 Material resource planning (MRP II) export controls, 73-74 programs, 63 flexible cells and systems, 58-62 Materials technology, 89, 122-24, 190 government policy effects, 69-77 Matsushita Electrical Industrial Company, grinding processes, 38-40 333 high-speed steel development, 35-36 Matsushita Industrial Equipment historical development, 26-30 Company, 326 importance to manufacturing, 19 Mazda Motor Company, 109 imports problem, 74-77 McClure, E. Raymond, 64, 73 interchangeable parts concept, 23-26 MCl,316 1986 world production, 19 McLough Steel, 195 numerical control, 14, 44-58 McPhee, John, 238 power needs, 28-29, 36-37 Mechanical Engineering Laboratory, 293 sewing machine industry, Mechanical engineers, 28 relationship to, 31-33 Medicine, fiber optics applications, 325, tax law considerations, 69-71, 77 326

349 INDEX

Mesabi Range, 165, 166, 183 National Research Council, 65, 73, 126 Metal-cutting machines, 21, 35-36 National Research Institute for Metals, Metal-forming machines, 21 293 Metal refining companies, 279, 281 National Science Foundation, 73, 291, Michigan, 109 299 Microcomputer industry, 2 National security Microelectronics Computer and dependence on foreign suppliers, 7, Technology Corporation, 298 337-38 Microminimills, 12 export controls, 14, 73-74, 339-40 Microwave communications, 316 Japanese defense market, 330 Midvale Steel Company, 35 machine tool import quotas, 75-76 Miehle-Goss-Dexter,49 National Steel, 199 Military applications. See also specific Naval Research Laboratory, 291, 336 service departments Naval Sea Systems Command, 336 advanced ceramics, 14,276,280,283, Navy Department, 72, 73 291 Needle making, 32 fiber optics, 314, 321, 323, 325, 336-38 New Hampshire, 320 Milliken & Co., 235-36 New Jersey, 319 Milling machines, 24, 25, 29-30 New York, 320 Milwaukee-Matic Model II, 49-50 New York Telephone, 317, 319 Mini-mills, 12, 174, 181-88, 191-93, New York Teleport, 319 197, 198, 200-204 NGK Insulator, 301-2 Mining industry, 281 NGK Spark Plug, 293 Ministry of Education and Culture, 331 NiJcra Ceramics, 280 Ministry of International Trade and Nippondenso Company, 109 Industry (MITI), 99 Nippon Electric Company (NEC), 281, advanced ceramics, 292, 293, 295-96 283,333 fiber optics, 329, 331-33 Nippon Kagaku, 279 machine tool industry, 74, 75, 79 Nippon Sheet Glass Company, 333 Minnesota, 165, 173, 183 Nippon Steel, 281 Mitsubishi, 283 Nippon Telephone and Telegraph Mitsubishi Electric Corporation, 333 (NT&T), 281, 283, 311, 328, 333, 334 Mitsubishi Rayon Company, 327 Nissan Motors, 96, 109, 284, 293, 327 Molins Machine Company, 58-59 Nixon, Richard M., 70 Morey Machinery, 47 NKK Steel, 199 Morris automobile plant, 43 Noble, David, 47 Multi-Fibre Arrangement, 250 Nondestructive evaluation (NDEl Murata Company, 281 techniques, 285, 287, 290 Nonwoven textiles, 232-33 Narumi China, 278 North, Simeon, 24-26, 28, 64 National Academy of Engineering, 126 North America, 226 National Academy of Sciences, 293, 298 North Carolina, 211 National Aeronautics and Space Northrup automatic loom, 227 Administration (NASA), 17n.5, 276, Norton, Charles H., 38-39 290 Norton, Franklin, 38 National Bureau of Standards, 73,291, 299 Norton Company, 38, 272, 278, 297, 298 National Center for Manufacturing Norton Grinding Company, 39 Sciences, 73 Numerical control (NC), 30, 67, 74, 78 National conferences, 299 computer control, 51-53,126 National Cooperative Research Act of development of, 14, 44-49, 72 1984,297 industry use, 49-51, 53-56 National Institute for Research on Japanese dominance, 52, 56-58 Inorganic Materials, 293 machinery imports, 53 National Machine Tool Builders Nylon, 211, 213-15, 217,220 Association, 64, 75 National Research and Development Oak Ridge National Laboratory, 291, 299 Program, 331 Occupational Safety and Health

350 INDEX

Administration (OSHA), textile industry Productivity, 1,2,15-16 standards, 221, 240 advanced ceramics effects, 280-82 Oceania, 226 automotive industry comparisons, Ohio, 109 106,108 Oil industry, 271, 281 improvement strategies, 10 Oil shocks, 88, 95, 102-3 job loss effects, 111-12 Oki Electric Industry Company, 333 steel industry comparisons, 166 Open hearth technology, 166, 173 textile industry, 215-16, 225-26, Optical ceramics, 276-77, 283, 301 236-38 Optoelectronic Measurement and Control Product quality System, 331 advanced ceramics, 284-86 Optoelectronics, 308 automotive industry, 113-15, 138 Optoelectronics Industry and Technology steel industry, 166 Development Association, 328, 332, 333 textile industry, 250 Optoelectronics Joint Research Laboratory, Producttechnology, 89, 119-22 331-32 Projectile looms, 228, 229 Ordnance Department, 25 Proprietary information, 144, 149 Organization of Petroleum Exporting Providence Tool Company, 30, 33 Countries (OPEC), 95, 102 Pumping equipment, 271, 281 Osaka machine tool show, 52 Punching and shearing machines, 74, 76

Packaging technology, 266-68 Quebec, 166, 170 Pakistan, 247 Quotas. See Trade issues Paris Exposition, 35-36 Parsons, John T., 46 Rapier looms, 228-29 Patent infringement, 31 Rayon,211,213,214 Pegasus system, 317 Reagan, Ronald w., 70, 75, 76 Pennsylvania, 165 Recuperators, 303 Pennsylvania State University Center for Research and development Dielectric Studies, 298 advanced ceramics, 289-94 Pension Benefit Guaranty Corporation, 194 automotive industry, 94 Pension liabilities, 194, 195, 206 fiber optics, 330-37 Perry, William c., 31 industry cooperation, 12, 294-99 Phelps, Orson c., 32 Japanese expenditures, 292 Phoenix Iron Works, 30 machine tool industry, 21, 72-73 Piecework system, 32 textile industry, 234-38, 243 Pipe fittings, 271 U.S. expenditures, 290 Plasma steel making, 193, 199,204 Rhone-Poulenc, 298 Plastic materials Ring spinning, 221-22 automotive applications, 122-23 Robbins, Kendall, & Lawrence, 26 fiber optics use, 327 Robbins & Lawrence, 26-28 integrated circuit packaging, 267 Roller bearings, 271, 272, 301 as steel substitute, 190 Rolls Royce, 272, 284, 298 Polishuk, Paul, 308-42 Rolt, L. T. c., 27 Pollution abatement, 240-41 Rome Air Development Center, 336 Polyester fiber, 211, 214-20 Rosenberg, Jack, 49 Pontiac Fiero, 120 Rotor spinning, 221-22, 224-27 Pope, Albert A., 34-35 Roving, 220 Portugal, 246 Rutgers Center for Ceramics Research, 298 Power sources, 28-29, 36-37 Pratt, Francis, 28, 30 Saab,284 Pratt & Whitney, 30, 34 Sacramento Air Logistic Center, 336 President's Commission on Industrial Sandia National Laboratory, 291, 299 Competitiveness, 335-37 San Diego, 267 Private communications networks, 320 Sasa, Katsuaki, 272 Process technology, 89, 124-29 Satellite communications, 316, 319 Production orders preparation, 32 Scheyer, Emanuel, 45-48

351 INDEX

Scrap steel, 184, 198 labor relations, 166-67, 172, 173, 194 Seiver, John D., 339 market changes, 164, 167-68, Sellers, William, 31, 35 174-75,188-90,203 Sellers Company, 45 mill technology, 166, 193, 204 Semiconductor industry, 2 mini-mills, 12, 174, 181-88, 191-93, integrated circuit packaging, 266-68, 197,198,200-204 300 plastics competition, 122-23, 190 Japanese strategies, 329, 330 production and capacity changes, Semiconductor Industry Association, 329 168-69,175-77,184-85,191-94 Semiconductor Research Corporation, 298 productivity, 166 Sensing devices, 268-69, 324-26 raw materials, 165-66, 170-71, Seth Thomas Clock Company, 38 197-99 Sewing machine industry, 31-33 technological advances, 2, 3, 184, Sharps Company, 28, 30 193,198-99,203-5 Shimadzu Seisakusho, 333 trade restrictions, 171, 174, 177, 191, Shop culture, 28 206 Showa Denko, 279 U.5. preeminence, 1950s, 11-12, Siemans AG, 52, 57 164-67 Silicon Carbide Products Operation, 272 U.s. strategies, 172-74, 185, 187-88, Silk production, 220 200-203,206-7 Singer Sewing Machine Company, 32-33 wage increases, 173 Smith, Merritt Roe, 25 Stevens, Candice, 7, 255-307 Snyder Tool & Engineering Company, 46 Stevenson-Wydler Technology Innovation Software Productivity Consortia, 298 Act, 336 Sohio Engineered Materials, 297 Stockpiling policies, 71-72 Solvay Company, 298 Stout, William B., 45 Sony Corporation, 334 Strategic Defense Initiative (501), 283, Sorenson, Charles, 40 336-37 South Africa, 211 Strikes, 139 South America, 170, 183,213,226,246 steel industry, 166-67, 172, 173, 194, South Carolina, 211 195 Southern Bell, 315, 319 Stubblefield, James, 25 Soviet Union, 168 Subaru Motor Company, 109 Spencer, Christopher, 28 Sumitomo Electric Industries, 327, 333 Spinning technology, 220-27, 245-46 Sundstrand Aviation, 60 Springfield (Mass.) Armory, 23, 26 Sundstrand Machine Tool, 60 Spun-bonded fabrics, 232-33 Sweden, 172,284,288 Statistical process control (SPC), 125-27, Switzerland, 76 138 Steam power, 29 Taiwan, 76 Steele, Richard, 7, 209-54 steel industry, 180, 191, 194 Steel industry, 162-208 textile industry, 226, 247 advanced ceramics applications, 281 Taniguchi, Norio, 63-64 automotive industry, relationship to, 9 Tariff Act, sec. 807, 249, 251 bankruptcies, 194-97, 201, 207 Tax laws, 14, 77,243 competitiveness, 171, 175-83, 194-97 Taylor, Frederick W., 35-36 direct-reduced iron, 184 TDK Electronics, 281 European strategies, 172, 186-87, 200 Technical Advisory Committee on Fiber future prospects, 188, 199,207-8 Optics, 339 government policies, 15, 165, 169, Technical Change Centre, 19, 81 173,205-6 Technology diffusion historical perspective, 8, 162-63 advanced ceramics, 284-88 integrated system, 163-64, 181, 192 diffusion rates, 63-65 Japanese strategies, 171-72, 185-86, export controls, 14,73-74,339-40 199-200 financial barriers, 66-68 job losses, 173-74, 193-94,205 government role, 14-15,327-28 labor costs, 166, 194-95 human factors, 65-66,68-69

352 INDEX

interindustry linkages, 8-10 research centers, 73, 298 machine tool industry, 6, 19-20, 22, University of California at Berkeley, 298 29-30,63-69,78-81 University of Pennsylvania, 320 nontechnical barriers, 10-15 University of Pittsburgh, 320 patterns, 6-8 u.S. Industrial Outlook, 299 role in industrial adjustment, 1-6, u.s. Steel Corporation, 162, 170 15-16 USX, 195 textile industry, 250-51 Utility industries, 321 Telecommunications industry, 276-77. See also Fiber optics Valves, 271, 281 Telephone service, 315-19, 322-23, Very large scale integrated (VLSI) circuits, 338-39 267,283 Teleway Japan, 328 Viall, Raymond, 38 Tennessee, 109 Vietnam War, 167 Texas, 272 Volkswagen, 90, 272, 284 Texas Instruments, 283 Voluntary export restraints (VERs), Textile industry. See Fiber, textile, and automotive industry, 103, 104 apparel industry Voluntary restraint agreements (VRAs) Textile Research Journal, 235 automotive industry, 103-4, 156 Thailand,247 machine tool industry, 76, 79 Tokyo auto show, 293 steel industry, 177, 191,206 Tolerances system, 23 Volvo, 284 Topy Company, 109 Toshiba Ceramics, 278, 283, 301 Wages Toshiba Corporation, 333 Japanese automotive industry, 106, 107 Toyota Motor Company, 96, 109, 124, 125, U.s. automotive industry, 106 135,137,138,284,293,327 U.S. steel industry, 173, 193-94 Trade associations, 295, 297, 332-33 War Department, 23 Trade deficit, 3, 100, 282 Warner, Thomas, 26 Trade Expansion Act, 75 Washington (state), 315 Trade issues Water power, 28-29 automotive industry, 100-104, 156-58 Wear parts, 271-72, 281, 282, 300, 301 electronics industry, 282 Weaving technology, 45, 227-30, 246 export controls, 14, 73-74,339-40 Weed Sewing Machine Company, 34 fiber optics, 329-30, 337-40 Weirton Steel, 195 machine tool industry, 73-77, 79 Werner Textile Consultants, 247 steel industry, 171, 174, 177, 191, 206 Western Wheel Works, 34-35 textile industry, 243-45, 249-50 Westinghouse Electric, 60, 281 Tufts University, 325 West Point Pepperell, 241, 242 Tungsten carbide, 40-42 Wheeler and Wilson sewing machine, Turbocharger rotors, 274, 301, 303 31-32 Turkey, 246 Wheeling Pitt Steel, 194, 195 White, Maunsel, 35, 36 Unemployment. See Job losses White House Science Council, 336 Unions. See Labor relations Whitney, Amos, 28 United Auto Workers (UAW), 93, 139 Whitney, Eli, 24 United Kingdom Whitworth, Joseph, 27 advanced ceramics, 272, 280, 284, Widia,41 288,298 Wilkinson, David, 22-23 machine tool industry, 19-20, 22, 59 Wilkinson, John, 22 productivity improvements, 10 Willcox and Gibbs sewing machine, 32 steel industry, 165, 166 Williamson, D. T. N., 58, 59 textile industry, 211, 215, 246 Wisconsin Telephone Company, 319 United States Advanced Ceramics Wool production, 214, 220 Association (USACA), 297, 303 Universities Yokogawa Electric Works, 333 fiber-optic networks, 320 Yugoslavia, 110

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A NOTE ON THE BOOK

This book was edited by Trudy Kaplan, Janet Schilling, and Dana Lane of the publications staff of the American Enterprise Institute. The figures were drawn by Hardur Karlsson, and the index was prepared by Patricia Ruggiero. The text was set in Palatino, a typeface designed by Hermann Zapf. Compositors Typesetters, of Cedar Rapids, Iowa, set the type, and Edwards Brothers Incorporated, of Ann Arbor, Michigan, printed and bound the book, using permanent, acid-free paper.